Hillary questioned about gold dealings

10:40p EDT Saturday, September 10, 1999

Dear Friend of GATA and Gold:

The article that I'm sending to you below by John
Dizard in the recent issue of Forbes magazine is
pessimistic about gold, but it shows GATA's
leadership on gold's behalf, so please enjoy it at
least for that.

Dizard is a sharp guy but I think he's dreaming if
he thinks that gold or anything else will be sold
for long below the cost of its production. And
while the dishoarding of central bank reserves
has that kind of influence on the market, Dizard
doesn't seem to take note of the recent events
suggesting that such dishoarding may be coming
to an end.

Please post this as seems useful.

CHRIS POWELL, Secretary
Gold Anti-Trust Action Committee Inc.

* * *

The Great Gold Price quot;Conspiracyquot;;
Or, Read This Before You Invest In Gold

By John Dizard
Forbes Magazine

The ideology of fanatic gold investors -- and that
means most gold investors -- has always been a blend of
libertarian and reactionary elements. They talk about
Fed conspiracies. They loathe government and its quot;paper
money.quot; They scorn fools who believe in stocks and the
dollar. Their feeling of superiority was reinforced in
the '70s, as the price of gold zoomed up 1,462 percent
while the equity and bond markets crumbled (along with,
as they saw it, things like law and order).

But since 1980 gold-stock owners have lost more than
90% of the value of their holdings, measured against
the Samp;P 500. The price of gold is down to a 20-year low
of around $250 an ounce. Most economists blame the drop
primarily on low inflation and the proliferation of
other inflation hedges, especially derivatives. But to
goldbugs there has to be a conspiracy. And they think
they've found it: speculators -- along with mining
companies and other members of the gold industry --
borrowing masses of gold, selling it on the spot
market, investing the proceeds in higher-earning
securities, then paying back their loans with cheaper
gold. If this goes on, they warn, we're in for a
financial crash because banks and dealers will have to
pay an exorbitant price to cover their short positions.

The goldbugs have a point in that there is short-
selling going on and it has helped depress the price of
gold in the short term. But most of the short-sellers
have offsetting long positions in real supplies for
future delivery. Speculative selling is limited, partly
because the market is so illiquid. The real problem is
the huge pile of gold sitting in government and private
vaults. And though there may be a temporary rally soon,
the downward spiral in price is likely to continue.

Sniffs Randall Oliphant, president and CEO of giant
Barrick Gold of Toronto: quot;I don't see how promoting a
conspiracy theory encourages people to invest in gold.quot;

Most of the selling is being done by mining companies
such as Barrick, hoping to lock in a margin between
production costs and prices -- a prudent, even routine
practice in most industries. They borrow gold from so-
called bullion bankers (big-name banks and financial
firms, which in turn borrow the metal from central
banks). Then they sell the gold and use the proceeds to
pay their production costs, eventually repaying the
loan with their own product.

Why does that strategy infuriate gold fanatics? First,
in the short run the hedging depresses the spot gold
price as the borrowed metal is sold into the cash
market. And as John Brimelow, a gold-stock analyst,
points out, the mining companies are essentially
forgoing quot;upside potential in the event of a big price
rise -- since some future production will have already
been sold at a lower price -- in return for a more
predictable but limited earnings stream. This hurts the
gold shareholders, who lose the potential from a higher
gold price, though management pay is safer.quot;

Says one goldbug: quot;Barrick Gold is evil. They have
debauched this market.quot;

Bad as the mining companies are -- in the goldbugs'
eyes -- even worse are the hedge funds, dealers, and
other speculators who have supposedly sold billions of
dollars worth of gold into the spot market and invested
the proceeds in equities, junk bonds, and other paper.

That only works, the goldbugs claim, if interest rates
on the borrowed gold (now around 2 percent for six
months) and gold prices both stay low. So the
speculators supposedly collude to keep things that way.

We're not just talking about a few malcontents wearing
T-shirts imprinted with a Glock 9mm pistol and the
legend quot;I Don't Call 911.quot; Listen to John Willson,
president and CEO of Placer Dome, the second-largest
North American gold producer: quot;I believe there are
forces, such as the central banks, that can get
together to modify or manipulate the gold market. They
keep the price down.quot;

(Of course, that sentiment hasn't stopped his company
from selling short 5 million ounces, or about 1 1/2
years' production.)

Fueling the goldbugs' bitterness, former stalwarts such
as the Bank of England and the Swiss National Bank have
announced that they will sell a large part of their
reserves over the next couple of years. (The former
auctioned 25 metric tons -- or 61,600 pounds -- July
6.)

In January gold enthusiasts formed a lobbying group
called Gold Anti-Trust Action Inc. and hired veteran
Philadelphia tort specialists Berger amp; Montague to look
into a case against quot;colludersquot; among the dealers and
banks. The World Gold Council, an industry trade group
headed by Willson, has its own investigation.

Says Bill Murphy, GATA's chairman: quot;It is clear that
the shorts will blow up in the not too distant future.quot;

How much gold is at issue here? The most extreme
goldbugs say speculators alone are borrowing up to
8,000 metric tons, or about $68 billion worth. The more
moderate, such as Willson, think the world's total
short position is maybe 7,000 to 9,000 tons, divided
roughly equally between speculators and industrial
users such as mining companies and jewelry makers.

Phillip Klapwijk, managing director of Gold Fields
Mineral Services Ltd., an industry economic research
firm, puts the total short position at about 4,300 tons
at the end of 1998, most sold by miners and industrial
users. (Since then, perhaps 500 to 1,000 tons more have
been sold short.)

Let's put this in context before we talk about a
teetering inverted pyramid of speculation. There are
about 137,400 tons -- about $1.1 trillion worth -- of
gold above ground, some 31,400 of which is held in
central banks, according to Gold Fields. All the
quot;global macroquot; hedge funds combined have maybe $30
billion available for trades such as selling gold
short, and most of that is committed to other
positions.

The mines, for their part, are likely to slow their
hedging in a couple of years because they and their
banks will reach the limits of prudence. That probably
means no more than 3,000 tons of producer hedging over
the next two to three years -- a little over one year's
production.

The capital and credit for a short-selling conspiracy
simply aren't there.

quot;Gold is best looked on as a slowly depreciating
currency. It is in the early stages of being turned
into just another commodity,quot; says Kevin Crisp, chief
gold researcher for J.P. Morgan.

Once it's demoted to the status of pig iron and oats,
you can expect to see the price falling to or below the
cost of production. That could be a good $50 or more
under even today's depressed level. Hard to see a
comeback from here. And hard to see a conspiracy.