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The Gold Derivatives Neutron Bomb


Gold $357.80, up $7
Silver $4.81, up 6 cents

"All the perplexities, confusion, and
distress in America rise ... from downright
ignorance of the nature of coin, credit,
and circulation."

-- John Adams in a letter to Thomas
Jefferson, 1787

Adams must have been referring to the Gold
Cartel, Gold Fields Mineral Services, the
World Gold Council, and most gold analysts.

The past two days I checked around and
couldn't find one gold fund manager who
wasn't looking for a sharp break in the gold
price. Not one! How bullish is that? Which is
what I have tried to convey to the Cafe
membership recently.

Never have I seen such rubbish from market
analysts as what the commentators and bullion
dealers have written about gold the past many
weeks. There is almost zero understanding of
the gold market out there. Bob Pisani of CNBC
insinuated today that gold's move up was due
to a bunch of know-nothing, emotional-wreck
small speculators. That is worse than

Today's sharp move higher is the biggest one
in memory on a closing basis. And yes, we
have another GATA coincidence.

It seems that every time GATA pops off about
the real gold story, gold bolts to the

It happened GATA's African Gold Summit in
Durban, South Africa, on May 10, 2001.

It happened when Reg Howe and I spoke at the
Mining Analysts Association's seminar in
London on May 23 last year.

It happened right after the report by Howe
and Mike Bolser, documenting the 15,000-tonne
central bank short position in gold, was
released on December 4.

And it happened today, 12 hours after GATA
disclosed that Portugal's central bank had
lost most of its gold.

Coincidences all!

Somebody is paying attention to what GATA has
to say.

Today's gold action was classic. Morgan
Stanley turned aggressive buyer right after
the opening, taking on the other bullion
banks. They kept at it and gold remained
firmly higher all morning, creeping
up to the critical $354.50 gold price. Then,
out of the blue and late in the trading
session, Goldman Sachs turned aggressive
buyer, taking gold up sharply on the day.

Over and over again these past weeks I have
been reporting Goldman on the buy side, not
the sell side. What we don't know is who they
are buying is for.

But for Morgan Stanley and Goldman Sachs to
be the featured buyers on a dramatic up day
for gold is very significant. It is an
indication that the rats are leaving the
gold-rigging ship. "Every man for himself"
must be the new deal.

Word is circulating in the bullion dealer

* The central banks have written more gold
calls than they have gold to deliver. Good

* Aussie gold hedgers are getting hit with
knock-in calls. Some say their exposure is
160 percent of their mine life. Good grief!

* Barrick is grousing that they are going to
accelerate their hedge covering. Good grief!

How quaint! What do you think is going to
happen when those major forces all try to
cover at the same time?

It is called the Gold Derivatives Neutron
Bomb. It goes off.

There is no way that players of that size can
cover without driving the price of gold way
up. You can't cover massive positions like
that in a market that has a huge monthly
supply/demand deficit and little gold supply

That is very bullish news in the aggregate.
Perhaps the Morgan Stanley and Goldman Sachs
buying is for the central banks, Aussie gold
producers, and Barrick. If it is, they have a
long way to go.

But it is amazing. I am hearing that veteran
traders still want to go short gold, not go
long. If the paid attention to GATA, they
wouldn't dream of it.

GATA stretcher-bearer: Prepare for active
duty, please. Gold has cleared all resistance
and will now head for $419 per ounce.

Today's close is particularly bullish because
gold consolidated for three weeks in the low-
$350 area. All those sellers are losers at
the moment. The close also tells traders that
the Gold Cartel has lost control of their
fraudulent manipulation. All they can do now
is rear-guard action to slow down the price
advance as best they can.

That means we are very close to that
Commercial Signal Failure I keep referring
to. The trapped commercial shorts (the Gold
Cartel and others) are going to have to give
up the ghost soon, which will lead to a
short-covering buying panic. There are no
gaps to fill in this gold market. That is
very bullish, as we still have the breakaway
gap ahead of us.

The gold news is bullish all the way around:

* The dollar closed in new low ground by a
good margin. March closed at 101.12, down

* The CRB closed in new high ground at 241.58
with oil rising to $33.66 per barrel.

* Iraq war news heated up as chemical
containers were found.

* The stock market is starting to roll over.

What a beauty of a gold chart:

If gold holds today's gains, it will give us
the seventh higher weekly close in a row.
Markets seldom do that. That tells you how
bullish gold is. That kind of action is
setting up an upside move of epic
proportions. Those moves occur when few
people understand the fundamental dynamics
that are moving the market (early in the
move). That is the case with gold.

The gold world refuses to tell the gold
truth. How many investors out there know the
GATA story and all we have distributed about
gold? How many realize that the price was
suppressed for years? How many know about the
15,000-tonne short position? Very few.
Someday they will know that story. Gold will
be $450 to $550 bid by then. Your gain, other
investors' loss.

Silver has put in a triple top at $4.885,
basis March. If it takes that resistance
point out, look out above. I still expect
silver to run up $1 one trading day in the
near future.

* * *

The John Brimelow Report
Thursday, January 16, 2003

Indian ex-duty premiums: AM $1.17, PM $1.86,
with world gold at $351 and $350.50. Below
legal import point -- the latter by only 30
cents or so. HSBC's daily report, courtesy of
Ross Norman's site:

helpfully notes:

"Further support was evident from the Indian
subcontinent, with HSBC traders reporting
typical price-dip trade during New York
market hours" -- in other words, when gold
dipped below $350 in the early New York day.

Japan lent a little more passive support
today, $US gold being virtually static (-5c)
on 6.6 percent higher TOCOM volume equivalent
to 21,438 Comex lots. Open interest edged up
the equivalent of 837 Comex contracts. In
view of the steadily firm yen, and in the
face of a lower New York price last night
this was a fair performance.

Yesterday New York was estimated to have
traded 62,000 contracts.

Although the wire services all parrot the
line that yesterday's softness was all long
liquidation, the opening in fact was
obviously a bear raid:

"Selling from Europe was executed prior to
the New York open, which saw market-on-open
fund selling, one broker selling nearly 1,000
lots of February futures.Sellers from the
previous New York close appeared to pick up
further interest and were aggressive sellers
on the move through $350 yesterday." --

"New York opened actively with aggressive
investment bank selling on the COMEX driving
the price below $349 amid rumors of sell
stops located below $348 and $345. Good
buying from the physical sector stemmed the
decline and the market quickly reversed
direction." -- Standard London.

The point is that gold's eerie refusal to
obey the screamings of technically oriented
observers that it should slump is in defiance
of considerable active pressure to do so. The
bears have a serious problem.

Hard-working active equity managers might
appreciate my brother's CBSMarketWatch attack
on Burton Malkiel, who for 30 years has been
dodging evidence that his "Random Walk"
hypothesis is fallacious. For gold's friends
the story is especially relevant, as not only
has the Vanguard Group bent the rules to keep
Malkiel on its board after evicting industry
titan Jack Bogle, but it also peremptorily
closed their large gold fund to new investors
early last year, implying that gold shares
were unsuitable for their clients.

Immediately after I sent out my comments
today, Reuters reported that open interest
rose 975 contracts yesterday on 57,199 lots.
Probably short sellers outweighed liquidating
longs. On the other hand, MarketVane's
Bullish Consensus for gold fell two points,
to 86 percent.

The onus of proof is on the bears.

-- JB

* * *

Yesterday I did my best to trash the
clueless gold analysts. Today it is time to
focus on the people who are supposed to know
that gold market better than anyone else:
Gold Fields Mineral Services.

At the 2000 Financial Times gold conference
in Paris, I stood up in the middle of the
Q&A session and challenged them to a debate.
They mocked GATA, saying we didn't rate a
debate with them because we didn't have their
31 years of experience. Here is their latest
commentary, which reveals the value of all
that experience:

* * *

GFMS Survey Sees Gold Price Averaging $330

TORONTO (Reuters) -- The gold price is
expected to average $330 an ounce in the
first half of 2003, but a lengthy war in Iraq
could easily move the market above $370, Gold
Fields Mineral Services said in an updated
gold survey on Thursday.

The London-based commodity research and
consulting company warned, however, that if
the Iraqi crisis fizzles out and investors
bail out of the safe-haven metal, gold could
move below $310 an ounce once again. It said
producers were expected to keep trimming
their hedge books, which will see the global
hedge book decline a further 135 tonnes in
the first half of 2003.

GFMS is a bunch of bullion dealer apologist
hucksters -- either that or a bunch of
dummies. It is really sad that the World Gold
Council uses their work and pays them for it.

Dave Lewis' commentary is timed perfectly:

* * *

"I may be going to hell in a bucket
But at least I'm enjoying the ride."

-- John Barlow, "Hell in a Bucket" (Grateful Dead)

I've written before about the Texas Hedge, or
the double-down strategy of keeping a price
above or below some point in order to avoid
making good on a contract. It is becoming
ever more common in options trading as
certain dealers (not all) try to avoid
delivering on their short options.

When I was cutting my teeth, so to write, in
the options game, I was taught this was a
poor strategy, as my individual trading was
minute relative to other interested parties.
As time went on, however, I saw how one
could, temporarily, push prices up or down
and hold them. Yet it seemed to me a fool's
game. Why sell a commodity to avoid
delivering the commodity on a short call if
you are properly hedged? Even if you manage
to push the price down at the right time, you
end up simply buying back both your hedge and
your newly shorted position.

This line of thinking, however, breaks down
once you think about leverage, or the art of
trading much more of whatever the underlying
concern is than you actually have.

Going further along this idealistic line of
reasoning, imagine that you are dealing with
a commodity in short supply. In that instance
it might cost 10-20-50 percent or more of the
notional figure to actually deliver the

For example, a few years ago natural gas was
in such short supply on the West Coast that
it was far better to lose 5-10 percent on
paper than to be forced to deliver in
physical. Even better, given that some end
users took the screen price as a "real"
price, you could avoid delivering simply by
keeping the price at expiry slightly below
your short call strike.

Last year some wise trader called this type
of bluff in the gold market, exercising a
call option even though futures were trading
below the strike. Had everyone been properly
hedged, my guess is that this would have been
a bad strategy, but prices jumped through the
strike, indicating the potential of a lurking
Texas Hedger.

With Gold blowing through and closing well
above the $354.5 level in today's trade, I
imagine we might be seeing a few more of
these "unconventional" option exercises in
both spot and futures and potentially even in
the stocks.

As we used to say during fast FX markets when
clients complained our price was different
from the screen price, "Then trade with the
screen, idiot." More conventionally, let me
suggest that a bird in the hand (an
enforceable contract near the current price)
might be better than two in the bush (trying
to buy in the market with the screen showing
prices slightly less than your strike).

-- Dave Lewis


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