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Gold shareholders, to your battle stations!

Section: Daily Dispatches

8:50p EDT Wednesday, October 13, 1999

Dear Friend of GATA and Gold:

GATA Chairman Bill Murphy was quoted prominently
Monday in the following story distributed by Dow Jones
News Service. I think it will interest you.

Please post this as seems useful.

Gold Anti-Trust Action Committee Inc.

* * *

Gold Price Steadies,
Investors Stop Beating Around the Hedges

Dow Jones Newswires

NEW YORK, Oct. 11 -- The price of gold has steadied,
giving pause to one of the biggest gold rushes in

This one wasn't a rush to California or the Yukon to
pan for gold nuggets. It was a scramble by gold mines,
banks, and speculators to cover their huge short
positions in gold. They had been selling borrowed gold
for years, intending to replace it eventually with even
cheaper gold.

Gold prices have been falling for 20 years. Shorting
the gold market has been a safe and hugely profitable
bet, especially while the market has declined
relentlessly the past three years.

Speculators and banks would borrow gold at interest
rates of 1 or 2 percent, sell it, and invest the
proceeds in assets that paid them 4 percent or more.
Gold mines would borrow gold, sell it, and use the
proceeds to mine more gold and to finance complicated
hedging programs that made money for them even while
the price of gold kept falling.

It all went sour on Sunday, Sept. 26, when 15 European
Union central banks announced their intent to limit
their gold sales and, for the next five years, freeze
the amount of gold they will lend at current levels.

That ignited a massive scramble by many mining
companies, speculators, and bullion dealers to cover
their short positions. Covering shorts requires buying
an amount of gold equivalent to previous sales, to
cancel out those short positions. Those short positions
were quot;enormous,quot; says Jeffrey Christian, managing
director of New York-based precious metals research
firm CPM Group.

quot;Nobody knows what the extent of the derivative
situation is, and now you're seeing the result of it,quot;
says Bill Murphy, a gold bug who runs, a financial website. quot;Everyone's
trying to squeeze through the door at the same time and
theyre not going to be able to get out.quot;

Gold, which had been languishing at 20-year lows of
around $255 a troy ounce for much of the summer,
skyrocketed to $327.50 on Oct. 6, the highest price in
two years. On Monday spot gold traded at $318.40 an

quot;Just a month ago, people were talking about gold going
to $200, and now they're talking $400,quot; says one New
York-based bullion dealer.

Gold's prospects depend on one's view of the size of
the leasing market for gold and to what degree the
shorts have been, or will be, shaken out.

quot;I still think we have at least one leg up to go,quot; says
Dave Meger, senior metals analyst with brokerage firm
Alaron Trading in Chicago. quot;There's no way of knowing
how much of a short position is left in the market. I
continue to believe that there's still a significant
amount left.quot;

If shorts are as large as some believe a rally to $500
and beyond is conceivable to some gold bulls.

More mainstream analysts, however, are projecting a
gold price of around $340 or $350 by year's end. That
still represents a sharp turnaround from expectations
only a month ago of a dive to $200 an ounce.

Most of the derivative claims against gold are the
product of the expanding market for leased gold. For 15
years central banks have been lending a portion of
their gold reserves to commercial banks at low interest
rates to get a return on the non-performing asset.

The slide in gold prices made the leasing market such a
safe bet that bearishness became pervasive. Even at 20-
year lows, some gold-mining companies put on fresh
hedges and speculators continued their heavy selling.

But gold lending by central banks and private-sector
sources has resulted in paper claims against the market
far in excess of annual mined production. With the 30
percent spike in the price of gold over the past two
weeks, many of those claims are now at risk.

While limited disclosure makes it difficult to judge
the extent of the short position in gold, market bulls
contend that as much as 12,000 metric tons -- 385
million ounces -- is currently on loan, compared to
annual mined production of 2,500 tons. A more-
conservative estimate from U.K.-based research firm
Gold Fields Mineral Services pegs total gold loans at
about 5,000 tons, 90 percent of which are from central

All the participants in the market -- the producers,
quot;hedge funds, dealers, and central banks -- have acted
to create, over 15 years, a structure that is hugely
unstable and intractable,quot; says gold bull Frank
Veneroso of Veneroso amp; Associates. quot;First-year micro-
economics would have taught them this.quot;

Already the rally has slammed some gold-mining
companies. Camblor Inc. saw its stock fall 41 percent
last Wednesday after news reached investors that the
jump in prices could result in big losses for gold-
producing company because of its hedging program.

Ghana-based gold producer Ashanti Goldflelds Co., also
caught by the rally in gold, has seen the value of its
stock decline by 50 percent.

quot;Almost all the gold companies have some hedging
program,quot; says John Hill, equity research analyst with
Salomon Smith Barney in San Francisco. quot;Some are above
water and some are under water at this time. It's very
ironic to contemplate that gold-mining companies are
suffering from a best-case scenario for gold investors:
a gold rally.quot;

Not only gold-mining companies are at risk. Rumors
abound of losses at hedge funds and bullion banks,
commercial banks that buy, sell, and lend gold.

quot;I wouldn't be surprised to see some bullion banks get
out of the gold business in the next three months
because of the losses incurred in this,quot; says CPM
Group's Mr. Christian. quot;It's not a particularly
profitable business anyway, but shorting the market has
kept them in it.quot;

Analysts say the outlook for gold largely depends on
the amount of gold available for leasing.

quot;There is little doubt that the leasing market has
contributed to the lower gold price, but the question
is: Where would the gold price be without it?quot; Gold
Fields Mineral Services Managing Director Philip
Klapwijk asks rhetorically. quot;Some imagine we would see
a gold price of $600. I think that's ludicrous.quot; He
said $300 is quot;fair value.quot;

While the EU banks are limiting their lending, there's
still the possibility of sales or lending from other
central banks and private-sector sources, as well as
the likelihood of selling by gold producers as the
price of gold rises.

Indeed, if the price of gold surges too high, the EU
banks may well reverse its new policy, some analysts

The European central bank statement quot;is perfect central
bank policy in that it's extremely vague,quot; says CPM
Group's Christian. quot;They ... cut themselves plenty of
leeway to do whatever they need to do.quot;

But for the time being, the change in European leasing
policy has transformed the gold market.

quot;The thing is to see if gold can still hold upquot; after
the short covering, says James Steel, analyst with New
York-based commission house Refco. quot;I suspect it will.quot;