By: banshee on Venerdì 13 Dicembre 2002 21:32
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 (INDU) 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 (JPM) 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 the Golden Sextant 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 (GG), 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. McEwen talks to Thom Calandra.
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."