What Europe''s central banks really did


9:10p EDT Thursday, September 30, 1999

Dear Friend of GATA and Gold:

The following article from the Financial Post section
of the National Post in Canada is doubly interesting --
first for its commentary on the precious metals, and
second for its crediting one of GATA's best friends,
Doug Pollitt of Pollitt & Co. in Toronto.

Please post this as seems useful.

Gold Anti-Trust Action Committee Inc.

* * *

Thursday, September 30, 1999

A happy accident waiting to happen
After gold, can silver be far behind?

Patrick Bloomfield
Financial Post

Them golden days are far from over, by which I mean the
regaining of gold's glitter was eminently predictable
and probably still has some way to go.

Today's massive bear squeeze was a happy accident just
waiting to happen, as I outlined in a column just 31
days ago. I cited a piece called "Anatomy of a Bear
Trap" by John Hathaway, manager of New York-based
Toqueville Asset Management Limited Partnership.

In it, he estimated that the aggregate short position
in gold bullion amounted to $40-billion to $80-billion
of capital at risk. He talked quite confidently of a
short-covering rally (at some point) of $50 to $100 an
ounce. (Gold is quoted in U.S.dollars.) As of
yesterday, London bullion prices had already surpassed
the bottom estimate and looked to be moving remorsely
nearer the top one.

We have now seen the "first negative metal-market
corner in history," as Bob Hoye of Vancouver-based
Institutional Advisors puts it. By negative he means
the famous corners of the past (whether collusive or
collective) were sustained by a manic thrust to drive
prices higher.

By contrast, the sustained slide in gold prices of
recent months was a mania by a whole gallery of players
to drive prices lower. As happens with all good
corners, the unwinding process is moving prices yet
more rapidly than the buildup (and, in the past, has
often signaled financial instability).

The writing was on the wall quite a while back. Doug
Pollitt of Toronto Stock Exchange member firm Pollitt &
Co. Inc., notes that, even as the Bank of England
conducted its first auction, and sent bullion prices
down some more, the rates at which central bankers lend
out gold to short sellers climbed to 3% and 4% from the
1% of bygone days.

Yesterday morning, as Mr. Pollitt further notes, lease
rates on gold had risen as high as 9%. The formerly
profitable practice of leasing gold, selling it and
investing the proceeds in U.S. bonds is as dead as the

Lease rates on silver have also climbed, which suggests
something of the same kind of thing might be going on
there too. I was listening to the then-contrary opinion
of Mr. Pollitt that precipitated my own good words for
gold last month, for which I take no personal credit.
(We columnists are indifferent market forecasters).

He is the junior Pollitt at his shop, where his father,
Murray Pollitt, is president. He has a mining
engineering degree from McGill University and has been
a computer programmer in his time.

Mr. Pollitt believes we have seen only the surface of
the iceberg that covers short sales -- being covering
by the more mobile players such as the good people in
the commodity futures pits. We have still to see how
the major players respond.

For instance, for many years now, gold producers have
been borrowing gold in order to sell forward gold they
have yet to produce. The word going around is that some
of those with sizeable paper debts were actually
prodded by their bankers (whose market savvy, I would
argue, must be about en par with we investment
columnists) to indulge in this euphemistically named
practice of "revenue protection."

There will undoubtedly be white knuckles still around
today, particularly belonging to anybody with a large,
uncovered short position.

Meanwhile, the hedge funds will have smelled blood (on
the upside) and investors who kept their faith in gold
stocks will carry on smiling.

For any investor inclined to join them, gold producers
that have not sold forward are obvious choices. Mr.
Pollitt also looks for top-class management, sound
track records, ample reserves and new projects on the

Among his favourites are Battle Mountain Canada Ltd.
(BMC/TSE), and the American depositary receipts of Gold
Fields South Africa Ltd. (GLDFY/NASDAQ). He also has a
good word for Repadre Capital Corp. (RPD/TSE), a
smaller player in the gold royalty business.

For my part, I bought a small holding of Euro-Nevada
Mining Corp. shortly after writing that earlier column.
It is now merged with Franco-Nevada Mining Corp.
(FN/TSE), the two of them being very senior players in
the gold royalty game.