COPYRIGHT 2001, WWW.LEMETROPOLECAFE.COM NOT TO BE REPRODUCED WITHOUT PERMISSION By Bill Murphy www.LeMetropoleCafe.com June 16, 2001 Gold $271.60 down $4 Silver $4.30 down 8 cents Goldman Sachs and crew continue to flex their short side muscle and came up a winner on Friday after losing for a few days. While a $4 drubbing is not conducive for sweet dreams on the weekend, it is not a reason to be down in the dumps either. This is what I think is going on. For the past year I have asked my GATA delegation colleagues what could be done to solve the gold problem. That is, say I am the president of the United States, I know GATA is right,and I have called the Howes and Venerosos in, seeking suggestions on the best way to undo the gold mess created by the Clinton administration. My colleagues have mostly answered, "I don't know." To illustrate just how serious and complicated the gold problem is, Frank Veneroso's specialty was crisis management. The finance ministers of Chile and Mexico called on Frank to help them solve economic crises. He knew just what advice to give them. But on gold he draws a blank. In recent Midas commentary, I have mentioned some anecdotal information about the government's main bank, J.P. Morgan Chase, like its stopping as many of the June Comex gold deliveries as possible. GATA also knows that the president, economic adviser Lawrence Lindsey, and Treasury Secretary Paul O'Neill are very aware of the gold problem. We also know that the volatility in the gold price has increased dramatically in the past month and that the lease rates remain high. My hunch is that to minimize damage in the unwinding of the gold fraud, the Bush Administration directed that the gold lease rates be taken to high enough levels to shrink the contango and discourage forward selling. That would tend to reduce the total number of short positions. That was the first step. Step 2 would be to increase the gold volatility in a deliberate effort to warn market participants that a big gold event is coming and that to be overly short or too aggressive in writing calls is liable to be very dangerous, or even fatal, in the very near future. They probably know that J.P. Morgan Chase has to be bailed out officially by the U.S. government in some way -- under the "too big to fail" principle. Their short position is just too big to be covered. How they will present this to Congress and the American public is hard to say. What they must be trying to do now is reduce the collateral damage to other gold shorts that will happen when they let the gold price go. With increasing volatility before the gold price takes off, a good number of gold market players should be scared out their vulnerable gold short positions, and out of their potentially disastrous written call option positions. The goal must be to have the Comex open interest as low as possible when the gold price explodes. And, in fact, the gold Comex open interest right now is an extremely low 118,677 contracts. That J.P. Morgan has taken in thousands of Comex gold contracts also fits, as it will make it harder for longs to squeeze Comex in the coming gold debacle, or cause an exchange default. Whether my postulation is correct or not, the high lease rates and the increased volatility have the attention of everyone in the gold world and have become a topic of conversation. For example, comments today from the Gold & Precious Metals Report from mega-gold bears Macquerie Research Equities in Australia: * * * * Traders are expressing a high degree of uncertainty about the current move and generally report little clear view on the likely direction in the short-term. It is fair to say that few generally believe that the rally in gold can be sustained for very long but are not convinced enough to sell into the strength evident from the U.S. This uncertainty, plus concerns about options positions, has seen gold option volatility jump higher. * Not that the strong gold prices have been driven by massive buying surges into gold. The Comex exchange data shows that while large speculators are maintaining a significant net long futures only position, the overall open interest is considerably lower than earlier peaks. * In our view the strongest positive argument for gold remains the narrowing gold contangos which have significantly reduced the risk/reward in forward-selling gold at these levels. Given that interest rates are still likely to fall in the coming months and the gold lease rates remain stubbornly near 2 percent, we still expect the contangos to narrow further and in the past contangos below this level tend to be associated with rising gold prices. * * * This is the most gold-friendly John Brimelow has seen the contangos, and this kind of commentary is becoming reasingly pervasive in the gold industry. I know of a silent Gold Cartel member that is "out of sorts" because it has a big option position and the increased gold volatility has its "models" buying and selling at the wrong times. In other words, they have to delta hedge written calls by buying on rallies. Then the rally fails and they sell. That has to be happening all over, which in itself increases the volatility. Adam Hamilton's gold volcano has given us spiking mini-price eruptions over the past month. It could no be more obvious that they are preludes to a giant eruption that is right around the corner. Woe to those that do not heed these obvious warnings and exit the short side of gold. The fix is ending. And woe to those gold producer CEOs who are overly hedged and do not heed these obvious warnings and price set backs to take in a sizeable amount of their forward sale positions. Hello, Anglogold, Normandy, and Barrick. John Brimelow on Friday: * * * Indian ex-duty premiums: AM $2.45, PM $1.92, with world gold at $275.10 and $274.70. Below legal import level of course, but impressive given the abruptness and lateness of yesterday's move. Increasingly it looks that action is developing in gold. Apparently some parties are 'short volatility,' the stratagem which destroyed LTCM. As Mitsui euphemistically says in its NY report today: "There seems to be some negative gamma around providing support. With vols rising, spot and option spreads are starting to widen defensively." The problem is that ' volatility' is an intellectual construct, which which exists only in a commercial sense if someone is willing to synthesise it. As a Lehman man said in Nicholas Dunbar's brilliant 'Inventing Money": "There was no fresh supply ... With anything else ... price ... can create ... more supply. This is like fine art. Why should anyone pay X million for for a Picasso? It's because there's not going to be another one." Maybe the LTCM debacle has relevance here. Enthusiasts might refer to my essays on the two wonderful books written on this mysterious subject: http://www.vdare.com/ltcm.htm and http://www.vdare.com/jbrimelow_WallStChangingCulture.htm My friend the long term chartist Martin Pring has called a bottom on the Euro: http://www.pring.com/registered/weeklychart.htm He is also constructive on gold shares and gold and negative on the US, and world wide stock markets, all fresh judgements. -- JB * * * CARTEL CAPITULATION WATCH The news could not be much worse for stock market bulls and the bullion banks in the Gold Cartel. -- Nortel loses an unexpected 19 billion -- The CPI rises to 4% - 4.8% on an annual basis, yet the boob tube TV analysts rattle on all day that inflation is not a problem. -- There is no economic "visibility" in sight -- the recovery is now put off until some time in 2002. Add this from the King Report: * * * The eight months of decline in industrial production is the longest stretch since March-December 1982, which was a recession year. Today's report also showed that industry operated at 77.4 percent of capacity in May, the lowest since August 1983 and a drop from 78.2 percent in April. Our friend Paul notes mortgage delinquencies of 30 days or more now number 10 percent of mortgages (Mortgage Bankers Association); it was only 8 percent in the last recession. About 400,000 additional families went delinquent in Q1. It was only a matter of time, a natural occurrence -- U.S. manufacturers are complaining that the strong dollar hurts them. They will lobby Congress for a weaker buck. When you're the largest debtor in the world and the reserve currency, weakening the $ is tres dangerous. You can look it up in the`70s. M3 exploded $26.4B for the week ended June 4. Fed holdings of US debt, thanks to Easy Al's persistent coupon and bill passing, is a record $531.9B. Meanwhile, inflation is now at 3.9 percent in Canada, the highest in a decade ... and rising. Wage settlements are starting to go up. Nurses here in BC will settle for around 20 percent+ over three years. That's just the start. * * * >From a very savvy Cafe member about what is going on out there in mainstream USA. The daisy chain of misery that occurs when a "bubble" bursts that few on Wall Street are articulating: "My brother (an executive with a well-known major tech firm) told me yesterday that one of his folks who had left about three years ago was back to try and get a job at 'the tech firm.' He left for a startup, the stock went through the roof, he made (on paper) about $8 million on at his option point. But was committed to keep the stock for two years from that point. Apparently there is a tax law in the U.S. that forces you to pay the tax when you exercise the option. So he was forced to pay the tax ... some $3 million. Since the stock could not be sold, he borrowed the money against the stock to pay the tax. On top of that he bought a house for about $2 million. Well, Bill, two pennies to you if you guess what happened. The stock cratered before he was allowed to sell. It is now virtually worthless. The loan for the tax and house is intact at the bank. He is about to declare bankruptcy. His wife left. He is looking for a job at his old firm. They are not hiring. Oh, boy! * * * What are seeing the aftershocks of the bursting of the stock market bubble. They are becoming more intense. As they do so, the public and Wall Street are going to cry out for more and more interest rate cuts by the Fed. The pressure on the Fed to be very aggressive is going to build. The bond market will not like it, and long-term rates are likely to go up, not down. Before you know it, the new investment mantra is likely do be: "Don't fight the rising bond yields, sell stocks." The lower short-term U.S. interest rates WILL reduce the gold contango even further and put more pressure on the shorts. Meanwhile, as stocks dive, more investors will eye gold and gold shares as the place to be. >From Mark H: * * * Subject: Newmont long / Barrick short A day trading firm that has ties to a San Francisco hedge gund has made this market call this morning. I view their site on a daily basis. It is the first mention whatsoever about gold. Thought you might be interested. * * * Ed Hamula, an officer of EnviroGold, one of those gem little junior gold companies I keep referring to, sent this in: * * * Great commentary Bill. All of us at EnviroGold are a happy lot. We're producers and sellers of real bullion coming out of our mill at 100- 130 troy oz/day at an all-in cost of less than US$100/oz. We'll be out of development cost debt in about four months and then look out! We look forward to those lofty days ahead when it approaches $600/oz . . . that's $900/oz in Canadian dollars! The IPO underwriter hounds will be barking at our heels for certain. We may never go public. Our geologists estimate our unmined reserve at 2 million ounces. Keep up the great work. * * * Ed and his firm are Café members and GATA supporters. A couple of notes to wrap up with. A bullion dealer tells us that the Australian government is concerned over the state of the Aussie gold producer hedge books. The same dealer says that Goldman Sachs has lost its reputation of being able to stop gold rallies whenever it wants to. It is not feared as it had been. -END- Your use of Yahoo! Groups is subject to http://docs.yahoo.com/info/terms/
