Gold futures and stocks move higher

Section:

Daily gold market commentary
for May 16, 2001
at www.USAGold.com

Gold rallied convincingly in early New York trading,
blowing through the $270 barrier and causing concern
among traders short the market. In what I thought to be
a slightly odd assessment of this morning's market
conditions and one which perhaps reveals more than
was intended, one trader said, "There is no panic on
the gold market now, especially after yesterday's
disappointing (Bank of England) auction. But things
might change in the second half of the day."

Panic!??!!

Apparently there is cause for concern in some
quarters, but "panic" is a fairly strong term to be
used at this juncture, wouldn't you think?

But this unexpected and strong rally could very
well be a side bar to the Fed rate cuts that only a
handful of analysts had considered. With the Fed
pushing down yield rates on one hand and the gold
market pushing up lease rates on the other, the
return (and the fun) is being wrung out of the gold
carry trade. The apparent beneficiary is going to be
what we always thought it would be -- the gold price.
If you happen to be hopelessly short the gold market
with a string of loans outstanding to a bevy of shaky
gold producers who would be seriously damaged if
the gold price were to start rising, perhaps there is
some cause for panic.

Along these lines, www.thebulliondesk.com is
reporting a rumor that Mike Price, apparently a heavy
hitter in the gold lending business working out of N.M.
Rothschild & Sons offices is leaving for greener
pastures. Thebulliondesk.com doesn't say why Mr.
Price might be leaving -- and let's face it, the departure
could be for any number of reasons -- however, the
timing does invite a question or two given the rapid,
deep-seated, and potentially dangerous changes
occurring in the gold carry trade business. Don't
orget it was Rothschild that presaged the Washington
Agreement with its call for transparency among central
banks in 1999. Recently Rothschild has called for Third
World central banks to curtail their gold lending practices,
suggesting that it is no longer in their best interest. Very
few analysts entering the gold fray can escape
acknowledging Rothschild's critical role in the gold
market going all the way back to the time of Napoleon.
That influence is no less today than it was some 200
years ago. So what happens at N.M. Rothschild &
Sons, for better or worse, is followed with a great deal
of interest.

Along these lines,the London Bullion Market Association
(in which Rothschild & Sons plays a leading role)
released their monthly turnover figures earlier this and
once again they reflect the view expressed often here
that the gold carry trade -- which has acted as a deterrent
to higher gold prices over the past several years --
continues to unwind. LBMA April gold turnover was down
a steep 12.5 percent. That could very well be the largest
drop since the LBMA started publishing its daily volume
figures. If nothing else it clearly signals that something is
changing, and perhaps changing abruptly, in the gold
lending business.

This has not been lost on gold investors the world
over. Bullion demand remains strong internationally
and Lipper reports over the weekend that gold stocks
have suddenly become a hot item, in fact the best
performing sector, in the world of equities. Rising gold
stocks usually presage rising gold prices.

Salomon Smith Barney's Leann Baker seems to
think we are in for some changes in the gold market.
In a report released this morning titled "Gold -- A
Discernible Shift, For the Better, in Investor Sentiment,"
she says:

"In our view, the higher lease rates suggest that central
banks are less willing to lend gold at subpar rates, and
some in fact appear to be setting "lease rate targets"
below which they will not lend. Moreover, we understand
that some major central banks lenders are now lending
further into the future, in turn becoming less active in
responding to short-term lease rate fluctuations. Lease
rates have firmed despite an apparent reduction in
demand for borrowed gold both by producers and by
speculator short sellers. Rising lease rates and
declining interest rates make it less likely that producers
stand ready to boost hedging activity if gold proves able
to successfully penetrate $275 resistance, which bodes
well for a more sustained move higher at some point."

Ms. Baker goes on to offer a gold price estimate in the
$275 to $325 range for the rest of 2001 and 2002.

That's it for today, fellow goldmeisters. We invite you to
call toll-free with your questions and concerns, or to get a
quote.

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