Midas commentary for April 18, 2000

1:30a EDT Sunday, April 16, 2000

Dear Friend of GATA and Gold:

The gold involved in the impending Swiss gold sales
is not likely to reach the market but rather just cover
the major official gold lenders in the euro area against
defaults and clear the way for gold's liberation from the
derivatives markets.

That's the analysis below from Reginald H. Howe of
www.GoldenSextant.com, who once again has plodded
through the official data and made sense of it. No one
is doing more for gold today than Reg Howe. What he
has found here is very bullish for gold and matches the
compelling analysis offered by Trial Guide, nee Friend
of Another, at www.USAGold.com.

Please post this as seem useful.

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

* * *

Gold Unchained by the Swiss and Ready to Rock!

By Reginald H. Howe
www.GoldenSextant.com
April 16, 2000

Barring the unexpected filing of a referendum petition
by April 20, Swiss gold sales should begin in May.
Gold's foes will hail the disappearance of the last
legal barrier to the Swiss sales as another bearish
event. In fact it is likely just the opposite.

My guess is that almost none of these sales will result
in added physical supply reaching the market. Rather, I
expect this gold will mostly replace that previously
leased into the market by euro-area central banks,
allowing them to bring their physical gold stocks to
the same levels as their officially stated gold
reserves.

By assuring sufficient physical gold to cover
outstanding gold loans on the books of euro-area
central banks, to which it can be directly channeled
through the Bank for International Settlements, the
Swiss sales obviate the risk of embarrassing defaults
that a rising gold price would otherwise bring,
particularly in a gold market that is net short by two
to four years of annual production. And by removing
this risk, the Swiss sales leave the euro-area central
banks, collectively the world's largest holders of
monetary gold, with many reasons to cheer -- and no
strong reason to oppose -- rising gold prices.

With respect to this commentary, the April issue of the
World Gold Council's quot;Gold in the Official Sectorquot;
(www.gold.org/Gra/Gios/11/Contents.htm) contains some
useful background information, including articles on
the Swiss sales (p.1), the BIS and gold (p.2), and the
BIS's smooth handling of the recent Dutch sales (p.4).

The World Gold Council, and the mining industry that
supports it, deserve criticism for their self-defeating
aversion to speaking out for gold as money or in
protest against official manipulation of gold prices.
Nevertheless, the WGC puts out a lot of good
information, even if its interpretation of some of that
information is often at variance with mine, as is
partially the case with the Swiss sales.

Two prior commentaries of mine at www.GoldenSextant.com
may also be helpful: quot;Two Bills: Scandal and
Opportunity in Gold,quot; giving details about the genesis
of the Washington Agreement, and quot;It's the Dollar,
Stupid,quot; especially the table showing official gold
reserves as reported to the International Monetary
Fund. These figures include leased gold as well as
physical gold stocks, a fact underscored by Kuwait's
reported gold reserves of 79 tonnes, notwithstanding
that nearly all of it is admittedly on loan through the
Bank of England.

On April 7 the Swiss National Bank released its 92nd
Annual Report 1999, which can be found at the English
language version of the SNB's website
(www.snb.ch/e/aktuelles/index.html), but the report
itself is available only in French or German. The
critical information on the SNB's gold loan activities
is contained in Section 1.4 and Notes 20 and 21.

As of year-end 1999, the SNB's total gold reserves were
2,590.2 metric tonnes, the same figure as reported to
the IMF, consisting of 2,274.5 tonnes of physical gold
stocks (in various places both in and outside
Switzerland) and 315.7 tonnes of gold on lease. Total
leased gold increased by 128.9 tonnes (or 69 percent)
over 1998. In a new twist, 73.3 tonnes (or 23 percent)
of this gold, having a market value of 1102.6 million
Swiss francs, were secured by collateral with a market
value of 1089.5 million Swiss francs. The average
maturity of the gold loans outstanding was 7.25 months,
and the average annual rate of return on gold loans in
1999 was 1.6 practice. The new practice of requiring
collateral on certain gold loans was instituted during
the year to reduce credit risk even though it also
produced a lower rate of return.

The report also confirms the SNB's quot;intention to begin
as rapidly as possible to sell the 1,300 tonnes of gold
no longer necessary for monetary purposes.quot; These
sales, as the report notes, were included within, and
are planned to be carried out pursuant to, the
Washington Agreement of September 26, 1999, regarding
future sales and leasing of monetary gold. Under the
agreement, the participants (SNB, European Central
Bank, 11 central banks of the euro area, the Bank of
Sweden, and Bank of England for the British Treasury)
are limited to selling no more than 2,000 tonnes, at a
rate of about 400 tonnes per year, in a coordinated
program to extend for five years from the date of the
agreement. During this period the same banks also
agreed not to expand their gold leasing or their use of
futures and options.

The 2,000 tonnes are allocated as follows: Switzerland,
1300 tonnes; Britain, 365 tonnes to carry out the
remainder of the sales program of 415 tonnes announced
May 7, 1999; Netherlands, 300 tonnes announced in
October 1999; and Austria, 90 tonnes announced at the
beginning of April. Altogether these announced sales
total 2,055 tonnes, so someone will have to cut back a
little to stay within the limit of 2,000 tonnes.

Since the date of the agreement, Britain has sold 75
tonnes and plans to sell another 75 tonnes in three
auctions prior to October (May 23, July 12, and an
unspecified date in September); the Dutch have already
sold their first year quota of 100 tonnes; and Austria
has sold 30 tonnes. Thus, of the 400 tonnes permitted
in the first year, at least 280 tonnes have been sold
or are in process to be sold, leaving no more than 120
tonnes to be sold by the Swiss before October.

Setting aside the British sales and disregarding the 55
extra tonnes implied by the Austrian announcement,
Switzerland and the euro area are allowed sales of
1,635 tonnes: 1,300 by Switzerland and 335 by the euro
area countries, mostly the Dutch. The planned sales by
the euro-area countries approximate quite closely the
SNB's gold loans outstanding, which are about 12
percent of its total gold reserves as reported to the
International Monetary Fund. In the absence of specific
figures on gold loans for the euro-area countries, it
seems fair to assume that collectively their total gold
loans are about the same percentage of total reserves
as the Swiss.

At the end of 1999 the euro-area countries as a group
reported total gold reserves of 12,457 tonnes to the
IMF, or 11,710 tonnes excluding the gold held by the
ECB itself. Putting their total outstanding gold loans
in a range of 10-12 percent gives estimates of 1,250 to
1,500 tonnes on the full total, or 1,170 to 1,400
tonnes on the total excluding the European Central
Bank. If these estimates are reasonably accurate, their
total gold loans are about equal to the planned Swiss
sales, just as total euro-area sales are about equal to
Swiss gold loans.

In these circumstances, final approval for the Swiss
gold sales could put the last block in place for a
workout of all or most outstanding gold loans on the
books of both the euro-area central banks and the SNB.
The essence of the plan would be to allow the leased
gold on the balance sheets of the euro-area central
banks to be replaced by gold purchased from the Swiss,
and leased gold on the SNB's balance sheet to be
replaced by gold purchased from the Dutch and
Austrians.

Because the ECB reports total gold reserves for the
euro area in aggregate, including its own and those of
the member central banks, gold sales between euro-area
central banks would wash out in consolidation. To
retire gold loans without drawing down its combined
gold stocks, the euro area must have the ability to
purchase gold from an outside country such as
Switzerland. And for Switzerland, with by far the
highest per capita gold reserves of any nation, the
logical quid pro quo is assurance of effective
inclusion in the euro area while remaining formally
outside it in accordance with the currently expressed
preference of a majority of its citizens.

The precise wording of the SNB's statement about quot;its
intention to begin as rapidly as possiblequot; its gold
sales may also be significant. It says nothing about
completion of the sales. A previous commentary queried
the need for speed, so vigorously championed by SNB
Vice President Jean-Pierre Roth. But haste in securing
legal authority to start a program is quite different
from quick completion of the program. Rising pressures
in the gold market, described in more detail later,
would make anyone party to a plan relying on Swiss
sales eager to complete all legal requirements as
quickly as possible.

A plan of this nature would: 1) recognize that leased
gold -- already sold into the market -- cannot be
replaced without forcing many borrowers into the
market, driving gold prices much higher, and increasing
the risk of defaults; 2) avoid any physical defaults on
outstanding gold loans of the euro-area central banks
and the SNB by covering all of them with interbank gold
sales; and 3) put reported official gold reserves of
all these central banks after the sales at the same
levels as their remaining physical gold stocks.

The plan would also carry two other important features.

First, little or no new physical gold would enter or
leave the market. Borrowers on outstanding gold loans
would be allowed to settle in paper, effectively paying
for the gold purchased from another central bank. All
transactions would be channeled through the BIS,
generally at market prices, but leaving it in full
control of the destiny of the gold.

Second, in the event of much higher gold prices
threatening the solvency of a bullion bank that is also
an important commercial bank, the plan would allow a
rescue through paper instruments without fear of
defaults on the bullion bank's gold obligations per se.

The WGC has applauded the BIS's deft handling of the
recent Dutch gold sales, noting that 100 tonnes were
fed into the market over 12 weeks from December through
February without any apparent affect on gold prices. At
the end of December, the SNB had secured gold loans of
just more than 73 tonnes. The market value of the
collateral closely approximated the market value of the
loans, suggesting that the security might really be
serving in lieu of payment until physical gold could be
found to retire the loans. Not to take anything away
from the BIS, but a pre-arranged waiting market for the
Dutch sales could also explain the benign market
reaction.

Of course whether there is such a plan is speculation.
But if so, three conclusions follow: 1) for a total
cost of some 1,600 tonnes of gold, the euro area and
Switzerland -- the old gold bloc -- have bought enough
time to launch the euro successfully in relative
monetary calm; 2) a net short position of more than
1,600 tonnes will be accorded tolerable terms of
surrender, resulting in less upward pressure on gold
prices from this particular source than might otherwise
be the case; and 3) the euro-area central banks and the
SNB, no longer facing the prospect of defaults on their
outstanding gold loans, are in position to let the gold
market truly run free. What is more, they have some
incentive to do so.

The euro area and Switzerland are by far the world's
largest holders of official gold. With the euro area
already marking its gold reserves to market on a
quarterly basis, rising gold prices are in its
interest. Recent rumors of French gold sales to fund
state pension obligations were quickly denied by the
Bank of France, and anyway would not be permitted under
the Washington Agreement for more than four years. But
as noted in an earlier commentary, ultimately much
higher gold prices may represent a partial solution to
acutely underfunded pension programs in many euro-area
countries. In this connection, while the Swiss have not
yet decided what to do with the proceeds of their gold
sales, dedicating them to the pension system currently
appears to have the most support.

In any event, whether or not the Swiss gold sales form
part of a wider plan, gold's future looks bright.

In quot;Gold Watchquot; (March 22, 2000, www.gold-
eagle.com/gold_digest_00/veneroso032200.html), Veneroso
Associates analyzes recent data from both Gold Fields
Minerals Services and the World Gold Council, and
concludes that in all probability quot;there was absolutely
huge undisclosed official selling in 1999.quot; Indeed,
looking at the fourth quarter of 1999 for which only
about 100 metric tonnes of official selling was
announced, Veneroso Associates now estimates that there
must have been undisclosed official selling of as much
as 1,000 tonnes or possibly more. Because the official
sector can and often does meet demand for physical gold
through leasing rather than outright sales, what the
Veneroso study labels quot;undisclosed official sellingquot;
would include leasing that ordinarily is not disclosed
in IMF figures.

The Veneroso study attempts to track physical gold
flows -- that is, gold demand for jewelry, bar
hoarding, and official coin. By comparing these flows
to new mine production of around 2,500 tonnes annually,
estimates can be made of official or other dishoarding
needed to meet annual new physical demand, now thought
to run in excess of 4,000 tonnes. Because new mine
supply has failed to meet physical demand for several
years, knowledgeable estimates of the current net short
gold position run anywhere from about 4,000 tonnes to
well over 10,000 tonnes. Even with 1,600 tonnes
removed, there is plenty of fuel for a vicious short
squeeze.

Following the Washington Agreement, lease rates spiked
to around 8 percent from already high levels of 3 to 4
percent. But since November they have returned to more
normal levels of 1 to 2 percent and remained there
despite the size of the net short position. As
discussed in a prior commentary, when fundamental
factors such as gross undervaluation of gold give rise
to a gold banking panic, both gold loan activity and
lease rates are likely to remain depressed until gold
is revalued to a more realistic level. Current lease
rates are consistent with this pattern. What is more,
despite a more normal contango, gold mining companies
continue in general to cut back on their hedging.

Activity and open interest in the paper markets have
shown varying levels of decline, particularly on the
LBMA and TOCOM, but to some extent on the COMEX as
well. One analyst has produced some studies suggesting
a repeating pattern of small gold price increases in
overseas markets being met by larger decreases in New
York. (H. Clawar, quot;Making Money with Manipulators,quot;
April 3, 2000, www.gold-
eagle.com/editorials_00/clawar040300.html), and prior
articles cited. Another has noted a huge increase in
gold derivatives during the last quarter of 1999 as
reported by the major U.S. money-center banks to the
U.S. comptroller of the currency. (U.S. Doran, quot;Is It
Just a Simple Bear Raid?,quot; April 4, 2000, www.gold-
eagle.com/editorials_00/doran040400.html.) At the same
time, unusual physical gold disposals such as Kuwait's
underscore the increasing difficulty of obtaining
physical gold.

All these straws in the wind point toward an ever-
tightening physical market pushing to break free from
the bonds imposed by the paper and derivatives markets.
Any manipulation by the U.S. Treasury Department's
Exchange Stabilization Fund and its prototype, the
Exchange Equalisation Account in the British Treasury,
the actual seller of the British gold, ultimately will
be broken by market forces if not by exposure. Whatever
they have done to cap the price has only further
compressed the coiled spring that gold has become.

While current conditions in the gold market itself are
sufficient to propel prices much higher, external
events could detonate a price explosion. Gold is
typically a contrarian and counter-cyclical investment.
Collapses in other markets -- equities, bonds, the
dollar -- could quickly lead to new investment interest
in gold on top of already strong physical demand. If
these collapses mark the end not just of an ordinary
business cycle, but also, as I suspect they will, of
the whole the dollar-based post-Bretton Woods
international monetary system, gold will reclaim the
monetary throne.

The gold shorts and their friends in high places will
propagandize the Swiss sales as another nail in gold's
monetary coffin. But the Swiss are not bugling the
death knell for gold. What they may be sounding is taps
for the U.S. dollar. Perhaps that is the tune that
triggered Alan Greenspan's sudden nostalgia for the
gold standard last Friday while stock markets were in
full retreat.