Why You Should Be Aggressively Long

Section:

12:05a EDT Wednesday, August 11, 1999

Dear Friend of GATA and Gold:

This "Midas" commentary of GATA Chairman Bill Murphy,
posted a few hours ago at www.lemetropolecafe.com,
summarizes the recent developments in gold's favor and
indicates that more things are moving our way.

This commentary is the second part of a two-part
series. I hate to loot so much from the Cafe, so let me
suggest that you take a look at the first part, for
free, by trying a trial membership to the Cafe. It's
the center of the universe for intelligence on the gold
market.

CHRIS POWELL, Secretary
Gold Anti-Trust Action Committee Inc.

* * *

Why Be Aggressively Long? Part 2

By Bill "Midas" Murphy
www.lemetropolecafe.com

Tuesday, August 10, 1999

Spot Gold $257.30 up 50 cents
Spot Silver $5.31 up 1 cent

Let me ask you this, if I may. Go back eight months. If
someone had told you that, as of the following August,
the price of oil would be $21.25 (the price was about
half that then), that the CRB and Journal of Commerce
indexes would have based out and headed higher, that
bond yields would rise from just above 5 to 6.25
percent, that the credit market spreads would widen to
decade high levels signifying severe liquidity
problems, and that many of the bank stocks would be
trading 40 percent off their highs, what would you have
expected the price of gold would be today?

$300? $350? $400? $450? $500?

That the gold price is only $257.30 is ludicrous and
makes no sense -- unless you understand that the market
has been manipulated to serve the interests of various
bullion dealers, U.S. officialdom, certain hedge funds,
and to some curious degree, the British government.

The technicals and fundamentals of the gold market have
taken a back seat to the status of the manipulation --
for until the collusion crowd loses their iron grip on
the market, the price of gold will not do what it
should be doing. That is the bad news.

The good news is they ARE losing their grip and, when
they do, the price of gold is headed for $500 to as
much as $1,000 per ounce. And that should not be a big
deal. For the price of oil just doubled in a short time
and there was barely a squawk about it. Since the
bullion dealer "Hannibal Lechter" has his research
mouthpieces claiming that gold has been demonitized, it
should not be of any great concern to anyone to have
the price of gold zoom higher -- at the end of a 20-
year bear market.

One of the signs that Hannibal and Co. are losing their
grip is that they have misjudged gold demand and it is
starting to bite them. For months the Cafe's John
Brimelow has been touting the strong Indian gold
demand. The gold cartel spokesmen have been saying it
was dismal, as part of their explanation of the weak
gold prices. But take a lot at this.

"New York, Aug. 9 (Bloomberg) -- Imports by India, the
world's biggest gold consumer, more than tripled in
June to 80 tonnes from a year earlier, the Business
Standard in New Delhi reported. The gain came as prices
fell almost 6 percent in the second quarter.

"`It is truly a remarkable figure for India,' said Paul
Walker, a director of Gold Fields Mineral Services Ltd.
in London. Malaysia, Indonesia, and other Asian
countries also have been buying more gold in recent
months, he said."

The Cafe's John Brimelow was right; Hannibal's crew was
wrong.

"Taipei, Aug. 9 (Reuters) -- Taiwan's imports of gold
bars and coins surged to 9.845 tonnes in July, up
298.74 percent from 2,469 tonnes in July 1998, the
finance ministry said on Saturday."

We are getting the same kind of demand numbers out of
Japan as well. In addition our sources tell us that the
refineries are all backed up trying to fill gold bar
demand orders. Premiums on Gold Eagle coins in the
United States have just risen a substantial 6 percent.
Further, we received a report today that a dealer just
bought 30 to 40 tonnes of gold. That's only one order
and a good deal more than the 25 tonnes sold by the
British.

While demand is soaring, gold supply is being
curtailed. For example:

"Sydney, Aug. 8 (Platts) -- Australia's gold production
fell by 4 percent in the financial year ended June 30,
1999, Melbourne-based consultancy Surbiton Associates
said over the weekend."

I firmly believe that the Hannibal crowd has made a
very big miscalculation -- that they very much
underestimated the normal supply/demand balance. Frank
Veneroso of Veneroso Associates believes it is 150
tonnes per month now. I have known Frank for 20 years.
He is usually right on such matters. If Hannibal has
been listening to other supply/demand forecasters, he
was given deficit numbers that were much lower. Thus
"Hannibal" is finding out that he needs much a greater
gold supply from some source to hold down the price of
gold. He is straining to find it.

Without that supply, the gold price will rise toward a
much higher "equilibrium" price.

As evidence of the strain in the gold market, I present
the 12-month gold lease rate chart:

http://cognite.com/gold_lease_rates.html

Look at this chart. It will help to put in perspective
what I am talking about. The 12-month lease rate has
jumped to 4.07 percent. That is a dramatic 350-percent
increase. The one-month and six-month gold lease rates
have risen just as dramatically.

At the close of the Comex today, word on the floor was
that there was a large buyer searching for physical
gold. They need the gold to fulfill commitments.

But not only did the Hannibal camp not get the basic
supply/demand gold number right, they failed to
understand that Asia, the world's gold demand engine,
would recover so strongly. Veneroso DID get it right
and made this case repeatedly over the past year and a
half and said so in "A Long-Run Perspective on Asia,"
which is an Appendix to Chapter 7 of his 1998 Gold Book
Annual. Frank predicted the Asian recovery. His
rationale back then was that "the Asian miracle was not
a mirage. It occurred because the Asian system of
alliance capitalism was uniquely successful."

On the other hand, here is what the Hannibal & Co. man,
Alan Greenspan, said when the Asian crisis was well
under way. (The quote was retrieved from Frank
Veneroso's 1998 Gold Book Annual.)

"The current crisis is likely to accelerate the
dismantling in many Asian countries of the remnants of
a system with large elements of government directed
investment, in which finance played a key role in
carrying out the state's objectives. Such a system
inevitably has led to the investment excesses and
errors to which all similar endeavors seem prone.

"Government-directed production, financed with directed
bank loans, cannot readily adjust to the continuously
changing patterns of market demand for domestically
consumed goods or exports. Gluts and shortages are
inevitable. The accelerated opening up in recent years
of product and financial markets worldwide offers
enormous benefits to all nations over the long run.
However, it has also exposed more quickly and harshly
the underlying rigidities of economic systems in which
government -- or government working with large
industrial groups -- exercises substantial influence
over resource allocation. Such systems can produce
vigorous growth for a time when the gap between
indigenous applied technologies and world standards is
large, such as the Soviet Union in the 1960s and 1970s
and Southeast Asia in the 1980s and 1990s. But as the
gap narrows, the ability of these systems to handle
their increasingly sophisticated economies declines
markedly."

Veneroso 1, Greenspan 0.

These rather undiplomatic remarks by Greenspan
suggesting that the Asian miracle was a mirage and the
Asian crisis was due largely to "internal rot" are very
surprising in light of the Fed-engineered bailout of
Long-Term Capital Management, and, if we are correct,
the recent bailout of the "T" hedge fund. Do I smell a
bit of hypocrisy in the air?

Now, using Greenspan's own quote, one can see why the
Hannibal camp is in big trouble regarding the gold
market. First, they got gold wrong by not knowing how
large the gold supply/demand deficit was. Then, by
underestimating the Asian recovery, they are now
outgunned by our camp in the level playing field of the
supply/demand arena. In essence did not Greenspan say:
Shortages will develop when the government sticks its
neck into the private market place using bank (gold)
loans and government (Hannibal & Co.) won't be able to
adjust readily to market demand?

Hannibals, perhaps you will be hoisted on your own
petards.

The lease rates are going up for a reason. Demand for
gold far exceeds supply at the moment. It is a very
dangerous situation for the shorts. They need borrowed
gold to be fed into the market to ration surging
demand; yet borrowers now have to pay 3.5-4.6 percent
interest rates and risk capital loss if the price of
gold rises. What if it rises sharply?

It is ironic that the Bank of England, in one of its
Abbott and Costello explanations about the mysterious
someone in Britain who made the decision to sell
Britain's gold, focused (for a nanosecond anyway) on
alternative investments for the bank. They mentioned
yen, in which they can now receive only three-quarters
of a percent in interest; euros that fetch 3.25
percent; or perhaps U.S. bonds, which have been going
straight down in price. Meanwhile back at the ranch,
their depleting gold supply suddenly is fetching 4.07
percent for one-year lending, and its upside price
potential is formidable.

Who was the brain at the British Treasury who made this
decision? Will it be revealed someday that Hannibal
Lechter himself actually made the decision? That will
go over big with the British electorate.

Hannibal & Co.'s supply/demand calculation blunder was
bad enough. They have bigger problems coming their way.
It is called being found out. It is not only the Gold
Anti-Trust Action Committee that has spotlighted their
manipulation. A concurrence of events is going against
them, and they are a very nervous lot.

Yes, bond yields have risen to 6.25 percent, hurting
many of their derivative trades. Credit spreads have
risen to 10-year highs, affecting liquidity and
maneuverability. And the bank index closed down about 2
percent today at 783.38, which is a new multi-month
low. That is making central bankers a bit apprehensive
and gold loans are being called in -- thereby reducing
gold supply.

But the really big problem is that the Hannibals are
being found out in Derivative Land. It is only a matter
of a bit of time before their gold gig goes gonzo.

Voila!

"New York, Aug. 10 (Bloomberg) -- Sumitomo Corp., the
Japanese trading company that lost $2.6 billion in a
copper trading scandal three years ago, sued J.P.
Morgan for more than $735 million.

"The lawsuit against J.P. Morgan and its banking unit,
Morgan Guaranty Trust Co. of New York, was filed under
seal today in federal court in New York.

"Sumitomo accuses J.P. Moran and Morgan Guaranty of
fraud, racketeering, negligence, unjust enrichment, and
other counts. Sumitomo is seeking more than $735
million, an amount that could be tripled if it can
prove the racketeering counts. While the court papers
were sealed, a cover sheet to the lawsuit summarized
the claims."

Now this is not a new story. And of course we have told
you before that J.P. Morgan heads up the Counterparty
Risk Management Group with fellow bullion dealer
Goldman Sachs.

Neither is it news that bullion dealer Credit Suisse is
being exiled from Japan for fraudulently hiding trades.
It is the most severe financial penalty since World War
II. This is after Credit Suisse's "Flaming Ferraris"
were booted out of Sweden for trying to manipulate that
country's stock market.

The news is that a real "derivative discovery process"
is under way, much like the Bankers Trust/Proctor &
Gamble fuss in 1994. The seedy side of the derivatives
market is coming to light. That light is shining on the
bullion dealer crowd and how they have used derivatives
to manipulate markets. It is one story after another
and the beat is accelerating.

Based on the widening credit spreads, there are also
bound to be some hedge fund or other financial
institution investment horror stories that will surface
soon. That will only shed more light on Hannibal's
darkness.

It is now known that a segment of the bullion dealer
crowd has been accused of using derivatives to
manipulate markets. GATA and others, in guerilla
fashion, are pounding away at the manipulation of the
gold market. It is clear as day what the gold cabal is
doing, and they are slowly being found out. 

The failure of the price of gold to response to the
action in the other markets is by itself calling
attention to their antics. But even if they have a few
more tricks up their sleeve, they will lose the day
because as these other market manipulations go into
legal discovery and expose the derivative tactics of
the bullion dealers and as other market derivative
problems are exposed and major trading losses are
uncovered, the derivative game will lose its appeal.

Then their goose is really cooked.

It is Charles Peabody's opinion that as the derivative
asset plays are discredited, gold will come back into
fashion and become the new "in" play. Gold will replace
derivatives as the place to be. And all those young
central bankers educated at Stanford, Harvard, and Yale
will have to rethink their derivative ways and start a
gold focus. They might be a bit slow on their reaction
time, as most bankers are, but they will get with the
program.

So about gold: Get long and be strong. Yes, we have
arrived at the dance. Let the party begin.