Tuesday, 01/21 Answers to a series of comments and questions from an email --
A: 1/ As I mentioned to you, there are precious few gold shares that are not without significant risk in the marketplace to a higher price of gold. All hedgers have risk they are not disclosing, IMO, properly to the public which is the money availability to them as their debt grows and cost of money produced as demand for money by derivative hedges that are under the market short positions. There is no such thing as a derivative without a margin call. Margin free derivatives are simply loan lines.
2/ The XAU contains hedged golds and silver stocks. The HUI is skewed by South African golds undervaluation due to concerns of indigenous enhancement programs. The only proper measure is gold itself on a relative strength basis comparison between each share.
3/ People have come to realize that the method of ounce counting is not a proper way to value gold shares as it values them in liquidation or on a take over at market basis both which rarely occur. This is why, IMO, Royal Gold has been front running because it is an earning via gold formula and therefore a real business.
4/ Be careful here because the expansion of monetary aggregates are one of the major tools to rescue the economy as Gov. Bernanke and Chairman Greenspan have proposed. Because of this and because it would be unwise for the Fed to drain reserves at the inception of an economic upturn, that increased economic activity would mobilize the aggregate into price inflation positive to gold. It is the action of the dollar that will determine gold price and not the action of equity market. If it was the equity market that determines gold price, why has gold broken to new highs as the equity market rallied 2000 points recently?
5/ Central Banks have dumped gold continually over the past years and the market price rose. The IMF sold from the early 70's and gold rose. Central Bank selling during a positive gold market periods only lets big people in at singular prices, thereby making gold more, not less, attractive. All that the Central Bank sales do is stall, slow down or very temporarily depress the gold market.
6/ I love the adherence of traders to COT. What makes you think that professionals (commercials) are infallible? When they blow it, it is historical in size. They usually go wrong when a major market changes. That may well be what a breakout above a four-year bullish teacup formation represents. COT in gold is the Comex primarily which is a pimple on the posterior of elephant when compared to the size of the secret cash market. Not one cent of the $280 billion gold derivative position is contained in COT.
7/ Would no war equate to a bull market in the dollar? If not, then the gold bull trend stays intact even if a war premium is squeezed out of the gold price. How will we know when there is no war? When did Saddam Hussein become Bin Laden? Does no war in Iraq mean the end to terrorism?
8/ Here is a tidbit you would like. There is a sign in NYC that counts off the National Debt and calculates each second the growth of the size of what each family in the United States would owe per family if that family had to pay off the US debt. If that sign was to run the size of the Notional Value of the derivatives carried on the books of JPM, divided as it does by the number of families in the United States, then each family would have a $660,000 piece the total or about 10 times more per family than the national debt. That is a fact.
9/ You say that gold generally moves inverse to the stock market. Correct as an observation, but it is more correct to say that the 22 year on-balance rising dollar was one of the major constituents to the rising stock market from 1980 through 2000. Gold, which is closely tied to the dollar, performed perfectly for 22 years by declining on-balance as the stock market and the dollar rose.
It is quite an important point that the inverse relationship between the market and gold is a product of the direct relationship between any world market and its currency. It is really not correct that just because the stock market rises, gold should fall or the other way around.
10/ Under terror threat, it might be well to mention that recent information (translations of al Queda interviews for Islamic media) concerning the tactics of financial savvy al Queda is to focus their future activity with financial targets in mind. Because of the exposed nature of unprotected financial settlements, mechanisms and exchanges, gold has been ungraded as an investment in its easily understood and hard to counterfeit one ounce coin currency form internationally.
11/ It should be made clear that gold producer hedgers represent only 11% of the total gold derivatives outstanding. Because of stockholder pressure, these positions have been reduced to the bare minimum. That minimum hedge is those hedges that are required under contract to be in place in the popular nonrecourse new gold project financing of the past six years. The size of the producer hedges is calculable by reviewing the risk disclosure statements of all public producers of 100,000 ounces per annum and up. What is most important to point out, as one seriously analyzes the gold derivative position, surprisingly is that a much larger amount of gold derivatives appears to have been placed by entities that have nothing whatsoever to do with gold production, fabricating, refining, trading or financing? This group is loosely called "The Carry Trade," but is actually entities that have used the central bank gold lease programs to finance their non-gold mostly financial businesses at a money cost of 1% per annum or less. It is reasonable to assume that these gold market neophytes non-gold related entities might easily get themselves into trouble first on their derivative positions and lease repayment requirement.
The gold gained from leasing and sold for cash has simply gone into process and no longer exists for settlement as required by the lease contracts. Settlement in cash is only possibility and would require central banks to take the gold off their balance sheets thereby making gold more attractive via less supply. No central bank gold lease is written for more than one year. The most recent report of the BIS placed the notional value of all gold derivatives outstanding at $280 billion. As the gold price rises, derivative positions will be influenced primarily by their in-house risk control programs. Eventually a combination of deteriorating debt to equity balance sheet ratios for the gold producer hedger due to money costs to maintain their hedges and risk control programs protecting the so called Carry Trade will transmute the notional value of all gold derivatives to market value and result in significant need to cover. The present notional value of all gold derivatives outstanding, if converted to ounces of gold at today's price, would indicate if notional value was to become market value as Sinclair indicated then the derivative position would represent more gold than all the gold held by all the central banks in the world.
12/ I think you might care to mention that official statements from the Minister of Finance of Malaysia indicates that the Malaysian dinar, the first of two to settle in gold, will become effective on or before June of 2003 making that a real market event, yet unreported to any degree by any Western financial publication. When Islamic press noted that this is a violation of IMF rules, the Malaysian minister of finance commented that it would not be the first for Malaysia. They already are using a settlement mechanisms which is a technical violation of IMF rules with great success. A recent evaluation published on Mine-web.com calculated the need for gold to make the Malaysian measurement gold settlement was approximately 10% of 2003 projected supply. Therefore this event is undeniably quite important to gold.
I trust this clears things up for you, but feel free to ask more questions.
