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Shorts default on Karachi bullion market
8:23p EDT Saturday, October 2, 1999
Dear Friend of GATA and Gold:
I bet you're tired of all the good news from me, right?
Think you can handle one more piece? It's from the
Forbes news wire. It quotes James Grant of Grant's
Interest Rate Observer as acknowledging central bank
manipulation of the price of gold, and explains the
huge leverage inherent in gold stocks. Nothing that you
probably don't already know, but it's remarkable how
all this now is reaching the mainstream media. Once
there, it may affect the investment decisions of people
who are not yet holding tickets on the gold train.
CHRIS POWELL, Secretary
Gold Anti-Trust Action Committee Inc.
* * *
Goldbugs are suddenly looking good
By J. Alex Tarquinio
Forbes News Wire
NEW YORK, Oct. 1 -- Even investors who were ho-hum on
gold last week have suddenly gone bullish on the
precious metal. The price-per-troy-ounce skyrocketed to
$305.30 as of market close today, up from $269.05 at
the start of the week.
But this sudden stampede for gold was not sparked by
the usual fears, such as inflation or stock market
upheaval, according to James Grant, author of the
popular newsletter Grant's Interest Rate Observer.
Rather, he says the price has long been artificially
kept down by the central banks, which manage the
monetary supply of the world's largest economies.
The large European Central Banks stated Sunday that
they would curtail future sales of gold reserves over
the next five years. They were as widely expected to
sell off gold. Now some investors are griping that the
banks have manipulated gold.
But Grant told attendees at a conference his company
held in New York today that gold has always been
manipulated. He said the central banks have been
mistaken in the 1990s, when they kept the price
artificially low by selling off some of their huge
stockpiles and leasing gold at the absurdly low rates
of about 1%.
Even if the price of gold does not continue higher,
gold mining stocks are likely to rise, market watchers
say. Michael E. Martin, a broker specializing in gold
mining stocks with New York-based Sinclair Group,
estimates the market cap of all gold mining companies
at about $50 billion. He says he thinks that could rise
by as much as about 50% over the next year.
Gold mining companies always have much wider price
swings than the commodity, both in positive and
negative territory, says Jean-Marie Eveillard,
president of Societe Generale Asset Management Corp.
and manager of the SoGen Gold Fund.
His reasoning: If the price of gold rises from $275-
per-ounce to $300-per-ounce, that is about a 10%
profit. But if it costs $250 to mine gold, the same
price increase will double the mining company's profit.
In recent years, there has been too little mining to
meet the global demand for gold. The central bank gold
sales and speculation by hedge funds and the mining
companies filled the gap. With Sunday's announcement by
the central banks, Eveillard says the price rise was a
simple example of supply and demand economics.
Many of the gold mining companies are scrambling to get
out of hedge positions now. For years, they have bought
gold futures and used the gold they mined to cover
their bets, thereby limiting the downside risk if gold
continued its slide.
The South African mining company Ashanti Gold (nyse:
ASL) announced yesterday that it had restructured its
hedge this week. This is a preemptive strike that other
mining companies should follow, says the Sinclair
Market watchers speculate there will be a shakeout of
mining companies in the coming weeks. Once investors
learn which companies have complicated hedges that are
tough to get out of, they will likely sell those in
favor of mining companies that did not bet so heavily
against gold. One mining company that is frequently
mentioned, Barrick Gold (nyse: ABX), is well known to
have some complicated hedges in place.
But this week investors have been gobbling up the stock
of all of the mining companies, and will likely weed
out the ones with risky hedges later.
Frederick J. Shehan, Jr., a John Hancock director who
develops new investment ideas for the company's
institutional investors, visited some South African
mines this summer. He says some of the smartest
managers were buying up weaker companies that could not
weather the 20-year low in the price of gold.
Though many investors are betting that the commodity
price will continue to rise, most of the gold mining
companies would realize a pretty good profit even if
gold remains around its closing price on Friday.