Gold breaks into the National Post

Section:

12:20a EDT Tuesday, August 31, 1999

Dear Friend of GATA and Gold:

The nearly unthinkable has happened.

A mainstream North American newspaper has printed an
analysis favorable to gold.

And as you'll see below, it's the work of Doug Pollitt
of the Toronto-based Pollitt & Co. brokerage, as true-
blue a friend as the mining industry and GATA have.
Doug helped GATA at the New York gold show a few
months ago and has been making gold's case tirelessly
in Canada. But Doug's work here -- persuading Patrick
Bloomfield of Canada's National Post to publish such an
analysis -- is a triumph.

Doug accomplished this by proselytizing with the
brilliant and comprehensive essay by the Tocqueville
Fund's John Hathaway that I posted to you the other
day. I've read much favorable reaction to John's
essay, and now that it has been publicized so well by
the National Post, I'm even more confident that we're
getting our message across. Truth, time, and -- I'm not
afraid to say -- justice are on our side.

So let's toast Doug and John.

Please post this as seems useful.

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

* * *

Monday, August 30, 1999

Gold less tarnished than it seems;
Latest fall simply a bear squeeze in the making

By Patrick Bloomfield
National Post of Canada

Don't write off gold quite yet -- for two good reasons.

The first is that buying any investment that everybody
else loves to hate can eventually be an effective means
of making money.

The second is that no market is exactly what it appears
to be on the surface.

CIBC World Markets economist Jeffrey Rubin may have
been quoted in this column recently that central banks
hold the equivalent of 12 years of global gold output
and some are willing sellers. But how much of that gold
is readily available for delivery, free of paper claims
against it?

If there is far from enough to meet market
circumstances at any time, you have a bear squeeze.

For this thought I am indebted to Doug Pollitt of
Toronto Stock Exchange member firm Pollitt & Co. Inc.,
for sending me not only his thoughts on this potential,
but those of John Hathaway, the fund manager of New
York-based Toqueville Asset Management Limited
Partnership.

As Hathaway sets out in a piece called "Anatomy of a
Bear Trap," there was once a time when the relationship
of gold to paper assets was in the form of a pyramid,
being currencies issued by governments, backed by
physical gold held by the central banks. That
relationship has long since been abandoned, and
replaced in recent years by a currency/gold pyramid
that is much less stable.

Hathaway stresses that there are few published figures
for the new pyramid, no reserve requirement, no
supervision or regulation and no accountability. It is
the private domain of bullion dealers, central bankers
and mining companies. Its creditworthiness, says
Hathaway, can only be an educated guess and his guess
is that it is bankrupt. In his view, it has become a
trap from which few short sellers will escape, because
"paper claims in the form of derivatives far exceed the
physical metal on which they are based."

As Hathaway sees it, there is the paradox that the
further the gold price falls, the stronger the consumer
demand, which has already been rising, and the greater
the pressure on the availability of gold for immediate
delivery. In his view, central bank and official sector
selling represents only a "small percentage of the
excess supply of gold."

Far more meaningful but much less publicized has been
the selling pressure from gold borrowed or leased from
central banks, and resold for the accounts of mining
companies or financial institutions. Central bankers
apparently report leased gold as "gold receivable" and
lump it together with gold on hand. In Hathaway's view,
much of this borrowed gold has already been melted down
and sold into the physical markets, and no longer
exists in physical and deliverable form.

"Aided by poor information and worse governance,
physical gold borrowed from the central banks has been
sold over and over again in multiple transactions."

Hathaway suggests that the "short-cover" ratio rivals
the most overvalued Internet shares. He talks of a
6,000-10,000 ton physical short interest. As at year-
end 1998, 3,600 tons had been sold short by mining
companies against future production, possibly 1,500 to
2,000 tons would be payables of jewellery fabricators,
and the 1,000-3,000-ton balance speaks for speculative
positions held by commodity funds, hedge funds and
financial institutions.

The mining companies' role speaks for a further
paradox. The more the price falls, the lower the value
of producers' reserves (against which they have sold
forward) and the lesser the creditworthiness of their
forward sales.

Hathaway makes a convincing case for an aggregate short
position that, in his view, represents $40-billion to
$80-billion (all figures in U.S. dollars) of capital at
risk. Thus, a short covering rally of $50 to $100 an
ounce (which he clearly regards as possible) would cost
$8-billion to $16-billion.

I have to admit to knowing dangerously little about the
bullion market. But I have witnessed my share of bear
squeezes. They can be powerful price propellants. Come
any significant increase in financial market tensions,
which have already sent gold lease rates upward (and
thus eroded gold's role as a source of cheap finance),
a further sharp rise in lease rates could wipe out the
profitable spread that has helped propel gold prices
lower.