Financial Post story bullish on gold

Section:

11:15a Saturday, August 21, 1999

Dear Friend of GATA and Gold:

The following article from the Financial Post is
actually ... dare I say it? ... bullish on gold. Please
post it as seems useful.

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

* * *

WHY ALL THINGS AREN'T EQUAL FOR GOLD

By Amanda Lang
Financial Post

NEW YORK -- If only gold behaved like other
commodities, one could reasonably expect the price of
bullion to rise.

Two separate industry groups this week painted a
portrait of wonderful conditions for producers: rising
demand coinciding with falling production.

According to the World Gold Council, demand for gold
climbed 16 percent in second quarter, a record for any
three-month period.

Meanwhile, the Gold Institute, a Washington industry
group, said production of gold worldwide will decline
this year for the first time in 20 years and be flat
for the next four years.

That should produce a price increase. For gold bugs,
who have watched the yellow metal slide in price from
$420 an ounce in 1996 to around $260 now (all in U.S.
dollars), such an increase appears as manna.

But experts warn investors shouldn't count their golden
eggs just yet. The gold market has always been split,
with the physical market, real-world demand for
jewelery and industrial use, bearing little relation to
the paper market, the vast quantity of gold bought and
sold through derivative products but never actually
delivered.

The paper market can obscure the supply-demand picture
to the extent that real scarcity of the metal, which
should flow through to prices and which some experts
say is the market condition right now, doesn't produce
higher prices.

Even getting a clear picture of the market can be
difficult. Some analysts believe the quantity of gold
on paper doesn't exist at all. That is, if everyone who
"owned" gold tried to cash it in, the market would
suffer a major crisis.

One signal of that dissonance is clear from the concern
around central bank gold sales, said John Lutley,
president of the Gold Institute. Central bank sales
have captured headlines worldwide in recent years, but
sales by banks were actually lower last year than, for
instance, in 1996. And without those sales, the world
would have faced a gold shortage last year.

"Demand for gold far exceeds mine production," said Mr.
Lutley, with the difference made up by recycling or
scrap and central bank sales.

The problem, said John Ing, president of Maison
Placements Canada Inc. in Toronto, is that while the
paper market obscures the true picture of supply and
demand, it could also represent a pending threat.

Producers, led by Toronto-based Barrick Gold Corp.,
have learned to hedge their production output. In
Barrick's case, it has sold forward about four years'
worth of production, meaning it has sold at current
prices gold it won't mine for years.

Hedging allows mining companies to offset production
costs while locking in current prices, in the event
bullion prices fall. It didn't take long for savvy
investment bankers to realize they could borrow the
gold for these hedging programs from central banks,
which offered low lending rates. By borrowing at, say,
1.5 percent, bullion banks such as Goldman Sachs could
then invest the capital in treasuries yielding 4
percent, and pocket the difference.

That "gold carry" is, like the yen carry used by hedge
fund Long-Term Capital Management, a bet on "spreads."

This is fine in a static environment. But as the world
learned when Long Term's yen bet turned sour, the world
can be volatile.

A similar change in spreads on the gold carry would
wreak havoc that could make LTCM -- which threatened
the financial system down last year -- seem a minor
incident, Mr. Ing said.

Goldman recently bought 4,700 futures contracts for
bullion, Mr. Ing noted, which could be a sign the bank
wants to get its hands on some actual gold.

"The paper market has flooded the physical market for
gold," Mr. Ing said, "which is why we are close to a
20-year low."

Ultimately, the fundamentals for gold are bullish,
experts said. While lowered production -- largely a
result of cost-cutting driven by the low price of their
product -- isn't the best scenario for mining
companies' long-term results, higher prices might help
gold companies jump back into exploration in a hurry.

Meanwhile, the huge short position on gold could get
squeezed out of the market as fundamentals force the
price upward, analysts said.

"These guys are sheep, when one moves, they all do,"
said Mr. Lutley. Any weakening in the U.S. dollar would
be good news for gold.

And, he added, investors may have new-found interest in
gold if stock markets fall sharply.