Midas commentary for May 25, 2000

11:50a EDT Wednesday, May 24, 2000

Dear Friend of GATA and Gold:

I'm sharing with you below the daily market commentary of Michael
Kosares, proprietor of www.USAGold.com, which I'm sure many of you
read as religiously as I do but which may be new to some of you. It
is a brilliant and comprehensive look at the gold market situation.

Please post this as seems useful.

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

* * *

By Michael Kosares
www.USAGold.com
May 24, 2000

Against a backdrop of equities markets plunging globally, gold
appeared essentially sidelined in Europe and Asia and awaiting
direction from New York's COMEX. The worldwide equities markets sell-
off began on Wall Street yesterday when NASDAQ shed almost 200 points
and the Dow 120 points. Tokyo was down as much as 2.7% at one point
yesterday before closing down 1.7%. Hong Kong,Singapore, Taipei,
Sydney -- all followed suit. Europe didn't fare any better with
Frankfurt down 1.6% and Paris down 1.9%. Technology stocks led the
retreat with brokers worldwide complaining about a herd mentality at
work. It seems that herds have this unpredictable tendency to run in
either direction. quot;It's pretty crazy,quot; said Louis Bernstone, European
fund manager at Baring Asset Management Ltd. quot;Everyone's now
saying, 'I don't know what's going on, but I'm going to sell it.'
It's capitulation.quot;

So far, we've had good volume at Centennial Precious Metals, as the
stock market has weakened over the past 30 days, with many investors
deciding to shore up their sagging portfolios with gold.

For months this website and others have implored investors to stay
out of the gold paper markets -- options, futures and other
derivatives -- so as not to serve as cannon fodder for the short-
selling financial firms and hedge funds. It appears that this
strategy is beginning to have an effect, not just because we and
others have attuned investors, but because it has become apparent
that something strange is going on in the gold market, and has been
for some time.

Bridge News reports this morning that quot;Giant US managed futures fund
John W. Henry amp; Company, which has around $2 billion under
management, said that its financial and metals portfolio has reduced
gold exposure to 60% of average position size to address liquidity
issues. It has also temporarily eliminated trading in silver since
the market has seen lower trading opportunities and reduced
liquidity.quot; One doubts seriously that John W. Henry was long the gold
and silver markets. Note the reference to quot;liquidity issues.quot; One
always needs someone to sell to in order to make a short position a
reality -- thus the reference to lack of liquidity. In other words,
the gig is up.

On another subject, Bridge also runs this sketch on the Bank of
England auction yesterday which elicited knowing chuckles in certain
quarters:

quot;The Bank of England announced Tuesday that it sold 803,600 ounces of
U.K. Treasury-auctioned gold at $275.25 per ounce. The bank received
bids for 2,134,400 ounces of gold but allotted only the expected
803,600 ounces,or around 25 tonnes, at the quot;lowest accepted pricequot; as
planned.quot;

Good plan.

Only the Blair government could find solace in selling an important
reserve asset at the quot;lowest accepted price.quot; If Britain's plan had
been in reality to sell its gold and put the proceeds into euros and
dollars as it publicly announced, then they could have done it in one
or two sales based on the heavy response from the first auction on
(note yesterday's auction was nearly three times oversubscribed). But
they have dragged it out for reasons only Gordon Brown and the rest
of the Blair government truly understand. Eddie George, Governor of
the Bank of England, clung to this near-ridiculous proposition
yesterday endorsing the auctions as a quot;sensible portfolio
diversification.quot; What he failed to mention is that the euro has
plummeted roughly 20% since the sales began and Britain began
replacing gold with that currency for its reserves. During the same
period the price of gold in pounds has risen comfortably as well --
so much for the quot;sensible portfolio diversificationquot; argument.

The World Gold Council, known for its general equanimity as the gold
wars rage on, uncharacteristically slammed the aurophobic UK
government for the sales saying quot;[the policy] suggests a degree of
arrogance on the part of the British government in that it is now
clearly flying in the face of majority wishes.quot; The Council points to
polls that show only 12% of the British public supports the sales,
and 48% are opposed.

Prominent gold analysts like Reg Howe of the Golden Sextant and John
Hathaway at DeToqueville are researching the theoretical possibility
that these recent central bank sales are little more than bail out
operations for financial firms which have already defaulted de facto
on gold loans and need the gold to pay back demanding creditors. With
the British and Swiss sales, we are seeing to what lengths central
banks are now willing to go in fulfilling their lender of last resort
function. In simple terms the theory goes like this: If one of the
commercial banks in your system is in trouble on gold loans, you are
required to bail that bank out even if you can't print yellow metal.
You are required to do that in order to forestall a rolling default
which might cripple the entire national banking structure. So because
you can't print gold, you raid the national treasury to provide the
liquidity, the commercial bank is saved from default, the system
limps on floating in a sea of paper derivatives hoping against hope a
gold-buying herd running in the other direction doesn't overtake it,
and make it impossible to rectify the situation.

Just as an aside: If you back to the Daily Market Reports written
when the British first announced their auctions, the theory outlined
above was offered then. The weakness in the theory is that all we
have is circumstantial evidence. We can smell the powder, but we
don't have the gun. The strength of the theory is that it makes the
most common sense under current market conditions, and that should be
of value to current and prospective gold owners.

So what does all this mean for the ordinary gold owner?

It seems that creditors (both central bank and private) are fed up
with running the risk of the gold carry trade. They have essentially
been sold a bill of goods on gold loans. The argument that you can
make a return on a moribund asset proffered by the bullion banks,
does not hold water when you are in danger of losing your asset in a
default because the speculating borrowers went overboard ala Long-
Term Capital Management. The Washington Agreement is probably aligned
to that realization.

As a result, it is unlikely that the lease pool will be growing any
larger. Gold carry trade/forwarding departments are being closed down
in financial firms around the world as reality sets it. It won't be
long until investors small and large catch on that the greatest
impediment to a rising gold price -- the gold carry/forward trade --
is in retrograde. Gold demand will increase markedly starting first
with the big financiers who smell blood in the water and then
spreading to the general public. The investor who gets in now by
purchasing the physical metal itself without the trappings and
dangers of leverage runs ahead of the crowd, and will be the most
likely to benefit from the run-up when the carry trade is finally
unwound.

The other side will not give up easily. The building positions at JP
Morgan are just more evidence of that. Stay away from futures,
options -- gold derivatives of any kind. Own physical. Sit back and
watch the show. It won't be long until the JP Morgan portfolio
committee will be looking at the same set of criteria which caused
John W. Henry to close down its operation. It may take some more time
but gold will have its revenge. As a Rothschild spokesman recently
said, quot;Gold will take no prisoners.quot; That applies to Morgan as much
as anybody.