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Thank C-SPAN and ask for a rebroadcast of GATA conference
10p ET Wednesday, February 13, 2002
Dear Friend of GATA and Gold:
Thanks to Dan Tessler of AU Capital in Rockville,
Maryland, for letting us share with you their most
recent commentary, which may be as good an
analysis of the world economic situation and as
persuasive a case for gold as you'll see any time
soon. It's below.
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
* * *
February 8, 2002
To Our Limited Partners:
Our capital gained 16.8 percent in all of
2001 and 3 percent in the fourth quarter. We
more or less tracked our peer group despite
reserving our entire micro-gold portfolio to
zero during the year. Here are the quarterly
data and your individual account statement,
all subject to audit and adjustment.
Au Capital, LP 3.0% 16.8%
Gold Funds (Lipper) 1.7 18.8
Phila Gold/Silv (XAU) -7.2 5.9
Gold Bullion -4.7 2.5
Since year-end, we gained another 35 percent on the
9 percent rise in bullion prices that accompanied
the extraordinary beginnings of overdue
examination into the hows and whos of
financial asset markets. The aggregate move
in gold prices since the start of last year
was not large as these things go. It may not
last and it surely will not continue
uninterrupted. It pleased us nevertheless to
see a sustained turn toward gold bullion and
gold shares in stressful times, confirming
that the instinct of the ages survives.
Once again, the yellow metal that is nobody's
liability promises to buy you a hot meal when
all the smoke clears, all the mirrors are
broken, and CNBC is flogging quot;Cheersquot; reruns
all the day long.
We've been saying for long enough to be
tiresome that the commodity fundamentals and
the market technicals in gold are generally
strong. As to fundamentals, annual physical
demand is nearly twice annual mine output,
despite uneven income growth in traditional
markets, like developing Asia, and a near
absence of investment demand elsewhere. That
deficit for years now has been filled --
overfilled, in fact -- primarily with gold
sold outright by central banks and, we
believe, with gold sold short by miners who
have borrowed it from central banks through
bullion bankers like J.P. Morgan Chase and
Goldman Sachs. Producers and bullion bankers
are now short an estimated five years'
production. That is 1.5 times the U.S. gold
stock and more than a third of all official
The sale of so much official metal has
precluded price rises that otherwise would
have matched demand to supply and cleared the
deficit. The Soviets subsidized bread so
greatly as to make it the preferred feed for
livestock; some now argue that Western
bankers are suppressing the price of gold in
order to obscure the normal valuation
landmarks across the financial horizon.
Whatever the cause, relatively low prices
have stifled exploration and capacity
expansion, and have caused closures and
consolidation of existing capacity. With
production peaking, rolling over and
beginning to decline, the physical deficit is
likely to grow for several more years, at
least. If nothing else changes, filling that
deficit will require central banks to sell
even more metal from dwindling stocks or to
accept substantial price rises and attendant
losses for those who are short, and possibly
for their taxpayers.
The technical conditions for a major reversal
in of gold prices also have fallen into
Gold shares and bullion both bottomed over a
year ago. The bullion charts now show the
two-year double-bottom formation that was
completed at $255 per ounce in February 2001,
followed by a 12-month, 18 percent upleg that has
clearly penetrated the ultra-long term
downtrend and left it behind. We associate
three extremely important and interrelated
developments with this reversal.
First, real, net yields for high-income U.S.
taxpayers are negative or nominal on U.S.
Treasury instruments up to nearly five years'
Second, one of the three largest gold
producers, a leading hedger, reduced its
hedge book 20 percent, reflecting the
decreased contango offered by low interest
Third, unhedged producers consistently
outperformed the hedgers among gold shares.
Gold now has traded narrowly between $250 and
$300 for four long years, except for brief,
event-related spikes, and has formed
sufficient base to support a new upleg. And
enough time has passed: 22 years since the
last $800 trade, six since $400, and four
since $300 or more was normal.
Bullion quietly but definitely de-linked from
other asset values in 2001. It appreciated
against the dollar even as the dollar
appreciated against almost all other
currencies, and it rose against nearly all
financial assets and commodities at the same
time. De-linking in this manner is
characteristic of bullion when excessive
credit inflation peaks and rapidly deflates.
It marks the part of the cycle when
previously deflated gold prices catch up,
when the metal is again seen more as money
than as jewelry and decoration. Typically, it
begins after the bubble has been pricked but
before it has deflated, it lasts for years
rather than months, and it results in
substantial gains in the real price of gold.
It seems that this process is in train again;
if so, the markets will punish hedging
producers, and governments will see that
official gold reserves are too valuable and
too sparse to sell as cattle feed.
(Unfortunately, coercion, in the form of
contract abrogation and/or confiscation of
private gold, is an alternative with
For more than a decade the world's monetary,
political, commercial, and social leadership
has fostered a colossal credit inflation. A
maniacal and unbalanced financial sector has
resulted. (There has been a large failure of
moral leadership too, but that is another
discussion.) Asset values and resource
allocations have been corrupted worldwide,
but especially in the United States, and in
all sectors, especially finance.
An uninformed and previously uncritical press
and public are just now starting to pay
attention. The policy lever is stuck on
quot;more,quot; adding $1 trillion to U.S. broad
money supply in the past year while economic
activity was flat to down, and pushing
consumer debt to record levels in December
after nine months of recession. The point-of-
no-return could be behind us, in any case,
but more of the same policy that brought us
here makes an accelerating credit deflation
that much more likely to happen and that much
less likely to be manageable.
In that quot;non-virtuous circle,quot; contracting
credit would deflate assets and income, which
would deflate credit further, largely beyond
the influence of monetary authorities, until
the system stabilized at lower levels of
economic activity and wealth. In similar
circumstances historically, gold and related
assets have been imperfect but useful tools
to help individuals preserve some tangible
wealth and to escape some of the pain.
Market action over the past year appears to
confirm that gold will be called again to
meet this challenge should it arrive.
That's the context in which we view the
markets today. And, frankly, if involuntary
credit deflation is ahead, everything else is
Terrorists on your trail? Argentina
collapsed, Japan on deck? Global recession?
U.S. current account deficit at 5 percent of
GDP? Renewed budget deficits? Record stock
multiples despite record stock losses? Record
bankruptcies? Enron? Andersen?
Here are some that you may fly below your
* U.S. banks in the aggregate have off-balance-
sheet liabilities on the order of $5 trillion
-- approaching their on-balance sheet loans --
just in backup lines to companies that may
need to exit commercial paper markets under
J.P. Morgan Chase is counterparty to an
astonishing 60 percent or $30 trillion at notional
value of all U.S. interest rate swaps
outstanding. n case 1 percent of that amount is at
risk -- through stupidity or cupidity, it
matters not -- you should know that it
represents 10 times the bank's equity. The
total of U.S. derivatives outstanding is
estimated to be $130 trillion, or 13 years of
U.S. national output.
Banks' derivative contracts are marked to
market. However, as with Drexel Burnham's
junk bonds, quot;marketquot; prices derive from
illiquid, unregulated OTC markets dominated
by the traders who create and sell the
instruments. Anybody need a bid? Anybody
need a bonus?
* Japanese consumers, bellwethers of Asia and
the most conservative and saving-prone middle
class in the world, are swapping yen for gold
before Japanese bank deposit insurance
coverage is reduced at the end of March.
* The People's Bank of China recently increased
its gold reserves from 400 to 500 tons, its
first acknowledged increase since 1977. Not
enough to risk losses on much larger dollar
holdings, but a faint breeze stirring near
the house of paper.
Our rationale for Au Capital has always been
to provide a few friends with a long-term,
low-cost or modestly profitable call on the
price of gold in order to hedge systemic risk
to financial assets.We've succeeded so far.
We've beaten the returns to our peers by
large margins over the years, and our
absolute returns are looking steadily better
in comparison to the broader equity and debt
indices. Now the systemic risk of which we
once spoke theoretically grows nearer and
clearer. We continue to hope that it won't
materialize, but we are encouraged to see
current evidence that gold will again be
helpful if it does.
With every good wish,
Hans H. Kahn and Daniel Tessler
AU Capital, LP
7524 Standish Place
Rockville, Maryland 20855