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here is a great article on the gold market
my analysis: go long!
if you want to send hate mail send it to the paper.
>Subject: Rick Ackerman- San Francisco Chronicle: Score one round for the
>little guys
>Date: Mon, 4 Oct 1999 00:28:26 -0400
>
>
>
>The "Left Flank" is indeed picking up steam in the
>mainstream press. Our effort has been relentless and
>will continue to be so!
>
>This article was in today's San Francisco Chronicle.
>This is one sharp journalist. He knows his stuff.
>
>"Score one round for the little guys"
>
>With gold on a bullish rampage last week, small
>investors racked up impressive gains on dirt-cheap
>mining stocks while many hedge funds and bullion bankers
>got caught with their pants down around their
>ankles.
>
>Equity portfolio managers and other institutional
>investors have been largely out of gold stocks for
>more than a decade, mainly because mining shares
>have been too depressed and too illiquid to
>buy or sell in size.
>
>But the diehards who held them last week feasted
>as spot bullion prices rocketed from below $270 to
>above $320 in just a few days. Echo Bay shares, which
>earlier this month had sold for $1.18, shot up to $2.62;
>Durban Deep went from $1.69 to $2.50, and Placer Dome
>soared from $10 to $17.
>
> >Commodity speculators who were positioned with the
>trend fared even better. "Some of my customers held
>$180 call options that went to $3,500," said one
>Chicago broker, Rob Rosenberg. "The market was
>sold down so hard that it was ready for a bounce."
>
>Call it sweet justice.
>
>For years the institutional leviathans have been
>raking in easy money by betting on gold's continued
>decline. Their strategy has been to borrow, or "short,
>" gold with the expectation of replacing it at lower prices.
>
>With bullion's value in practically ceaseless decline
>since the late 1970s, this has been the sweetest game
>in town.
>
>It works like this: First, the hedgers borrow gold
>from the central banks of Europe or the U.S. for a
>nominal rate of 1% to 2%; then, they sell it for cash
>and park the proceeds in risk-free Treasury
>paper yielding anywhere between 4% to 6%.
>
>The spread is profitable by itself, but many pushed
>the leveraging a step further, using the Treasurys as
>collateral to speculate in the stock market.
>
>For a while this strategy simulated a kind of
>financial perpetual motion machine whereby everything
>that the hedgers owned moved up in
>value while all that they owed moved down.
>
>This borrow-yourself-rich gambit is known as a
>"carry trade," and it is the same trick the pinstripe
>crowd once performed to spectacular excess using the
>Japanese yen, which can still be borrowed for next
>to nothing.
>
>Even so, the high-octane money-machine seized when
>the yen began to appreciate sharply against the dollar
>13 months ago, making it more costly for carry-trade
>operators to pay back their yen-denominated debt.
>
>It wasn't long before the Japanese currency's
>precipitous and wholly unexpected rally put some
>massively leveraged U.S. hedge funds on
>the ropes, necessitating a strident easing of credit
>by the Federal Reserve to prevent a systemic
>financial collapse.
>
>Now, it's possible the Fed will have a new crisis
>on its hands, since some very big institutional
>players who have been using borrowed gold for
>carry-trade leverage are rumored to be in way over
>their heads.
>
>One reason is that gold lease rates have skyrocketed.
>While just a few months ago the hedgers were able to
>rent gold for 2% or less, the rate spiked last week to 11%.
>
>Even if rates fall by half it will be prohibitively
>expensive for >gold shorts to maintain their positions.
>Moreover, there is not enough physical gold readily
>available to replace what they have borrowed.
>
>The problem boiled up on Tuesday, when Europe's central
>banks said they would restrict bullion sales to 400 tons
>a year for the next five years.
>
>Before the announcement the central banks had been the
>gold hedgers' best friends, lending more or less
>unlimited quantities of bullion on demand, and at
>bargain-basement rates.
>
>Moreover, by frequently announcing sales of large
>quantities of gold from their inventories, the central
>banks helped to keep a lid on gold prices to the further
>benefit of gold borrowers.
>
>How much bullion are the hedgers short? Just four of
>them alone account for at least 70 million ounces,
>according to estimates published at
>www.lemetropolecafe.com
>
>LeMetropole's sick-ward list includes Tiger Fund,
>Tudor Capital, Moore Capital, and that notorious
>troublemaker of recent memory, Long Term Capital
>Management.
>
>Some big banks as well are reportedly short gold
>in quantity, including Chase, J.P. Morgan and Citigroup.
>Ironically, even a few gold producers could be in big
>trouble, since they have been among the most
>enthusiastic players in the carry-trade game.
>
>LeMetropole's owner, Bill Murphy, has been warning
>stridently for months that the gold carry-trade
>would trigger a squeeze on bullion inventories that
>would cause the metal's price to soar.
>
>At the same time, acting through a group called
>the Gold Antitrust Action Committee (GATA), Murphy
>and his partners have pursued the indictment of
>banking's international elite and the hedgers, who he
>says colluded to suppress gold prices.
>
>For now, though, precious metal prices are quite
>buoyant, portending problems of a higher order of
>magnitude than those faced by mere bullion bankers
>and hedge funds.
>
>For it can only be at the expense of a strong dollar
>that Europe's central banks would choose implicitly
>to support the price of gold. In declaring to the
>world that they plan to limit bullion sales,
>Euroland has affirmed a willingness to give gold
>a monetary role.
>
>This is a direct assault on the greenback, since
>the dollar is backed by nothing of substance, much
>less gold. By deigning to support a standard which
>implies the dollar's inferiority, Europe is
>clearly seeking to elevate the value and utility of
>its euro while diminishing the dollar's role in world
>trade and its dominance as a global reserve currency.
>
>Clearly the Europeans are scared of a world
>manifestly awash in dollars, just as they are fed up
>with the obligation of supporting a
>global financial system that conducts most of its
>business in dollars.
>
>Japan may be thinking along the same lines, since
>its central bank recently rejected the idea of easing
>credit to slow the yen's steep rise against the dollar.
>
>If Europe and Japan succeed in breaking the world's
>dependency on dollars, it will surely spell trouble
>for the U.S. economy. For, a weaker dollar would
>diminish investment by foreigners in our
>Treasury bonds, raise interest rates and curtail
>the ability of our consumer-oriented economy to
>function effectively without savings.
>
>It would also increase the cost of the many
>things we now buy abroad, the bill for which has
>been running at a monthly clip approaching $25 billion.
>
>If the threat to the U.S. economy of a weaker dollar
>and higher interest rates is real, the stock market
>has so far failed to acknowledge it. Share prices are
>only slightly below their levels prior to gold's surge
>and by week's end looked to be firming.
>
>While I will not hazard a prediction concerning
>gold's course, I seriously doubt that U.S. share prices
>can make much headway in the coming months, given the
>weakness in the dollar.
>
>If there are any stocks that can buck the trend,
>they will most likely be found in the mining sector.
>Some of them, particularly the still-depressed shares
>of South African gold producers, look like they
>can't lose.
>
>Before you take the plunge in any of them, though,
>make certain their profits come from selling gold
>they extract from the ground rather than from their
>successful exploitation of the carry-trade.
>
><
>
>
>
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