Gold backers -- finally -- in NirvanaResearcher catalogues vast...

Gold backers -- finally -- in Nirvana
Researcher catalogues vast 'short' position in metal



By Thom Calandra, Editor
CBS.MarketWatch.com
Friday, December 13, 2002


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SAN FRANCISCO -- Their kingdom for a freeze-frame.


Gold's supporters, for nearly a decade deprived of lasting
gains, are licking their chops. The metal's spot price Friday
morning reached $336 an ounce. That's the highest since
Oct. 5, 1999, when the price briefly touched $339 after central
banks in Europe and the U.S. agreed to limit their auctions
of the metal.


Even Andy Smith, the circumspect and widely followed
precious metals analyst for Mitsui Global in London, is
(slightly) impressed. "In the last 10 days, gold has entered
a macro Nirvana -- almost perfect positive correlation
with the euro, almost perfect negative correlation with the
Dow. Maybe the poison in the body economic has taken
hold?" Smith said Friday.


Smith, who has been advising clients to steer clear of
gold for years, turns out to have the year's most accurate
forecast for the gold price -- so far -- among commodities
analysts.


In the fourth quarter of 2001, Smith forecast an average
price for the metal this year of $315 (with a $355 high).
That view will turn out to be correct if the gold price
exceeds $330 for the rest of December. Smith has long
believed the traditional buyers of gold, Indian families
with discretionary rupees to spend, are turning to more
practical purchases, like Nintendo Gameboys and
mobile phones.


The analyst says his 2003 forecast will come out after
Christmas, and he won't say whether this week's strong
rise in the precious metal will influence his thinking to
any great degree. He does hint, "There are indications
that gold has developed some macro-macho since 9/11."


Smith was good enough to provide me a copy of the
1997 research paper that may have been in part
responsible for the years of down time for gold.


In it, then-Federal Reserve Board staff member Dale
Henderson and Stephen Salant, of the University of
Michigan, slaughtered the golden lamb by analyzing
the repeated net sales of gold by central banks from
1974 through 1996.


At the time, central banks held about a fifth of all gold
in the world, including gold located but not mined from
the earth. The two economists wrote their gold note as
central banks, among them Belgium and the Netherlands,
already were unloading their bullion and switching into
other reserve assets.


The economists observed, "Each government makes
more revenue if it sells its gold before other governments
either sell or announce a sale. Thus, without coordination
there could be a rush to sell, which could strain relations
among countries and cause abrupt changes in the gold
market."


For his part, Smith in London sees gold in the past 10
days tracking the strength of the euro against the dollar,
step for step. Gold, seen as the anti-stock market holding
for those who disdain equities, also has formed a
convex-mirror image of the Dow Jones Industrial
Average in the past two weeks, he says.


Smith, who notes the long-term trend for gold has been
down, at least since 1996, also says the metal must next
surpass $340 if it's to become something worthy of respect.


Other bullion observers are far more ebullient.


"Gold has broken out of a 6-year base, and gold is in a
major bull market," says James Turk, operator of payment
system GoldMoney.com and longtime editor of Freemarket
Gold & Money report.


Turk says the reasons for the metal's rise this week go
beyond usual suspects: terrorism talk, weak dollar,
horrendous trade deficits and a faltering stock market.
Instead, Turk points to a paper that was published earlier
this month by Reginald Howe, who two years ago filed a
federal suit against the Switzerland-based Bank for
International Settlements, Fed Chairman Alan Greenspan,
the U.S. Treasury, J.P. Morgan Chase, and others, alleging
governments and commercial banks colluded to depress
gold's price as they engaged in profitable leasing and
forward sales of the metal.


A federal judge in Boston dismissed Howe's lawsuit this
year, effectively saying Howe hadn't demonstrated whether
he or any citizen had the right to sue government agencies
over their financial practices.


In the December paper, Howe, an attorney, catalogues 20
years of data and academic theories about central-bank
and commercial forward sales and leasing of the metal,
and their use of complex derivatives to "hedge" the
massive trading activity. Total gold derivatives tracked by
the Office of the Comptroller of the Currency, for instance,
rose 21 percent in the first half of 2002 from a notional $231
billion in December 2001 to $279 billion in June of this year.


Howe, who operates www.GoldenSextant.com Web site,
concludes that central and commercial banks are lending
more gold than they actually have -- by vast amounts. Such
a steady stream of leasable gold has diluted gold's price
for years, say he and others, notably the Gold Antitrust
Action Committee.


Howe points to figures showing that gold's lenders could
be short, or lacking supplies, to cover as much as 15,000
tons of gold. He also refers to Robert McEwen, chief
executive of Goldcorp, a successful Canadian gold miner
that buys bullion for its corporate treasury.


McEwen is a critic of producer hedging, in which miners
use forward sales to increase slightly the amount of money
they get for their bullion. In exchange, the supply of real and
derivative gold released by such hedging depresses gold
prices.


Howe notes that McEwen "recently tested the liquidity of the
spot market by placing an order to purchase 40,000 ounces
(of gold) and encountered significant constraints in availability."


Turk, the newsletter editor, told me Friday, "This article by
Howe was published on Dec 4., and the gold price has been
rising ever since. This report is spreading through the big
hedge funds and money managers like wildfire because it
provides more evidence of the size of the gold short position."


Turk says gold "could be at the beginning of an explosive
move to the upside as the shorts get squeezed, which will
take gold from its current undervalued level to a more normal
valuation in the weeks and months ahead."


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