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Gold market manipulation message is breaking out

Section: Daily Dispatches


Midas Commentary for November 26, 2000

By Bill Murphy
November 26, 2000

Spot gold $265.45
Spot silver $4.59

Russian state repository
to concentrate on buying gold

BBC Monitoring Service, November 22, 2000

quot;Moscow -- Russia's state repository has decided not to
buy diamonds in 2000-2001, but to concentrate on buying
gold and compete with commercial banks, deputy head of
Gokhran, Vladimir Rybkin, told Interfax.quot;

The West seems hell-bent on selling gold, while the
East is buying. It might be well for Western central
bankers to remember the adage, quot;He who has the gold
makes the rules.quot;

Based on recently released figures, the central banks
have only 32,000 tonnes of gold left. It is our camp's
guess that the gold loans have risen to around 12,000
tonnes. The natural/supply demand deficit is probably
1,500-1,800 tonnes per year at current prices. With
those prices, gold demand is on the increase, while
mine supply is on the decrease, so the deficit is
increasing every year. That deficit must be filled by
above-ground supply.

No market will get close to the available supply being
zero. Based on the above numbers, there will be no gold
left in the central banks in 12 or 13 years. That is
just not going to happen.

The gold story becomes more intriguing. The United
States is supposed to own 8,140 tonnes, the Germany
3,700 tonnes, France 3,000 tonnes, Italy 2,500 tonnes,
and the International Monetary Fund 3,124 tonnes -- a
total of 20,464 tonnes. At the moment none of that gold
is scheduled for sale. According to the 15 signatores
of the Washington Accord, those European central banks
may sell only 400 tonnes of gold per year for the next
four years.

It does not take an Einstein to see what is developing
here. Based on our numbers, there are 20,000 tonnes of
central bank gold (32,000 minus 12,000) that may be fed
into the physical gold market in the years to come. But
of that number 20,464 tonnes are not scheduled for
sale. In short, that leaves a 464-tonne problem that
some central bank is short. If the Europeans sell their
allotted 400 tonnes per year, that central bank dilemma
grows by 400 tonnes per year.

On top of that we have 1,100 to 1,400 tonnes of the
natural supply/demand deficit per year to add to the
growing central bank problem. As previously stated,
that can be met only by above-ground central bank
supply. Where is it going to come from? Which central

Jordan, Kuwait, Sri Lanka, Chile, Uruguay, Bangladesh,
and the Philippines recently have been called on to
lend or sell their gold. That, combined with the very
recent controlled action of the gold price, leads our
camp to believe that the gold cartel is running out of
options to obtain physical gold to continue their

This leads to a staggering recognition. These countries
and other central bankers are quot;lendingquot; gold at $265 an
ounce. They are supposed to get their gold back from
the borrowers. What are all the borrowers to do when
the price of gold rallies hundreds of dollars because
of a physical shortage and a short squeeze? What are
the worldwide financial ramifications of such a

Squeezes are known to the commodity world. It would not
take much for Middle East or Far East players to pull
it off.

That is why GATA continues to pound the table,
foghorning: The gold cartel is in big trouble.

That may be only the tip of the iceberg. Pile an
enormous amount of derivatives on top of the 12,000
tonnes of gold loans. Those derivatives have been used
either to hold down the price of gold or for income
enhancement purposes. Gold producer and central bank
writing of calls to earn income are examples of what
has been taking place. That is not a subjective opinion
on my part. The notional value of the derivatives at
Chase, Morgan, and Deutsche Bank have exploded over the
past 18 months. For two years GATA has identified those
three banks in particular as gold cabal participants.

The bullion dealer/Gold Fields Mineral Services camp
will come back at us by saying the gold loans are only
5,000 tonnes, not 12,000 tonnes. We do not believe that
is possible, but even if it were the case, the central
banks still would have only a few years left until some
central bank would have to decide to sell its gold or
be forced to delivering into its lent gold.

That won't be as easy to do as it sounds. The euro is
in the trash bin. Some European central bankers are
calling on the European Central Bank to raise the gold
reserves for the euro from 15 to 20 percent -- not to
sell gold. In the United States, the leadership of both
the Republican and Democratic parties, as well as the
Black Caucus, banded together in 1999 to vote down any
IMF gold sales because they would hurt the poor African
countries the sale was supposed to help.

That leaves the United States itself. Will the
Republicans and Democrats suddenly reverse course on
this issue? How could it be even explained without
admitting that the price of gold had been manipulated
all these years and held down to an unrealistically low
price to serve the greed of the New York bullion banks
and a warped U.S. administration, thereby creating a
horrific financial problem and jeopardizing the
currencies of certain countries?

The longer the price of gold stays down at these low
levels, the bigger problem it will be down the road for
the governments of the world. That is why we must all
do what we can to bring it to their attention and get
them to do something about the scam. Why let it go on
any longer?

Leave it to gold cartel co-ringleader Goldman Sachs to
come out on a holiday in the United States to put out
negative gold share vibes. In the last few days the XAU
has shown signs of life, as have the shares of some of
the moribund gold producers. One well-known fund
manager we know told a Cafe source he was going to
start buying gold shares. Newsletter writer Richard
Russell came out with a gold stock buy recommendation,
citing Homestake two days in a row as his favorite.

That was all the gold cabal had to see. Counting
Thursday's and Friday's overseas action, gold has
traded with a $266 handle for 23 days in a row. That is
unprecedendeted and reveals how scared the market
manipulators are about allowing any gold excitement at
all. With the gold shares popping up (ever so
pathetically), Don McConvey of Goldman Sachs was called
in from the shopping malls to bash the gold stocks:

quot;NEW YORK, Nov. 24 (Reuters) -- Goldman Sachs said on
Friday that the current rally in gold stocks caused by
the unresolved U.S. presidential election would be
unsustainable unless election uncertainty worsened.

quot;Large-cap gold mining stocks have rallied 10 to 15
percent from their lows of last week on the back of the
presidential vote deadlock, Goldman analysts said in a
research note. 'We believe that, unless general equity
markets become more turbulent, this gold equity move is
premature. We believe it offers an exit opportunity for
those investors already focused on lightening up on
gold equities,' analyst Daniel McConvey said in the

quot;In the first 10 minutes of Friday trading, the
American Stock Exchange Gold Bugs Index fell 0.8
percent. The index has gained 4 percent since Nov. 7,
though it remains down 47 percent for the year to date.

quot;'For those investors determined to enter the sector,
we would recommend gold mining stocks with the
fundamentals required to do relatively well in a low
gold price environment. Our favorite stocks are Barrick
Gold Corp., Placer Dome Inc., and AngloGold Ltd. which
all have Goldman's investment rating of market
outperformer.' McConvey goes on to say, 'Anglogold's
fundamentals are currently benefiting by current rand
and Australian dollar weakness, which makes the current
situation more interesting. We are also are becoming
more positive on Australian stocks Newcrest Mining and
Normandy Mining, which are both rated market

Does it surprise anyone that these firms are big
hedgers? Anglogold and Barrick even announced
increasing their hedges last quarter at these low gold
prices. However, many of the Aussies, such as Normandy,
are taking the opposite tack and delivering into

That is a good move because the potential of a
worldwide gold hedge blow up is increasing. Sources
tell me that Australia's Centaur may have only a month
or two left before going tapioca. Anglogold is reported
ready to move in for the kill.

The problem for the Aussies and their hedges is this.
They should cover now and get out. But because of the
collapse of the Aussie dollar, their hedge books are
under water in most cases and they do not have the cash
to do so. As world gold production is on the decline
while gold demand is on the upswing, it makes no sense
to stay very short in this environment, as it is only
matter of time before the price of gold must move
substantially higher. What will that do to their hedge
books and the price of their shares?

McConvey and Goldman Sachs are going to have a heckuva
lot of explaining to do.

McConvey mentions Placer Dome. With friends like
McConvey and Goldman Sachs, what gold producer needs
enemies? It would appear that McConvey will tout only
big hedgers that support the gold cartel.

Anyway, Placer Dome's CFO, Rex J. McLennan, has written
a long letter to GATA supporter Dale Schnitzler, who
expressed concern about Placer Dome's hedge policy.
McLennan's response was well considered, prompt, and
earnest. I met Rex during last year's Denver Gold Group
Conference and commend him for his meticulous attention
to shareholder concerns.

Because it is so thorough, I thought you might like to
review Placer's thinking. So here is McLennan's letter
to Schnitzler.

* * *

Dear Mr. Schnitzler:

I am writing in response to your recent e-mail note to
Ron Stewart, our manager of investor relations.

No doubt producer hedging remains a contentious issue
among shareholder constituents, and we receive
letters from shareholders, equity analysts, and even a
few of our own employees that voice a range of views.

Some, as you argue, hold the view that hedging activity
is a primary reason for the weakness of gold against
the U.S. dollar during the past two years or so. Their
rationale essentially boils down to two points. First,
that producer forward selling is contributing
incremental supply to the market that, combined with
central bank sales in the 400 to 500 tonnes per year
range, is depressing the gold price relative to what
would exist in the absence of such producer hedging.
Second, that the willingness of producers to sell
forward a substantial amount of their production
damages the sentiment or image of gold and encourages
others to speculate by borrowing gold to create a short

I will address both points.

Producer hedging does increase incremental supply to
the market when the overall level of hedges outstanding
increases. Producers that are not increasing their
hedge positions -- rolling over existing positions --
are, individually, not adding incrementally to global
supply. When the overall hedge position of the
producing industry grows, it means that more gold is
being lent by the central banks (and likely some
private stocks) and consequently sold into the spot
market than is being repaid. On the other hand, if the
overall hedge position of the industry declines, then
gold is removed from the market and returned to the

We stated early last February that in anticipation of
reduced hedging in future, and improved gold market
sentiment, we were prepared to reduce our overall hedge
commitment by 2 million ounces this year. This we will
achieve. Some other producers took a similar view and
modified their hedging strategy, while others,
particularly in Australia, chose to increase their
positions and have continued to do so as the Australian
dollar has declined against the U.S. dollar and gold.

Similarly, with the decline in value of the South
African rand, increased hedging activity resulted. More
recently, third-quarter announcements by Barrick and
Anglogold suggest there has been a substantial increase
in the industry hedge position since mid-year as a
result of their expanded programs.

A key question is whether, in the absence of this
incremental hedging, would other sellers -- both
official sector and private -- have mobilized
additional inventory into the market to take its place?
Or would independent actions of producers to reduce
their levels of hedging alone have improved the
sentiment for gold sufficiently to dissuade other
inventory liquidation?

I do not believe anyone is in a position to know that
answer, but the evidence of the past six months would
suggest the former is more likely under the current
monetary environment. On the other hand, I would think
that if the producing industry as a whole moved away
from gold borrowing (quot;hedgingquot;) -- due to a belief that
it is cheaper and less risky to finance by borrowing
dollars or other currencies -- speculators may be less
inclined to short gold. The perceived intentions of
those who hold large stocks of gold must impact
sentiment and price. This may also support your point:
quot;What looks reasonable on a micro-economic level makes
absolutely no sense in the aggregate.quot; But one comes
back to a more basic question: Does any of this resolve
the more fundamental issues for gold? Not likely.

The gold bullion market is large and liquid, and no
single producer or bullion dealer is in a position to
materially influence it. This brings me to some final
points. I believe that the growth of producer hedge
programs and other short selling (by hedge funds, et.
al) is more a symptom of gold's changing image rather
than a cause of it. The actions of market participants
are shaped by the sentiment on gold relative to
competing financial assets, principally U.S. dollar
assets and competing commodities such as platinum. Gold
has performed quite well against the euro, Australian
dollar, and rand, and is holding its ground against
many other currencies -- the Canadian dollar, the yen,
and a number of Asian currencies, for example. However,
other commodities have generally outperformed gold in
recent years.

Clearly, the enduring strength of the U.S. dollar is a
major issue for gold. This strength is vested in
confidence in U.S. financial assets and in the direct
investments that together provide the capital inflows
to finance a growing U.S. current account deficit. Most
economists I speak with have long argued that the
dollar is overvalued, but predicting the future of the
U.S. current account deficit and the appetite of the
world to continue to increase capital flows to the
United States has proven impossible. The co-existence
of a strong dollar and rising U.S. current account
deficit reflects the remarkable strength of the
investment-led, technology-driven expansion in the U.S.
economy. Eventually, one would expect the global
competition for capital to intensify with a portion of
the world's savings now directed to the United States
(about 73 percent at last count) flowing to Europe and
Asian markets, and the dollar weakening as a

Against this backdrop, one should not be surprised to
see gold trading in a $250-$300 range. If and when the
dollar weakens, I would expect gold's dollar price
range to improve somewhat. However, the more
fundamental issues for gold in terms of its value as a
hedge against inflation and monetary crisis (currently
viewed as low risks) and its ability to compete in the
jewellery fabrication market will remain.

Therefore, I believe that the gold-producing industry
must focus on the following seven fundamentals to
secure a more compelling future and attract new

1. Stop investing in (or operating) unprofitable or
marginal mines (based on a spot gold price).

2. Stop investing in new development that does not
recover the cost of capital, plus a reasonable premium,
under a conservative spot gold price outlook.

3. Maximize the return on investments already made by
relentlessly reducing all costs of running the
business, and by enhancing the asset portfolio over

4. Invest in research and development to achieve
productivity improvements and revenue enhancement.

5. Invest in sustainable development to demonstrate
more forcefully that mining converts minerals in the
ground into sustainable improvements in people's lives.

6. Invest in promoting demand for gold to improve its
image with consumers.

7. Create a new image of the gold mining industry as a
dynamic part of the quot;new economy.quot;

We are addressing these fundamentals. We also believe
this message is registering favorably with our
shareholders, and are confident that following this
path will create value for them. From my perspective,
we are financing our growth strategy with a prudent,
balanced combination of public investment-grade debt
(dollar borrowing), hedging (gold borrowing), and re-
investment of free cash flow (equity). We are also
making steady progress in strengthening our financial
position despite the low gold price environment.

Our hedge program has been an integral part of our
financing strategy over the past decade. It has served
to underwrite our profitability when the gold price is
low, while still retaining exposure to a rising gold
price on about 85 percent of our reserve base and two-
thirds of our production over the next five years.

This is a balanced, prudent approach to managing our
business risks while ensuring that our shareholders
hold a high-quality exposure to gold. I can assure you
that, based on our conversations with our major
shareholders and most gold equity analysts, this
strategy is being well-received. I also recognize that
my response may not fully address the concerns you hold
regarding industry hedging, but hopefully it will shed
more light on what Placer Dome is doing to improve
market sentiment, secure our own financial performance,
and position the company for profitable growth.

Yours sincerely,

Rex J. McLennan
Executive Vice President
and Chief Financial Officer
Placer Dome

* * *

Rex raises many valid points here. Unfortunately, it is
a quot;can't see the forest for the treesquot; routine. Last
year I told him what the real problem was and that if
the gold producers did not address the most fundamental
issue, the market manipulation issue, that they would
be in trouble. Sure enough, it is one year later, they
have done nothing, and their share price is in the

I have not yet seen one gold producer response from the
gold market manipulation letter Dale Schnitzler wrote
to Newmont Mining, the prototype of which many of you
sent to other gold producers. Not one gold producer
executive seems to be willing to respond to the
manipulation issue in writing. As a result, they may be
the most derided industry executives in history and
their shareholders are the laughingstock of the
investment world.

They play kissy-face with investment banker Goldman
Sachs and as soon as their share price starts to lift,
Goldman Sachs suggests to the investment community that
their gold shares should be sold -- AFTER the shares
have been going straight down for years.

For weeks and months now you have read the voluminous
evidence that the gold market is rigged and by whom.
Has anyone read even one comment from a gold producer
executive that something is amiss in the gold market?


The inept leadership of the gold industry has served to
bleed money out of gold and precious metal funds, and
has relegated the sector to a minor role in the overall
fund industry.

Funds included in the precious metals category average
about $45 million in assets, according to Morningstar
Inc., a Chicago fund analysis firm.

That is why gold share prices just go down. The irony
is that with some help from the gold producers, we
could have a free gold market and our gold share
investments would be the rage.

Cartel Capitulation Watch


Extremely cold weather has plagued the Midwest early in
the heating season, sending the price of natural gas
soaring. While the Northeast has been colder than
normal, it has been spared really cold blasts until
now. It looks like another cold front is on the way for
the middle of next week.

The heating oil panic will begin. If there is a very
cold winter in the Northeast, and Azteca de Oro is
correct, we will run out of heating oil in February.

* * *

Iraqi Newspaper Says Country
Thinking About Cutting Oil Exports

By Waiel Faleh

BAGHDAD, Iraq, Nov. 23 (AP) -- Iraq has again
questioned the benefit of exporting its oil, saying it
is quot;thinking seriouslyquot; about cutting exports if the
U.N. sanctions committee does not clear the
humanitarian and oil contracts on hold.

quot;If the world community does not accept its
responsibility for Iraq's suffering, why should Iraq
feel responsible for the expected oil price increase in
case it stopped exporting?quot; the government's official
English paper, the Baghdad Observer, asked Thursday.

* * *

Cafe member TCH notes:

quot;I just did a check of the one-year backwardation
spread for the energies.

quot;Crude: 30 percent.

quot;Heating oil: 40 percent.

quot;Natural gas: 39 percent.

quot;Gasoline: 20 percent.

quot;Clearly, things are EXTREMELY bullish for the energy

(Backwardization is the spot price, or prompt futures
contract, trading at a premium over more distant
futures prices.)

* * *

Harry Schultz points to an old $20 bill pictured in his
recent HSL newsletter. He says it quot;tells young people
all they need to know about the gold standard and
gold's role in the social fabric of society. The bottom
line on this $20 bill says it is $20 'in gold coins
payable to the bearer on demand.'

quot;Before the power-mad politicians withdrew this
currency, U.S. citizens didn't have to trust
government. The government had to trust citizens not to
cash in the paper for gold -- which they could do if
government misbehaved, overspent, ran up debt, over-
regulated, etc.

quot;Gold would be $300 higher but for bullion banks' price
cappers aided by various governments' actions and
support. If a John Dean will come forward from a
bullion dealer or govt agency and expose them, we can
move quickly to get these price cappers off gold's
back. All we ask for is a free market.quot;

Three cheers for a free gold market!