Jim Sinclair: Protecting Your Financial Self

Here's a word of caution from the man who knows gold like the palm his hand:

Dear CIGAs,

For your information, gold above $782 by 3% means $882 - $889 and then on to $1050.

It does not matter if it is next week or next month. It is coming as the price of gold makes its way to $1650.

I have no doubt that $1650 will come. My concern is not that it will not happen, but that I am much too conservative in my long-term price objective since 2000.

Last week’s story is becoming too common to ignore. Keep in mind that all this damage has occurred because of a small part of the gigantic mountain of over the counter derivative paper, which if official figures are correct is only 5% of the total. What do you think the financial landscape would look like if 1/3 of the OTC derivative mountain were to melt? It will.

If major international investment banks can be torn apart how can we have faith in the small local institutions that hold most of your ready cash? How about all those retirement plans that prevent you from securing ownership without the need to pay a penalty tax?

When I said “This is IT,” it is not something that I take lightly. Never in 49 years in finance have I seen a set of circumstances so challenging to the man in the street.

If there is a severe financial challenge to the man in the street, there is possible decimation on the top. Decimation may well be too conservative a statement because that means one out of ten. Right now it looks like 80% of major names have problems from their principle position in the issuance of over the counter derivatives. It should not be a shock because the financial capacity to perform on these instruments depends on the balance sheet of the loser in the transaction. Add to that no clearinghouse financial structure and performance is not improbable but impossible in a crunch.

What I am getting at is a simple question. Are you prepared?

You would be amazed how little space $1,000,000 in gold coins takes up. $100,000 looks like a small loaf of bread. Now you can see the actual transformation from the US dollar to gold as a currency of choice. It has happened.

When gold is purchased as money there is no reason why you should play it as a speculative item trying to buy it cheaply as it may well leave you in the lurch.

It becomes more important now to take delivery of whatever investments you have in shares as paper certificates. Whenever a broker tells you it cannot be done it is either self-serving or rank stupidity. Once you do have them in your position DO NOT lose them.

The basic goal now is to eliminate intermediaries between your assets and yourself. What do you stand to lose by taking this action, a few percentage points interest, and a tax advantage? You gain the advantage of possession in the financial world that is separating people from billions, probably trillions of dollars. It cannot be contained among the Blue Blood International Investment firms. This is coming our way and you cannot simply weave and duck to avoid it. You need to be your own bank, your own broker and your own central bank.

If the once most respected international investment firms are teetering, if not already broke, how can you sit by without taking precautions? You have nothing to lose and your fortune to protect.

If there is no need for the actions I am suggesting then simply put it back. No bank will refuse your money if you wish to deposit it. No broker will turn you away if you want to convert your paper certificate back to a transfer agent’s computer entry.

Xenophon Zolotas historical speeches

Prof. Xenophon Zolotas (March 26, 1904 – June 11, 2004) was an eminent Greek economist who had also served as an interim non-party Prime Minister of Greece. The speeches that follow were given to a foreign audience, at the closing session of the International Bank for Reconstruction and Development, on September 26, 1957 and on October 2, 1959. Prof. Zolotas held the positions of the Governor of the bank of Greece and the Governor of the Funds for Greece, at that time.

1957 speech

"I always wished to address this Assembly in Greek, but I realized that it would have been indeed Greek to all present in this room. I found out, however, that I could make my address in Greek which would still be English to everybody. With your permission, Mr. Chairman, I shall do it now, using with the exception of articles and prepositions only Greek words"

"Kyrie,

I eulogize the archons of the Panethnic Numismatic Thesaurus and the Ecumenical Trapeza for the orthodoxy of their axioms, methods and policies, although there is an episode of cacophony of the Trapeza with Hellas.

With enthusiasm we dialogue and synagonize at the synods of our didymous Organizations in which polymorphous economic ideas and dogmas are analyzed and synthesized.

Our critical problems such as the numismatic plethora generate some agony and melancholy. This phenomenon is characteristic of our epoch. But, to my thesis, we have the dynamism to program therapeutic practices as a prophylaxis from chaos and catastrophe.

In parallel, a panethnic unhypocritical economic synergy and harmonization in a democratic climate is basic.

I apologize for my eccentric monologue. I emphasize my eucharistia to you Kyrie, to the eugenic and generous American Ethnos and to the organizers and protagonists of this Amphictyony and the gastronomic symposia.''

Xenophon Zolotas


1959 speech

"Kyrie,

It is Zeus' anathema on our epoch for the dynamism of our economies and the heresy of our economic methods and policies that we should agonise between the Scylla of numismatic plethora and the Charybdis of economic anaemia.

It is not my idiosyncrasy to be ironic or sarcastic but my diagnosis would be that politicians are rather cryptoplethorists. Although they emphatically stigmatize numismatic plethora, energize it through their tactics and practices.

Our policies have to be based more on economic and less on political criteria.

Our gnomon has to be a metron between political, strategic and philanthropic scopes. Political magic has always been antieconomic.

In an epoch characterised by monopolies, oligopolies, menopsonies, monopolistic antagonism and polymorphous inelasticities, our policies have to be more orthological. But this should not be metamorphosed into plethorophobia which is endemic among academic economists.

Numismatic symmetry should not antagonize economic acme.

A greater harmonization between the practices of the economic and numismatic archons is basic.

Parallel to this, we have to synchronize and harmonize more and more our economic and numismatic policies panethnically.

These scopes are more practical now, when the prognostics of the political and economic barometer are halcyonic.

The history of our didymous organisations in this sphere has been didactic and their gnostic practices will always be a tonic to the polyonymous and idiomorphous ethnical economics. The genesis of the programmed organisations will dynamize these policies. I sympathise, therefore, with the aposties and the hierarchy of our organisations in their zeal to programme orthodox economic and numismatic policies, although I have some logomachy with them.

I apologize for having tyrannized you with my hellenic phraseology.

In my epilogue, I emphasize my eulogy to the philoxenous autochthons of this cosmopolitan metropolis and my encomium to you, Kyrie, and the stenographers."

Xenophon Zolotas

Χρυσός: το bull market συνεχίζεται αλώβητο

Χρυσός: το bull market συνεχίζεται αλώβητο.

Η εβδομάδα που πέρασε σφραγίστηκε από ακόμα ένα νέο ρεκόρ. Η τιμή του Χρυσού έκλεισε στα $783.50/ουγγιά, ήτοι στα ανώτερα επίπεδα των τελευταίων 28 ετών. Κρίνοντας από το μακροχρόνιο διάγραμμα της τιμής για την εν λόγω περίοδο, βλέπουμε ότι το bull market που ξεκίνησε δειλά-δειλά στα μέσα του 2002, είναι για τα καλά στρογγυλοκαθισμένο από τεχνική άποψη. Αλλά και τα θεμελιώδη μεγέθη της παγκόσμιας οικονομίας που έδωσαν το εναρκτήριο λάκτισμα στο bull market αυτό, συνεχίζουν σήμερα να ισχύουν περισσότερο ενισχυμένα από ποτέ (δείτε προηγούμενα ποστ)

Με τέτοια θεμελιώδη σε συνδυασμό με την ακλόνητη τεχνική εικόνα, όλα δείχνουν ότι το ρεκόρ όλων των εποχών στην τιμή του μετάλλου (δλδ. τα $850/ουγγιά) είναι απλώς θέμα χρόνου να διασπαστεί. Άν εξαιρέσει κανείς την περίπτωση μιας ογκώδους και καλά ενορχηστρωμένης παρέμβασης στη τιμή του Χρυσού από τους "γνωστούς κύκλους" -όπως η GATA ακούραστα δεν σταματά να καταγγέλνει- η διάσπαση αυτή θα έλθει ίσως συντομότερα και απ'ότι αναμένετο.

Στα θεμελιώδη, πέραν από τα αστρονομικά μεγέθη λιμνάζουσας ρευστότητας παγκοσμίως, ανήκει και η ενίσχυση της γενικής αντίληψης ότι το US$ έχει ακόμα δρόμο στην κατηφορική του πορεία. Όσο τούτο γίνεται συνείδηση, τόσο ενισχύεται η φυγή και απεμπλοκή από το US$ προς σταθερότερες αξίες -όπως αυτή εμφανώς πλέον καταδεικνύεται και πάλι από τη πορεία της τιμής του χρυσού- των όσων κατέχουν δολλαριακή ρευστότητα (π.χ. Κίνα, Ρωσσία, Αραβικά Εμιράτα κλπ)

Κατά την ανοδική πορεία του χρυσού θα πρέπει βέβαια να αναμένονται κατά καιρούς "ισχυρές αναταράξεις" καθώς κάθε άνοδος θα συμπιέζει προσωρινά τη ζήτηση που προέρχεται από το μεγάλο -προς το παρόν- "πελάτη" δλδ του εποχιακού κλάδου της χρυσοχοϊας. Όσο όμως περισσότερο η ζήτηση του μετάλλου θα περνά σε ισχυρά επενδυτικά χέρια -safeheaven investing- τόσο η ένταση και η διάρκεια των όποιων διορθώσεων θα μειώνεται.

Βραχυπρόθεσμα τελικά πού βρισκόμαστε;
Η διάσπαση του επιπέδου των $800 είναι πολύ πιθανό να πραγματοποιηθεί μέσα στο 2007 καθώς όλοι οι οδοδείκτες συγκλίνουν προς τα κεί. Τού χρόνου ποιός ξέρει; Ίσως -τολμώ να πώ- να δούμε και τα $1000/ουγγιά!

Gold Stocks - Crucial Information for the Investor - Not All Rosy

By Kenneth J.Gerbino

The big news globally is that the U.S. Federal Reserve and the Bank of England both threw in the towel on monetary policy to deal with market panics in the last two months. We believe these problems are only the tip of the iceberg of a massive credit and investment bubble that is threatening to unwind. Their only answer is more money and soon more inflation.

In the U.S., the Fed lowered important benchmark interest rates well beyond what was expected and instigated very lenient bank repayment policies for borrowed capital from the Fed. This was not to help the man in the street or to “avoid a recession”. Since unemployment is so low the Fed rate move was obviously made to bail out Wall Street and the major banking institutions. This resulted in the dollar hitting new lows and gold moving higher. These trends are likely to continue.

History tells us the truth about the Fed. In the twenty years before the Fed was created, there were 1,724 bank suspensions, in the twenty years afterwards there were 15,502. By subsidizing and protecting the banks they encourage speculation, overleveraging and excessive credit creation which leads to major banking problems that are then solved at the expense of the general population.

In England the central bank announced that all depositors of Northern Rock, Britain’s 5th largest mortgage bank would have their deposits guaranteed by the government. This was in response to a bank run which had ensued with world press coverage showing thousands of people lining up to withdraw their savings at various branches.In the future this will become a disastrous precedent encouraging more speculation by institutions and investors. Northern Rock had a $6 billion equity base and had leveraged its balance sheet to $226 billion. I suspect they are not alone and this may not be the last of the bail outs.

These actions are only the beginning of a new round of paper money injections that will surely bring on above average inflation. An excellent study by economist John Williams shows the real inflation rate in the U.S. since 1991 was annually 4% higher than government figures. Financial writer Howie Katz reports adjusting the CPI from 1983 to reflect housing costs as opposed to rents shows U.S. consumer prices have tripled not doubled as reported by the Bureau of Labor statistics. Gold averaged around $400 in 1983, it is reasonable to triple this price for a future target just based on a simple real CPI formula.

The Dollar

With the dollar at new 40 year lows, it will force Europe and other countries to devalue their currencies. If you are an international business working on 2-3% margins or less and you can now buy your U.S. goods 8% cheaper because of a weak dollar, it is an incentive to do so. This means other countries that depend on exports will not get that business and their governments will respond with competitive devaluations. Devaluations in the current floating currency environment (where exchange rates change daily in response to supply and demand as well as government intervention) can be accomplished by 1) manipulating interest rates lower (which then leads to more money creation by the banking institutions) or 2) just printing money. The central banks and the banking establishment in these countries along with the politicians also have a beautiful excuse to print their way out of the fiscal mess they are in because they cannot meet the obligations to their citizens. This is and always will be bullish for precious metals. This is one reason why precious metal ownership by way of reserves in the ground of mining companies is prudent. Precious metals could be one of the only monetary assets still standing when this excessive global credit and monetary cycle is over.

China and Japan – The Big Currency Misconception

Because of competitive devaluations, already mentioned above, the death of the dollar may not be as fast as some people think. Also one of the big misconceptions that I keep reading about is that China and Japan will soon dump their holdings of dollar denominated Treasuries because they are losing value with the dollar going down. Not true.

Follow this very carefully.

1. A million dollars of clothing is exported from China to the U.S.
   
   
2. A million dollars is sent to China.
   
   
3. The Chinese factory owners send the million dollars to the central bank and ask for the equivalent in renminbi so they can pay their workers and suppliers.
   
   
4. No problem so far.
   
   
5. But what does the Chinese central bank do?
   
   
6. They actually create (print) $1 million worth of renminbi and send this off to the factories and keep the original $1 million and buy U.S.Treasuries with it.
   
   
7. The central bank does not have to exchange the dollars for renminbi’s, they can create an additional $1 million worth of renminbi’s.
   
   
8. Since China now has $1 million in local currency they earned for the clothing does the central bank even care if the value of extra $1 million in Treasuries they own goes down by 20% or more.
   
   
9. The answer is no.

China sent $1 million of clothing to the U.S. and now they have $1 million of local currency and $1 million of U.S Treasuries. Easy money.

China now has more money in circulation (M1) than the United States. $1.9 trillion vs. $1.4 trillion. The reason is that they have been double dipping.

In the above example the $1 million they have in Treasuries is all gravy and this is what the Chinese have done the last 10 years and that is why their money supply has mushroomed. When the time comes they will most likely take the trillions they have in U.S. Treasuries and come back to the U.S. and buy buildings and factories (like the Japanese did in the late 80’s) Spending dollars for dollar denominated assets in the U.S. will have zero effect on the exchange rate. So the argument that these Treasuries are a huge overhang on the U.S. dollar because the Chinese don’t want to lose value is not true. They are so far ahead already it doesn’t matter. Of course the local citizens will now have to put up with plenty of inflation that is coming to China from all the new money floating around the country.

Gold Demand

High oil prices are flowing huge amounts of money to countries in the mid east that have been historically pro gold and the higher oil goes the more gold will be absorbed by these governments, their financial institutions and investors.

It has been estimated that all the gold in the world ever mined equals 5.3 billion ounces. This has a value of $3.7 trillion. Much of this gold is in woman’s jewelry cases and on men’s wrists or resides in peoples teeth. Global liquid financial assets are in the hundreds of trillions of dollars and global derivatives are over $450 trillion. Therefore the ratio of gold available for investment is a tiny fraction of the other investment alternatives. When further financial problems arise gold will have to rise when too much money chases too few ounces.

The U.S. Economy – Where’s the Beef?

The U.S economy has been skating on thin ice. Subtracting out the money that people have spent from refinancing their homes, the U.S. economy (GDP) has averaged only one half per cent growth annually for the last six years. This means we are living in an economy that has been fueled by consumers borrowing home equity money and this has now come to an abrupt end. This, coupled with the underlying problems in our banking system, means the only way out is a loose monetary policy. The overleveraged banking system cannot handle a recession. This unfortunate scenario coupled with more trade and budget deficits will have a positive effect on the gold price and will also contribute to future inflation.

Since 2002 crude materials in the U.S. are up exactly 100%. This is more anecdotal evidence, that the inflation rates in the U.S. will rise substantially in the coming years.

Money Creation Versus Gold

Our survey of the seven largest countries in the world and Europe show that they created $775 billion in new money in the last year. The supply of gold available for investment, outside of jewelry and industrial demand which would include bars, coins and bullion funds was approximately $13 billion. This is a ratio of 60 to 1 and does not include the money creation by the other 175 countries in the world. The point is that there really is not much annual gold supply around for investment purposes or financial insurance or a money substitute. Sooner or later the price will dramatically reflect this imbalance. India has increased it’s money supply 15.3% in the last year. This is probably why in the first eight months of 2006, gold imports increased by 86%. India could be on track to consume over 35% of 2007 global mine supply all by itself.

Because mining companies have gold in the ground, their valuations over the next decade are logically bound to increase substantially. These companies provide an outstanding opportunity to own gold in the ground via stock ownership.

Volatility and The Gold Stocks

The recent volatility of the precious metals and the mining shares unfortunately is part of the equation of this investment sector. We attempt to balance these fluctuations in our hedge fund but it is a difficult task and requires focus and discipline. You should expect volatility with your personal portfolios in the future and realize that volatility in this sector is normal. But, in my opinion, this type of volatility is a small price to pay for the long term trend that is clearly in your favor and the excellent growth and value attributes of a well diversified and hedged portfolio.

The mining sector should continue to be one of the top performing investment sectors in the coming 3-5 year period. The past actions of the Fed and other central banks mean they will surely do everything they can to avoid a credit and debt implosion that according to many experts could be in the trillions of dollars of potential defaults and bankruptcies. If this estimate is true then bailing out the institutions that are in danger will require the greatest expansion of paper money in history. The winner will be gold and other natural resources because the more money that is created the higher the prices of basic commodities and monetary substitutes (gold and silver) will go. Gold mining shares are the beneficiaries of the economic excesses of others.

It is important to be careful of exploration stocks and allocate only a small amount to this sector. The large mining stocks are now being bought by huge non gold savvy hedge funds and will create lots of volatility as we go forward. A stampede by these players either way can be profound. The developmental mining companies with solid resources in the ground and a 1-2 year horizon to production will be targets for buy outs by mid-tier and major mining companies.

Good luck - you are going to need it especially if gold goes to $1,200 and then back down to $700 and then to $2,000, which is very possible in the coming decade. So always keep a core portfolio as insurance (and long term appreciation) and a trading portfolio that rolls with the punches. Do not go on margin and do not spend much time or money on the exploration stocks as more than likely every share you buy is usually from an insider who is selling. Also if there ever is a major economic upheaval gold and silver mining companies with known and verified resources in the ground will go up dramatically but exploration companies with nothing but a geologist and promoter’s dreams will go no where because they have nothing in the ground. Remember that - they have nothing - so be careful.

For more information on the economy, stock market and gold please visit our website at: www.kengerbino.com

Ken Gerbino
26 October 2007

***

Gold: New 27 year High..

It looks like gold will be testing the $800/oz. mark before the year is out.
Mine stocks are still a little shy (perhaps they still can't believe their eyes!) and the metal is leading the paper for the time being.
Once the up trend has embeded a definite track on the collective awareness, then it's "fasten seatbelts" time...

New IMF transparency rules likely prompted change in U.S. gold report

By CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

The U.S. Treasury Department's acknowledgement of loans and swaps of gold from the U.S. gold reserve, disclosed last week by James Turk of the Freemarket Gold & Money Report, appears to have been prompted by the International Monetary Fund's adoption in May of stricter rules for financial transparency for member nations.

The revisions to the IMF's fiscal transparency manual were adopted on May 8, seemingly without any announcement except for this brief preface on the IMF's Internet site:

http://www.imf.org/external/np/fad/trans/index.htm

GATA long had complained that IMF rules allowed member nations to count leased and swapped gold as gold still in the vaults of their treasuries and central banks. But the IMF agreed to consider tightening the rules when the issue was pressed by Neal R. Ryan, then vice president and director of economic research for New Orleans coin and bullion dealer Blanchard & Co.

The revised manual, posted at the IMF's Internet site here -- http://www.imf.org/external/np/pp/2007/eng/101907m.pdf -- appears to require more specific accounting for gold reserves, declaring on Pages 74 and 75:

"Financial assets consist of financial claims that entitle the government to receive one or more payments from a debtor, as well as monetary gold and
special drawing rights. Financial assets to be reported include cash and cash equivalents; other monetary assets, such as gold and investments; and loans and advances.

"Additional breakdowns should be provided within each category of financial asset. For example, investments might be broken down into direct marketable securities, equity investment in private companies, portfolio investment in private companies, and investment in international institutions. Loans and advances receivable might be broken down by sector (e.g., agricultural loans, student loans, and housing loans), and within sector by major loan programs.

"Foreign exchange reserves held by the central bank should not be reported as part of the central government statement of financial assets for fiscal policy purposes. They are generally held to provide import cover and for possible exchange market intervention, although it is acknowledged that in some countries foreign exchange reserves have been run down as a matter of central government policy for other purposes, including debt repayment, even when held by an independent central bank.

"Foreign exchange reserves should, however, be reported as part of other transparency requirements (i.e., in the context of monetary or statistical standards), generally by the central bank.

"Any special characteristics of financial assets, such as being secured against a debt or other specific liability, or any restrictions on the use of an asset or the income deriving from it, should be noted as memorandum items. [Emphasis added.] Any financial assets excluded from reporting should also be noted."

The acknowledgement of the need to distinguish between gold in the vault and leased ("deposited") and swapped gold began to appear in the Treasury Department's weekly U.S. International Reserve Position report a few days after the IMF adopted the revisions to its fiscal transparency manual, on May 14. The 13th line of the Treasury report, recording gold reserves, contained this new language parenthetically: "including gold deposits and, if appropriate, gold swapped."

The Treasury's May 14 report can be found here:

http://www.treas.gov/press/releases/20075141738291821.htm

But the Treasury Department's new reporting form fails to comply with the new IMF rules, since it still does not distinguish unencumbered gold from encumbered gold, gold on deposit and gold swapped, even as there would be no need for the new language in the reporting form if the Treasury had not already placed gold on deposit somewhere or had not swapped gold.

So a lot remains to be done before central banks come clean about their gold reserves. GATA aims to press the Treasury Department about this in a formal and legally demanding way in coming days.

Chris Powell: Markets, or just interventions?

Remarks by Chris Powell
Secretary/Treasurer, Gold Anti-Trust Action Committee Inc.
New Orleans Investment Conference
Sunday, October 21, 2007

Ever since the Gold Anti-Trust Action Committee was founded in 1999 to expose manipulation of the gold market, we have been called "conspiracy nuts." We don't mind the "nuts" part, but we're actually public record nuts. For the scheme to suppress the price of gold is increasingly a matter of ordinary public record.

It was a matter of public record in July 1998, six months before GATA was formed, when Federal Reserve Chairman Alan Greenspan told Congress: "Central banks stand ready to lease gold in increasing quantities should the price rise." That is, Greenspan himself contradicted the usual central bank explanation for leasing gold -- supposedly to earn a little interest on a dead asset -- and admitted that gold leasing was all about suppressing the price. His admission is still posted at the Fed's Internet site.

The Washington Agreement on Gold, made by the European central banks in 1999, was another admission -- no, a proclamation that central banks were working together to control the gold price. The central banks in the Washington Agreement claimed that, by restricting their gold sales and leasing, they meant to prevent the gold price from falling too hard. But even if you believed that rubbish, it was still collusive intervention in the gold market.

Barrick Gold, then the largest gold-mining company in the world, confessed to the gold price suppression scheme in U.S. District Court in New Orleans on February 28, 2003. On that date Barrick filed a motion to dismiss Blanchard & Co.'s anti-trust lawsuit against Barrick and its bullion banker, JPMorganChase. The Blanchard suit charged that Barrick was doing exactly what Barrick's motion went on to admit. But Barrick's motion said that in borrowing gold from central banks and selling it, the company had become the agent of the central banks in the gold market, and, as the agent of the central banks, Barrick should share their sovereign immunity and be exempt from suit. Barrick's confession to the gold price suppression scheme is posted on the Internet HERE.

The Reserve Bank of Australia confessed to the gold price suppression scheme in its annual report for 2003. "Foreign currency reserve assets and gold," the RBA's report said, "are held primarily to support intervention in the foreign exchange market." The RBA's report is still posted on the Internet at the central bank's own site.

Maybe the most brazen admission of the Western central bank scheme to suppress the gold price was made by the head of the monetary and economic department of the Bank for International Settlements, William S. White, in a speech to a BIS conference in Basel, Switzerland, in June 2005. There are five main purposes of central bank cooperation, White announced, and one of them is "the provision of international credits and joint efforts to influence asset prices (especially gold and foreign exchange) in circumstances where this might be thought useful."

White's speech is posted at GATA's Internet site HERE.

Last week the editor of the Freemarket Gold & Money Report and the founder of GoldMoney, James Turk, a longtime consultant to GATA and a speaker at this conference, revealed some U.S. Treasury Department reports showing that since May this year the U.S. gold reserve has been or is being mobilized for leasing to suppress the gold price. Those records are available on GATA's Internet site.

In complaining about the manipulation of the gold market, GATA has not been called "conspiracy nuts" by everyone. We have gained a good deal of institutional support over the years.

First came Sprott Asset Management in Toronto, whose chief investment strategist, John Embry, has spoken at this conference. In 2004 Sprott issued a comprehensive report supporting GATA. The report was titled "Not Free, Not Fair -- the Long-Term Manipulation of the Gold Price," and it remains available at the Sprott Internet site.

Then last year the Cheuvreux brokerage house of Credit Agricole, the major French bank, issued its own report confirming GATA's findings of manipulation in the gold market. The Cheuvreux report was titled "Remonetization of Gold: Start Hoarding," and you can find it at the GATA Internet site.

And last month Citigroup -- yes, Citigroup, a pillar of the American financial establishment -- joined the conspiracy nuts. On September 21 Citigroup published a report titled "Gold: Riding the Reflationary Rescue," written by its analysts John H. Hill and Graham Wark, declaring: "Gold undoubtedly faced headwinds this year from resurgent central bank selling, which was clearly timed to cap the gold price."

You can find the Citigroup report at the GATA Internet site.

So a bigger question today is not whether central banks and their agents manipulate the gold market -- even Citigroup sees it now -- but why this should ever have been a mystery or a controversy.

For the manipulation of the gold market by central banks is only the most basic economic history. That's what the gold standard was about -- governments fixing the price of gold to a precise value in their currencies, a price at which governments would exchange their currencies for gold, currencies that were backed by gold. Though the gold standard was abandoned amid the Great Depression, that was not the end of government efforts to control the gold price. The United States and Great Britain attempted to hold the price at $35 per ounce throughout the 1960s in a public arrangement of dishoarding that came to be known as the London Gold Pool. The London Gold Pool was overwhelmed by demand and was shut down abruptly in April 1968. Since then there has been sporadic selling of gold by central banks and, increasingly, leasing of gold by central banks, even as the gold price has continued to rise.

That the London Gold Pool was a scheme to manipulate the gold price is not denied even as the more recent selling and leasing by central banks may be disputed.

But it is all much bigger than that. Gold is only part of it.

For market intervention is why central banking was invented. Intervening in markets is what central banks do. They have no other purpose.

Central banks admit intervening daily, even hourly, in the currency markets, buying and selling their own currencies and those of other governments to maintain exchange rates at what they consider politically desirable levels.

Central banks admit doing the same in the government bond markets.

Now there is even evidence that the Federal Reserve and Treasury Department have been intervening frequently in the U.S. stock markets since the crash of 1987. You don't have to settle for rumors about the "Plunge Protection Team," also known as the President's Working Group on Financial Markets. Again you can just look at the public record.

The Federal Reserve injects money into the stock and bond markets every day, on the public record, through what are called repurchase agreements the Fed has with the major New York financial houses. The financial houses become the Fed's agents in directing that money into the markets. This week the money deployed into the stock and bond markets by the Fed through the repo pool stood at about $160 billion -- which is plenty for pushing all sorts of markets around or propping them up. Indeed, market manipulation is the only purpose of the repo pool.

As even Citigroup acknowledges now, the price of gold has been manipulated through the strategic dishoarding of gold by central banks and their sale of gold futures and options.

So the biggest question of all may be why central banks manipulate the gold price and what this means for investors.

Gold has been manipulated by central banks because it is a currency that competes with their currencies, a currency whose price helps set the price of government currencies and helps determine interest rates.

More than that, gold is the ticket out of the central bank system, the escape from coercive central bank and government power. As an independent currency, a currency to which investors can resort when they are dissatisfied with government currencies, gold carries the enormous power to discipline governments, to call them to account for their inflation of the money supply.

In recent months central bankers often have complained about what they call "imbalances" in the international financial system. That is, certain countries, particularly in Asia, run big trade surpluses, while other countries, especially the United States, run big trade deficits and consume far more than they produce, living off the rest of the world. These complaints by the central bankers are ironic, since these imbalances have been caused by the central bankers themselves, their constant interventions in the currency, bond, and commodity markets to prevent those markets from coming into balance lest certain political interests be disturbed.

Yes, when markets balance themselves they often do it brutally, causing great damage to many of their participants. The United States enacted a central banking system in 1913 because for almost 150 years before that the country went through a catastrophic deflation every decade or so. Central banking was enacted to prevent those catastrophic deflations. The problem with central banking has been only the old problem of power -- it corrupts. One market intervention encourages another and another and increases the political pressure to keep intervening to benefit special interests rather than the general interest. These interventions, effectively subsidies to one economic interest or another, increasingly are needed to prevent the previous imbalances from imploding. And so we have come to an era of daily market interventions by central banks, so much so that the main purpose of central banking now is to prevent markets from breaking out.

Central banking controls the value of all labor, services, and real goods, and yet it is conducted almost entirely in secret -- because, in choosing winners and losers in the economy, administering the ultimate patronage, modern central banking cannot stand scrutiny. Yet the secrecy of central banking now is taken for granted even in nominally democratic countries. What a hundred years ago in the United States was called the Money Power is so ascendant today that it boasts of its privilege. What other agency of a democratic government could get away with the principle that was articulated on national television in 1994 by the vice chairman of the Federal Reserve, Alan Blinder? Blinder declared: "The last duty of a central banker is to tell the public the truth."

The truth as GATA sees it is this:

First, gold is the secret knowledge of the financial universe, but it is coming to be an open secret. Indeed, GATA announces here today that it has retained a prominent Washington-area law firm, William J. Olson PC of McLean, Virginia, to work with our consultant, the monetary historian Edwin Vieira, to demand from the U.S. government, under the federal Freedom of Information Act, a full accounting of U.S. gold reserves. That demand will be filed in a few days.

Second, while you will hear at this conference much technical analysis of the markets, all of it will be compromised if it fails to account for government intervention.

And third, that intervention is failing because of overuse, exposure, exhaustion of Western central bank gold reserves, and the resentment of the developing world, which is starting to figure out how it has been exploited by the dollar system. The Western central banks are attempting a controlled retreat with gold. But GATA believes that they may have to retreat farther than anyone dreams -- that when the central banks are overrun in the gold market, as they were overrun in 1968, and the market begins to reflect the ratio between gold suppply and the explosion of the world money supply of the last few decades, there may not be enough zeroes to put behind the gold price.

One more thing: You're all invited to GATA's fund-raising reception, cocktail party, and buffet during this conference. It will be held from 7 to 10 p.m. Tuesday at Latrobe's on Royal, 403 Royal St., here in New Orleans. Admission will be $50, you'll get to meet GATA's officers and directors, and for a few hours it will be one place in the world financial system with absolutely no liquidity problem.

* * *

Puru Saxena: The Raging Bull!

"We are witnessing a generational bull-market in natural resources. The boom is due to the ongoing urbanisation and industrialisation of vastly populated developing nations in Asia and Latin America. And central-bank sponsored monetary inflation is adding fuel to the already raging fire. It is interesting to note that despite all the "end of the world" forecasts by numerous analysts, my preferred assets continue to power ahead.

Today, some highly intelligent economists are shouting "bubble' and claiming that this uptrend built on the easy monetary policy cannot last forever. However, I am of the view that we are not in a "bubble" yet and this bull-run is due to the very real fundamental forces of supply and demand. Wherever you care to look in the commodities' universe, you can see that supplies are extremely tight and failing to keep up with the rising demand coming out of emerging Asia.

In the business of investing, it usually pays to observe the market and one should avoid becoming fixated with pre-determined conclusions. After spending over a decade in the investment-management business, I have learnt never to fight the trend. And the trend for commodities and the emerging-markets is up. For sure, as night follows day, this bull will mature and then die. However, between now and judgement day, fortunes will be made by patient investors..."

Please click HERE for the rest of Puru Saxena's article

Gold: long term P&F chart

Just to keep th gold situation in proper perspective it is very enlightening to refer to this ultra-long term $U.S. 5 X 3 Point and Figure chart made available by the The Privateer Website:

GATA publicizes mobilization of U.S. gold; will you support our work?

From GATA's newsletter:

8:53p ET Tuesday, October 16, 2007

Dear Friend of GATA and Gold:

Tonight GATA distributed an international press release via Business Wire about the discovery by our consultant, Freemarket Gold & Money Report editor James Turk, that U.S. Treasury Department documents confirm the recent mobilization of U.S. gold reserves to suppress the price of gold. That press release is appended.

We hope this will strike a powerful blow against the gold price suppression scheme and all those perpetrating it.

This kind of work costs money, and with GATA approaching a few other annual expenses and with tax season not so far away, this may be a good time to ask those who have not yet made a contribution to GATA to consider doing so now.

Just as the World Gold Council, with its annual budget of about $60 million, is the only international organization devoted to promoting gold's use as jewelry and to diverting investment demand for gold into paper, GATA is the only international organization devoted to creating a worldwide free market in gold and re-establishing gold as an independent international currency defending human liberty everywhere. Our budget may be a quarter of 1 percent of the World Gold Council's.

So if GATA's work has been useful to you, we could use your help.

Since the U.S. Internal Revenue Service recognizes GATA as a non-profit civil rights and educational organization under Section 501-c-3 of the U.S. Internal Revenue Code, contributions to GATA federally tax-deductible in the United States.

You can donate to GATA by credit card over the Internet here:

http://www.gata.org/node/16

Or you can send checks payable to GATA at the address of your secretary/treasurer below.

Thanks for your consideration.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
7 Villa Louisa Road
Manchester, Connecticut 06043-7541
USA

* * *

Records Show U.S. Gold is Mobilized
to Suppress Gold Price, GATA Says

GATA Press Release
via Business Wire and Yahoo Business
Tuesday October 16, 2007, 8:12 pm ET

http://biz.yahoo.com/bw/071016/20071016006669.html?.v=1

MANCHESTER, Conn. -- U.S. Treasury Department documents reveal that since May U.S. government gold has been loaned to bullion banks or swapped with other governments to suppress gold's market price, according to the Gold Anti-Trust Action Committee Inc. (GATA).

The documents were publicized today by the Freemarket Gold & Money Report, edited by GoldMoney founder James Turk, a consultant to GATA.

Until now the U.S. government has denied intervening in the gold market or swapping gold with other governments. Pressed by GATA for an explanation in 2001, the general counsel to the Federal Reserve Board's Federal Open Market Committee, J. Virgil Mattingly, even repudiated the minutes of the FOMC's meeting of January 1995, which quoted him as saying that the U.S. government indeed had been engaging in gold swaps:

http://www.gata.org/node/1181

Turk writes in the issue of FGMR published today:

"The U.S. Treasury quietly made a subtle change to its weekly reports of the U.S. International Reserve Position, which includes the U.S. Gold Reserve. This change was first made on May 14. The differences can be seen by comparing the report's old format release on May 8 to the new format used the following week.

"Here are the links:

http://www.treas.gov/press/releases/2007581342179779.htm

http://www.treas.gov/press/releases/20075141738291821.htm

"Note the additional description of gold provided in the new reporting format. It says the U.S. Gold Reserve is 261.499 million ounces and, importantly, that the gold is now reported 'including gold deposits and, if appropriate, gold swapped.'

"This description provides clear evidence that the U.S. Gold Reserve is in play. Gold has been removed from U.S. Treasury vaults and placed on deposit, presumably in the couple of bullion banks the Treasury has selected to assist with its gold price-capping efforts.

"Gold placed on deposit gets loaned out by these bullion banks and then sold into the spot market to try capping the gold price. The same thing happens with swaps, but the vague language in the note to the Treasury reports makes it uncertain whether they are in fact being used at the moment.

"It is noteworthy that this change of accounting occurred in May. Could it be that the gold cartel had to dip into the U.S. Gold Reserve to accommodate the big gold buybacks of hedge books that Lihir and others completed at that time?"

Turk's disclosure adds to recent evidence, including disclosure by the London Bullion Market Association of defective gold deliveries from the Bank of England, that the Western central bank scheme of currency and commodity market manipulation is under great strain.

The complete text of the Oct. 16 edition of FGMR has been posted at GoldSeek.com here:

http://news.goldseek.com/JamesTurk/1192554861.php

The Gold Anti-Trust Action Committee Inc. is a non-profit civil rights and educational organization that exposes manipulation in the gold market and related markets. Its Internet site is www.GATA.org.

* * *

Japan: gold price break up!

Japan's grannies drive up gold prices

By Ambrose Evans-Pritchard
Telegraph.co.uk

Gold has soared to a fresh 28-year high of $760 (£372) an ounce on fears of global currency disorder and a surge of buying by Japanese investors using exotic trading signals.

Traders report a sudden burst of activity on the TOCOM gold futures markets in Tokyo as the price breaks through the psychological barrier of 3,000 yen (£12.52) per gramme, the measure used by the Japanese to trade gold.
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The country's irrepressible grannies rely heavily on Ichimoku "cloud charts", multi-faceted indicators designed to give support/resistance levels in various markets, which have issued a powerful buy signal in recent days.

John Reade, head of precious metals at UBS, said the Japan can be a major driver of the gold price. "Japanese buying can come out of the blue, but it is too soon yet to tell whether they are about to take over the gold market," he said. "When the Japanese public move in with reckless abandon, everybody else gets out of the way. They can be the last to join the rally."

The fresh interest in gold comes as the yen renews its slide, hit by signs that the economy may be tipping back into deflation after the housing collapse during the summer. Housing starts fell 23.4pc in July and 43.4pc in August as new laws came into effect. The Bank of Japan has signalled that it will keep interest rates at 0.5pc for the foreseeable future, inviting funds to step up borrowing in Tokyo to chase higher yields elsewhere through the global "carry trade".

Rising inflation across China, India, the Middle East, eastern Europe and Latin America have all created the backdrop for a major move in gold. Citigroup said a global "reflation rally" caused by cuts in US interest rates could push prices above $1,000 an ounce.

UBS has upgraded its long-term forecast, but is cautious for now. "The net long positions on the US futures markets are at all-time highs. They have been at extreme levels for four weeks and when that happens you can be sure there will be a correction. It could be any time now," said Mr Reade.

Merv Burak: Who could afford such losses shorting gold?

Merv Burak's weekly gold and silver technical analysis report at Market Oracle picks up on a point made often by GATA over the years -- the seemingly infinite resources behind the short position in the gold market, resources that could belong only to governments. Burak doesn't quite draw that conclusion but couldn't come closer. He writes:

"... [w]ith such heavy short selling over the past 6 weeks, this had the effect of keeping the price of gold from exploding on the up side. This may also mean that there is still to come this buying activity to cover the shorts, which should boost the price further -- but it's not all that clear.

"There seems to be a lot of capital behind this short selling. If it continues it could have the effect of discouraging further buying and cause the price to move lower. Shorts could then cover under the radar screen of such lower trending price, as they did during the short sales and an upward trending price. But this starts to sound like manipulation of gold price.

"Ah! Welcome to the real world.

"Now who could it be that has such deep financial pockets to be able to withstand such huge transactions and potential losses should they lose their bet? That's where we get a whole lot of different conspiracy theories. I don't have a clue who could be involved so will leave it up to your efforts to search the Internet and find out for yourselves, should you be further interested. One interesting site to start with could be www.gata.org.

"Another way to look at this is that during this six-week period gold increased in price by $80 or an average $40 per ounce (that is, $4,000 per contract). With 153,120 contracts, that's a total average loss so far of $612 million. Who can afford that kind of loss? It sure isn't your average futures speculator."

You can find Burak's commentary HERE

Adrian Ash: Gold & the End of History's Holiday

Adrian Ash, London financial correspondent for The Daily Reckoning, contributor to MoneyWeek magazine, editor of Gold News, and head of research at BullionVault, has another wonderful essay at Gold Seek, "Gold and the End of History's Holiday." It pokes fun at the arrogance of our betters in finance who for years now have considered gold fit only for the inhabitants of primitive countries with unreliable currencies.

Of course the West now has just sophisticated itself out of any chance at solvency, while the "primitive" people of Asia scurry about doing actual work, saving more than they spend, and, to a growing extent, saving in gold...

Gold & the End of History's Holiday

by Adrian Ash

BullionVault

Tuesday, 9 October 2007

"...The 1990s failed to mark the end of history. It just took a short holiday, instead – and at the very same time, historians and pundits alike announced the 'death of gold', too..."

IF WHAT YOU THINK depends on where you sit, then in early 2000, the Oxford historian Niall Ferguson – like pretty much everyone else who pulled up a chair and took a look – sat two decades into the final demise of gold as a valuable asset.

He wasn't to know, of course, that gold's 20-year bear market was about to hit rock-bottom...nor that his own TV and book-signing career was about to take off as well, bringing him tenure at both Harvard University and the Harvard Business School, plus a weekly column in the Los Angeles Times.

But in studying 300 years of "money and power in the modern world" as he subtitled his 2001 book, The Cash Nexus, Professor Ferguson might have at least wondered whether tomorrow would bring something different for gold from today.

The lesson of history, after all, is that nothing lasts forever...nothing, perhaps, except gold. Least reactive of all metals, and impossible to destroy with anything other than cyanide to dissolve it, gold had been used as a store of wealth across the world for more than 3,500 years.

By the end of the 20th century, however, the more recent past read like an obituary for the "barbarous relic" of ancient kings.

Hence the "Death of Gold" proclaimed by a Financial Times' editorial in 1997, together with The Economist's seemingly annual rant against gold throughout that decade. Come October 1999, and BusinessWeek told its readers that "this ancient form of wealth is less an international currency and stable store of value than ever before.

"It's just another commodity that swings to the global rhythm of supply and demand."

In short, "the twilight of gold appeared to have arrived," agreed Professor Ferguson, stepping out of the lecture hall and into his gypsy fortune-teller's painted caravan. "True, total blackout is still some way off," he forecast in his 2001 book, and "gold has a future, of course, but mainly as jewellery."

All the evidence he gathered together at the turn of this century pointed to "the creeping demonetization" of gold. First, the international Gold Standard had collapsed at the start of World War One, after dominating global finance for barely 13 years. The Gold Exchange system of world currencies that followed it seemed only to spread and deepen the Great Depression. In turn it collapsed, too, on the eve of World War II.

The United States then ceased paying gold in exchange for US Dollars in 1971, finally destroying the post-war Bretton Woods settlement and severing all links between the world's most important currency and the "barbarous relic" of gold.

Funnily enough, the end of gold's convertibility into Dollars sparked a 24-fold spike in its Dollar-price by the start of 1980. But "the surge in Gold Prices that occurred during the 1970s was historically anomalous," said Ferguson as the 20th century drew to a close, "reflecting a sudden increase in demand for gold...and the rapid depreciation of most Western currencies relative to oil and other commodities."

The "historical anomaly" of $850 gold lasted just one day, in fact – 21st Jan. 1980 – and from then on, gold's role as a monetary asset sank almost as fast as its price. By the end of 1999, the Gold Price was languishing at a 20-year low. Then the British government, founder and guardian of the international Gold Standard a century before, picked its moment to sell half of its national gold reserves, swapping the metal for Dollars, Euros and Yen to keep in the Bank of England's vaults.

At the very same time, the Swiss National Bank – last of the world's central banks to abandon the Gold Standard in the 1930s – sold half of its gold reserves, too. The sale required a change to the Swiss constitution, and that required a national referendum of the Swiss people, plus a re-writing of Switzerland's currency statutes! But the central banks of Argentina, Austria, Australia, Belgium, Canada, Luxembourg, the Czech Republic and India were already selling gold by this point.

So what had the Swiss people to fear? What comfort were they hoping to take from gold bullion anyway? The changes were ratified, the legal link between gold and the Swiss Franc was severed at last, and the SNB began the sale of 1,300 tonnes of gold in a five-year program.

"From the point of view of investors in the West, where the possibility (or at least the memory) of financial catastrophe has receded, the twilight of gold makes some sense," Ferguson went on. "As an investment, gold has signally under-performed stocks and government bonds in the United States and Britain in the past century."

Surveying the world from the dreaming spires of Oxford, however, "gold also has a future as a store of value in parts of the world with primitive or unstable monetary and financial systems," forecast the don.

"Gold will [also] continue to have an appeal as a store of value anywhere where currencies or banking systems are fragile," he added, pointing to "the countries of the former Soviet Union."

But given what's happened to world Gold Prices since then, however, might Professor Ferguson now want to review his opinion of Western currencies and banking systems? Seeing the recent run on Northern Rock in Great Britain – and the near-run on Countrywide Bank in California, an event which Ferguson himself reported in a recent column for the L.A. Times – might Western governments also want to reconsider their disdain for gold, that barbarous relic of less enlightened times?

Fast forward to late 2007, and gold is now approaching its seventh annual gain on the trot. Rising by nearly a quarter against the Dollar over the last 12 months – and rising by 10% and more against both the Euro and British Pound – the "anomaly" of surging Gold Prices in the 1970s has made a comeback.

Put another way, the "Long Boom" enjoyed from 1982 to 2000 may have discounted tech-stock earnings until A.D. 2146 on the Nasdaq index, but it failed to abolish the threat of instability in Europe and the United States. At least, that's what the Gold Market has been saying since the current surge got underway in mid-2005. And just as the famous "End of History" proclaimed by Francis Fukuyama in 1989 proved to be merely a weekend vacation during the mid-to-late 1990s, so the "Death of Gold" announced by historians, pundits and analysts at the very same time has proved somewhat premature.

Of course, investors joining this bull market now should beware of repeating their error. But if deciding to Buy Gold feels at all hard today, it might suggest the top of this market remains a long way off yet.

And for as long as Bloomberg columnists argue that buying gold is like "believing in the tooth fairy," you might also take comfort in the fact that mainstream consensus is still opposed to gold.

Just like it was at the turn of this century.

Adrian Ash

BullionVault

CITIGROUP: Macro, supply/demand forecasts mix could send gold soaring to $1,000/oz

From Mineweb:

Citigroup suggests that $1000/oz gold could become a reality if a mix of macro and supply demand forecasts sufficiently gel to send gold soaring beyond its historic ceiling of $850/oz.

Dorothy Kosich
RENO, NV -

Citigroup metals analysts said Monday they are positive on gold "based on a mix of macro and supply/demand forecasts," that could send gold beyond its historic ceiling of $850/oz to as much as $1,000/oz or higher under certain circumstances.

Noting that 2007 is running $62/oz above the 2006 average of $605/oz, analysts John H. Hill and Graham Wark declared that "we would not be surprised to break its historical highs of $850/oz."

The analysts theorized that the policy resolution to the current credit crunch may be "an extended ‘Re-flationary Rescue,' in a new cycle of credit creation and competitive currency devaluations that should be inherently positive for pro-cyclical basic materials, hard assets, oil and gold."

"This could take gold to $1,000/oz or higher," they predicted.

Citigroup hiked gold forecasts for 2009/2010 to $800/$820/oz and long-term valuation to $700/oz. "Within this, a test of $850-$1000/oz is likely," they advised.

Investment Returns with a Vengeance

Citigroup's research suggests that gold is entering a new investment-driven phase as gold market drivers "tend to oscillate between bouts of eastern physical/fabrication demand and western investment demand."

The analysts asserted that "the handoffs back and forth between these demographically distinct buyers, typically over six- to nine-month intervals, continue to define gold's stair-step ascent over the past five years. Investment driven-upside, typically featuring retail investors responding to macro jitters, tend to be violent and shorter-lived. Fabrication support tends to play off in a more muted manner."

Nevertheless, Citigroup feels that "investment has returned with a vengeance. This was driven first by safe-haven demand during the credit crunch and now by greater awareness of gold's critical role in the ‘re-flation trade'. Investment patterns in physical gold are mirrored by the equities."

Gold Equities Looking Good

In Citigroup's research, Hill and Wark noted that a powerful resurgence in investment demand has coincided with seasonally strong fabrication offtake, which "may extend the move to the upside." However, the Indian/Asian holders who would normally be selling aggressively into the current rally are limited by pre-buy ahead of the western holidays, Indian festivals in November, and the Chinese New Year in early February.

The September close of the central bank sales year also brings relief to the pressure to sell gold, according to the analysts. "As a result, there is a good chance that the gold rally will continue through year-end, followed by a correction in early 2008 when Indian/Asian holders have more latitude to sell," they advised.

Meanwhile, Citigroup noted that gold ETFs have set a new high of 759 T, up 21% since the end of June and valued at $18 billion.

‘The behavior of gold equities closely mirrors action in the physical market," Citigroup noted. "It is no accident that the equities awakened simultaneously with investment demand for bars, coins and ETFs."

The good news, Citigroup suggests, is that gold stocks are finally outperforming gold, as investment demand rekindles. "After early signs of life in 2Q/07, our broader-based gold composite has tacked on +28.4% in the second half of this year to date. This is notable because the stocks have lagged gold since 2H/05. In 3Q, star performers were Barrick and Agnico Eagle."

Citigroup's analysis also indicates that stocks are showing leverage to the gold price. "Longer term it is reasonable to assume that growth companies with superior executive can deliver betas of roughly 1.5x the gold price."

Supply/Demand Considerations

Hill and Wark claimed that central banks "have been forced to choose between global recession, or sacrificing control of gold, and have chosen the perceived lesser of two evils. We expect sales to continue to run in the 400-500 TPY range and see this as a normal, recurring feature of the gold market. Long-await official sector accumulation in dollar-overweight/gold-underweight countries like China and Saudi Arabia could provide a catalyst."

Citigroup believes that growth in the Chinese market and western ETF demand can easily absorb central bank gold sales and de-hedging from gold miners, particularly since the global hedge book standards at 1,064 T or roughly 8.5 months of mine production, the lowest since 1995.

Company Earnings

The analysts raised EPS estimates for the second half of this year and 2009.

Barrick Gold (ABX) remains Citigroup's favorite as the analysts hiked the target price from $43 to $48 a share, citing "higher long-term gold assumption." Possible catalysts include the advancement of the Pascua/Lama project; day-lighting non-gold assets; buying the minority interest in the Cortez operation; buying back shares; and reduction of what the analysts called "the increasingly unwieldy project hedge book."

The analysts also praised the hidden value of Barrick's non-gold portfolio. "While there is no need to immediately monetize them, we see asset value gains as offsetting mounting MTM losses on the project hedge book, which was about $4.1 billion at the end of Q3."

Hill and Wark admitted that they were disappointed with Newmont's announcement concerning higher unit costs and lower reserve replacements. To achieve financial and operational improvements, Citigroup suggests that Newmont needs to return to normal production at Batu Hijau; have the new Leeville underground mine achieve commercial production; and achieve better power availability in Ghana. Nevertheless, problems remain with higher diesel and Australian-dollar costs, start-up issues at Phoenix and the closure of Midas due to a fatality.

Citigroup remains positive on Freeport McMoRan Copper & Gold (FCX), raising the share target price from $120 to $122/sh. Nevertheless, the analysts warned Freeport investors to be prepared for three "false negatives" including so-called falling production, royalty rumblings in Indonesia, and delays/cost escalation at the Tenke project.

Nova-Teck?!?!

The analysts raised the target price for NovaGold Resources (NG) from US$18 to $23/sh, and upgraded it from "Hold/Speculative" to "Buy/Speculative" with an expected share price return of 38.3%. Citigroup cited a possible 50-50 settlement with Barrick in the battle over Donlin Creek, and a consensus that values NovaGold at 30% of Donlin.

In fact, Citigroup believes that "Canadian major Teck could potentially create an innovative, negotiated solution to the Donlin impasse with Barrick. This might involve contributing Donlin, Galore, and Teck's large Pogo gold mine to ‘Nova-Teck', with Barrick taking a minority shareholding in exchange for some/all of its Donlin stake plus the Grace claims near Galore."

"In this way, expensive, time-consuming litigation might be avoid, while providing investors with an exciting new mid-tier North American-based gold/copper miner," they suggested.

Central bank gold sales fall below quota for second year

By Jon A. Nones
Resource Investor
Wednesday, October 3, 2007

ST. LOUIS -- The deadline of September 26 for annual Eurosystem central bank gold sales came and went with seemingly little notice in the market. But as gold prices continue to flirt with 28-year highs, news that signatories failed to hit the sales quota again this year could help contribute to gold's much-anticipated march to $800.

Matthew Turner, commodities analyst at Virtual Metals, puts gold sales at 475 tonnes, once again short of the 500-tonne quota per the Central Bank Gold Agreement (CBGA) of September 27, 2004.

"This wouldn't include forward sales, but there's zero evidence of any of those," he added...

For the full story please click HERE

Antal Fekete: Peak Gold! A Primer on True Hedging, Part Five

PEAK GOLD! -- A Primer on True Hedging, Part Five

Antal E. Fekete
Gold Standard University Live
aefekete@hotmail.com

Note: for Part I please click HERE,
           for Part II HERE,
          for Part III HERE
  and for Part IV HERE

BARRICK EXECS CONTINUE TO EXERCISE OPTIONS AND SELL SHARES

In Part Four I revealed that when it comes to owning Barrick shares, the two top Barrick executives, CEO Greg Wilkins and CFO Jamie Sokalsky have voted with their feet. In retrospect it looks more like a stampede of insiders out of Barrick shares and options.

As reported by the Canadian newspaper National Post on September 21 and 25, Barrick executive vice president Alexander Davidson exercised 25,000 options for company shares at $23.85 each on Sept. 18 and then sold these shares for $39 each the same day. Davidson exercised 5,600 more options at the same price on Sept. 20, then sold the shares. He exercised another 19,400 options at the same price the following day, then sold the shares for $41 each.

Patrick Carver, executive vice president and general counsel at Barrick exercised 12,100 options at $29.60 on Sept. 18, then sold these shares for prices ranging from $39.35 to $39.41 the same day. He exercised another 12,000 options at $29.60 on Sept. 20, then sold these shares for $40.30 each the same day.

Peter Kniver, executive vice president and COO, exercised 40,000 options for Barrick shares at $23.80 each on Sept.21, then sold these shares the same day for prices ranging from $40.26 to $40.32.

Executive vice president and CFO Jamie Sokalsky exercised 49,100 options at $30,70 each on Sept. 19, then sold these shares the same day for prices ranging from $39.45 to $39.61. This is in addition to selling 135,000 shares between Sept. 1 and 14 as mentioned in Part 4 of this series. Many others at Barrick have exercised options and sold company shares. The National Post comments:

"Looking for someone to pick up the tab for a night on town? Well, you might want to track down one of the 28 executives, directors and/or officers at Barrick who since Sept. 1, 2007 have exercised and sold more than 1.2 million options for company shares. Consider the 420,050 options that were exercised and then sold in four days, from Sept. 10 to Sept. 14. They generated $3,254,651 plus $1,439,812 in total profits for the 15 Barrick officers who performed these transactions. That's one helluva dinner for starters."

More pertinently I ask the question: what's the rush to get rid of Barrick shares? What is it that insiders do know but shareholders may not?

Barrick throws in the towel

It could have very well been the impending bombshell timed to explode on September 28 when Barrick CEO Greg Wilkins was to announce that the company "has no plans to return to the futures markets to hedge its gold production". This amazing announcement is in my opinion nothing short of an admission of guilt. Barrick's hedging policy has caused a financial disaster that was perfectly foreseeable and avoidable. Barrick executives have been warned that their so-called hedge-plan was fraudulent and involved the company with unacceptable risks. I told CFO Sokalsky in person about the errors of his ways already ten years ago. My 50-page memorandum Gold Mining and Hedging -- Will hedging kill the goose laying the golden egg? that I prepared for Barrick executives is in the public domain. Ferdinand Lips in his book Gold Wars quotes extensively from it.

Shareholders would be perfectly justified in launching class action suits against Barrick executives. Insiders are well aware of this. Hence the spectacular stampede to dump Barrick shares that may have their origin in illegally paid bonuses. Why, these bonuses could possibly represent paper profits rather than earned profits. It is criminally fraudulent to pay yourself a bonus out of paper profits. The contingent liability encumbering paper profits could turn into real losses for which the funds paid out in bonuses should have served as cover. Apparently this is what happened to Barrick: the rising gold price made paper profits from Barrick's "hedges" evaporate while turning all remaining "hedges" into a loss-maker. Millions of dollars that Barrick executives have recently pocketed from bonuses could conceivably be part of the cover for losses embodied by the 9½ million ounces of "hedges" under water.

It is remarkable and noteworthy that CFO Sokalsky has got off from his high horse. He is no longer touting his so-called hedge plan that involved using paper profits for the purposes of window-dressing operational profits. Quite possibly company counsels have warned him that such a tactic may be deemed illegal and actionable by shareholders.

As reported by Reuters quoting an interview on CNBC, on Friday, September 28 company president Wilkins announced the end of the saga of "hedging" in gold mining. He still appeared to be defending the practice by promising that the company is going to continue to hedge its copper production. The red herring of copper hedging will lull nobody into believing that the discontinued gold hedging strategy was unobjectionable from the legal point of view. The objection is not against the use of the futures markets in hedging; it is against the practice of selling leased metal. There is no lease market for copper so Barrick cannot sell leased copper.

As this series Peak Gold!, a primer on the economics of gold mining, has set out to show, the economics of copper mining is as different from that of gold mining as night is different from day, on account of the different behavior of the underlying marginal utilities (see below).

Be that as it may, Barrick has thrown in the towel. Truth has won over falsehood. President Wilkins said in the interview: "Frankly, our investors are really looking to benefit from the upside of gold and we share that point of view." He did not explain why it took him so long to come around to honoring the wishes of shareholders, nor did he say what other criteria than serving the interest of shareholders may guide his actions. Deafening silence surrounds the question what he is planning to do with the 9½ million ounces worth of "hedges", now deeply under water as a direct result of the foolish hedging policies of management, and a potential source of further horrendous losses in case the price of gold advances further.

The fact is that Barrick is haemorrhaging gold, and the executives are trying to cover it up. Rome is burning and Nero fiddles on the roof. A few days earlier, at the Denver Gold Group Forum, Wilkins talked to the assembled mining experts complaining about the high price of truck tires explaining how he was going to fix the problem. Not one word was said about the 9½ million ounces of "hedges" under water, or how they can be lifted before they do further damage to the company and its shareholders. The CEO talks about building a truck tire factory when the gold mine is on fire. Perhaps, if he put out the fire first, then he could afford to pay the going price for truck tires.

Of course, he must have noted that "hedging was practically anathema" at the Forum, as niftily put by Citigroup analyst John Hill. Was Wilkins just trying to be considerate in avoiding an unpleasant subject? The gold price reacted to the news that Barrick has thrown in the towel by jumping almost $10 to $744, a 28-year high. That cost the company and its shareholders a cool 95 million dollars.

Still, Barrick shareholders have every reason to celebrate. I take this opportunity to congratulate them upon their victory over a fossilized management. I pledge my further support to them with my pen. I shall provide a post mortem on Barrick's unilateral hedging strategy. I have changed the subtitle of this series to: A Primer on the Economics of Gold Mining, to indicate that a new era has started in the history of gold mining. The mindless rush of gold mining companies to play "follow the leader" is over. I could not find anybody willing to defend Barrick's indefensible strategy of unilateral hedging. This strategy has been thrown where it belongs: to the garbage dump of history. Make no mistake about it: this was the greatest mining disaster in the history of gold mining.

Two-legged straddles

I shall now explain what Barrick has done wrong, and how it should have proceeded instead. What I have to say is basically no different from what I told Sokalsky ten years ago. Selling gold futures at price spikes in excess of annual output is no hedging, it is naked forward selling. As events have proved, I was right: naked short selling is a foolish strategy as it can make even the #1 gold miner suffer, not just a loss of face, but also the loss of billions of dollars.

Consider two hypothetical gold mines, AXY and XAB. Compare their operations which are very similar yet fundamentally different. Both mines work with two-legged straddles having a short and a long leg. With their short legs they both enter the gold futures market. The difference is in where they put the long leg. I wish to emphasise that this example is schematic, that is, oversimplified for easier comprehension. The actual situation is considerably more complicated, but simplifying it does not affect the underlying principle. AXY enters the long leg of its straddle into the bond market; XAB keeps the long leg anchored in the gold mine itself.

From this it should already be clear that XAB's are true hedges in the sense that they are rooted in mining. By contrast, AXY's hedges are false. The gold mine has been turned into a hedge fund. At any rate, its "hedges" have nothing to do with gold production. AXY needs gold only as a source of cheap financing for its gambling ventures.

Fraudulent hedging

Suppose there is a $10 upwards spike in the gold price. AXY reacts by selling 100 gold futures contracts. In doing so it locks in a selling price for gold, gold that it arranges to borrow from a bullion bank at 1 percent per annum interest, in order to sell it and invest the proceeds at 6 percent in the bond market for a net income of 5 percent per annum. AXY does not think that it is in any danger on account of a possible advance in the gold price. "What goes up must come down". In any case it reasons that the gold sold forward is in hand: it can be scooped up from its mines at any time. But as we have seen in Part Three, this is a fundamental mistake. AXY does not have the gold in hand: it only has a bird in the bush. The hedge is fraudulent because the 5 percent net interest income is commingled with operative profits, disregarding the contingent liability that AXY still has on its open "hedges". As we have observed, it is criminally fraudulent to represent paper profits as earned profits.

True hedging

The other gold mine XAB reacts the same way to the initial $10 upwards spike in the gold price: it also sells 100 contracts of gold futures, the short leg of the straddle. The difference, as already suggested, is in the long leg which in this case is entered into the actual production of gold from the mine.

In more details, XAB is alive to the opportunity offered by the fact that the upward spike in the gold price has promoted some of its submarginal grades of ore into the payable category. To fix our ideas suppose that XAB has a submarginal vein of gold bearing ore it affectionately calls Moonbeam. Even though submarginal, Moonbeam it is not barren. It is pregnant with profits which XAB wants to capture.

A godsend, XAB finds that Moonbeam is now payable, thanks to the $10 upwards spike in the gold price. The trouble is that the godsend may be available only for a couple of minutes, and it is not possible to get the gold out of the ore and take it to the market in such a short space of time. No problem. That is where hedging, in the true meaning of theword,comes in. Using the facility offered by the gold futures market XAB can lock in the spiking price now; mine and deliver the gold later. Geologists at XAB know exactly how much of Moonbeam ore should be earmarked and mined in order to come up with the right amount of gold that must match the amount sold forward. The mine goes ahead and produces the gold. Never mind if the price of gold has fallen back in the meantime. The higher selling price is locked in. When the gold produced from Moonbeam ore is sold, the mine lifts its hedges, i.e., covers the short position in the futures market.

In effect, XAB has sold gold at a profit from ore that, absent hedging, represents zero value. It looks like prestidigitation, but it isn't. It is the same idea as harnessing energy from the tide-and-ebb movement of the oceans. XAB harnesses the fluctuating gold price which represents energy. The energy of tides, given the skill of engineers, can be put to use. Likewise, the skilled gold miner can squeeze gold out of worthless rock. That's the challenge of the profession, challenge that not every gold miner can meet.

Notice that XAB does not care if the price of gold has increased between its selling of gold futures, and its selling cash gold later. It is true that any increase generates a loss on the short leg, but it is compensated dollar for dollar by the higher price it will receive for the gold extracted from Moonbeam. XAB only cares about the opportunity of selling gold profitably, gold, the production of which in the absence of hedging would involve the mine with a loss. If, on the other hand, the gold price fell back, then the short position of XAB in the gold futures market would show a profit. That profit could be taken immediately.

Suppose that the chance of the gold price moving up or down after every $10 spike is 50-50. Then the mine will enjoy an extra income from its hedging operations because 50 percent of its hedges will be closed out profitably without even touching any gold bearing ore. The other 50 percent is just as beneficial making it possible to extract gold profitably from submarginal grades of ore. Herein you have a win-win strategy. Quite unlike Barrick's which is a lose-lose strategy -- except in a bear market for gold.

Fool's gold future

This being a post mortem I want to explain most carefully what has made the boat of Barrick hit reef. The #1 gold miner did not understand the subtle difference between selling gold futures and selling borrowed gold. While both come under the heading "selling gold forward", there is an important difference. The gold mine selling gold futures has not sold the gold, so any possible mis-judgement in timing is self-correcting. On the other hand, the gold mine selling borrowed gold has thereby finalized the terms of the sale. Only delivery is put off. The self-correcting feature is missing. Any error in timing could be disastrous.

Barrick is totally ignorant of (true) hedging. Observe the difference between two operations: (1) Selling gold futures for hedging purposes is one thing. It simply means booking a selling price now, with the actual sale of newly mined gold to follow later. A subsequent increase in the price of gold is not hurting because the gold mine has retained the right to sell gold at the higher price later.

(2) Selling borrowed gold is another thing altogether. The actual sale of newly mined gold at a fixed price has been consummated, only delivery remains. Every cent of an increase in the price of gold is hurting because the increase means that the gold has been sold at the wrong price.

AXY acts as a hedge fund. Its straddles are fraudulent. Even if the financial results are positive in the end, it cannot report, still less pay out, a profit. Profits are paper profits. They will not be finalized until the "hedges" are lifted. There is a contingent liability which can turn into real losses if the gold price has a subsequent run on the upside. Paying out paper profits in bonus is a criminal fraud. The fact that AXY is a gold mine has nothing to do with its adventures in the world of gambling. Any hedge fund can do it (and will probably do a better job of it). The problem plaguing Barrick now is that it has commingled paper profits from gold and bond speculation with operating profits from gold mining and has, apparently, dipped into its treasury and paid hefty bonuses to executives and directors. The money is gone, but the contingent liability remains. When the gold price increases, it becomes a loss that gets larger with every cent of an increase in the gold price. The potential loss is open-ended.

Double jeopardy

No wonder that the 28 Barrick executives are in such a mad hurry to cut and run before their bonuses are attached by court injunction in a possible class action suit. Damn whoever invented bonuses in the form of options. Cash bonuses would not have left such a stinking paper trail.

By contrast, consider XAB. It acts as any proper hedger does who is involved in the production of real goods. Its straddles are true hedges: they aim at benefiting the company from favorable price hikes by producing gold from ore body whose market value is zero in the absence of a hedging strategy. This operation is completely independent of the fickleness of interest rates and of the variation of the gold price.

Note that the profitability of the "hedges" of AXY is exposed to "double jeopardy". It depends on the assumption that neither interest rates nor the gold price will rise. Should either do, the "hedges" will show an immediate loss. Higher interest rates make the market value of bonds fall, hurting the long leg of the straddle. A higher gold price will increase the cost of lifting the straddle.

Maximizing the life of the gold mine

But the main difference between the two strategies has to do with the fact that true hedging (the strategy of XAB) extends the working life of the gold mine, while fraudulent hedging (the strategy of AXY) shortens it. True hedging spares the richest ore bodies and shifts mining towards the submarginal grades or ore. This also means the most efficient deployment of the capital of the mine.

Barrick-type hedges result in a ruthless exploitation of the mining resource. Naturally, AXY wants to squeeze the maximum amount of cash out of its "hedges", regardless of the damage it may cause to the logevity of the mine, because it wants to buy as many bonds as possible. In consequence the richest grades of ore are extracted first and the mine is exhausted prematurely. When it is forced to close down, it will still have a lot of valuable gold-bearing ore left behind.

Economics of Gold Mining

The economics of gold mining is as different from that of base metal mining as day from night. The aim of a copper mine, for example, is to maximize profits without regard for the working life of the mine. The reason is that the marginal utility of copper is declining. This means that if you do not market your copper at the earliest opportunity, then competition grabs your market share and runs with it. Tarda venientibus ossa -- says the Latin proverb (late-comers to the meal get the bones). In the case of copper miners late-comers have to sell at a lower price.

By contrast, the marginal utility of gold is declining so slowly that it is practically constant. There is no pressure on the miner to rush his product to the market. His concern is to get as much gold throughout the mine's extended working life as possible, regardless how long it may take. If it takes longer, no harm done. The mine stands to benefit from deliberate currency debasement practiced by governments. Debasement has the unintended effect of promoting the submarginal ore bodies of the gold mines to the payable category.

Incidentally, this is the secret of the popularity of owning gold mining shares in spite of the meager returns to invested capital. Gold mining shares have a built-in option-feature. The option expires when the gold mine is exhausted. Thus given two identical gold mines with exactly the same geological features, the one worked more conservatively will command the higher share price and the higher market capitalization, because the underlying option has the longer maturity date. The market will assign the lowest market capitalizartion to the gold mines that go after the highest grade of ore, even if the dividends paid by that mine are higher.

Having said that, we find that the hedging stategy of XAB still has shortcomings and calls for further improvements. Both AXY and XAB are using unilateral hedging strategies. As a side-effect speculators are invited to converge on the short side of the market and compete with the gold mines to nip every gold rally in the bud. What is needed, clearly, is bilateral hedging and its four-legged straddles to eliminate that threat. This is the subject of the next instalment of Peak Gold!.

GOLD STANDARD UNIVERSITY LIVE

Session Three of Gold Standard University Live will take place in Dallas, Texas, from February 11 through 17, 2008 (please note the change of place and date.) It will have three parts:

(1) a course on Adam Smith's Real Bill Doctrine and its Relevance Today, consisting of 13 lectures, from February 11 through 14;
(2) a debate on the Economics of Gold Mining with industry participation;
(3) a panel discussion entitled Gold Profits in Troubled Times where paraphernalia such as the basis, the gold and silver lease rate, the NAV of gold and silver ETF's and the variation of these will be discussed with invited experts. Program (2) and (3) are scheduled for the week-end February 15-17. The registration fee covers participation in the debates during the week-end. It is also possible to register for the week-end program only at a reduced fee. Participation is limited; first come first served. Participants pay their own hotel and meal bills. The cost of the closing banquet is included in the registration fee.

For the benefit of European friends of Gold Standard University, Session Three, will be repeated in March, 2008, at Martineum Academy in Szombathely, Hungary, where the first two sessions were held, provided that a sufficient number of people register. More details will follow later.
For further information please inquire at GSUL@t-online.hu.

References:
A.E. Fekete, Peak Gold! www.safehaven.com, August 15, September 10, 17, 19, 2007
A.E. Fekete, Have Gold Bugs Been Barricked by the U.S.? www.gold-eagle.com, July 12, 2007
A.E. Fekete, Gold Vanishing Into Private Hoards, www.gold-eagle.com, May 31, 2007
A.E. Fekete, To Barrick Or To Be Barricked, That Is the Question, www.safehaven.com, August 11, 2006
A. E. Fekete, The Texas Hedges of Barrick, www.safehaven.com, May, 2002
Charles Davis, So Big It's Brutal, Report on Business, The Globe and Mail: Toronto, June 2006, p 64.
Bob Landis, Readings from the Book of Barrick: A Goldbug Ponders the Unthinkable, www.goldensextant.com , May 21, 2002
Richard Rohmer, Golden Phoenix: The Biography of Peter Munk, Key Porter Books, 1999
Ferdinand Lips, Gold Wars, Will Hedging Kill the Goose Laying the Golden Egg? p 161-167, New York: FAME,
George Bush's "Heart of Darkness" -- Mineral Control of Africa, Executive Intelligence Review, January 3, 1997, see in particular:
Barrick's Barracudas
Inside Story: The Bush Gang and Barrick, by Anton Chaitkin
George Bush's 10 billion giveaway to Barrick, by Kark Sonnenblick
Bush abets Barrick's Golddigging, by Gail Billington
See also: http://american_almanac.tripod.com/bushgold.htm

Antal E. Fekete
Professor, Intermountain Institute of Science and Applied Mathematics, Missoula, MT 59806, U.S.A.

DISCLAIMER AND CONFLICTS
THE PUBLICATION OF THIS LETTER IS FOR YOUR INFORMATION AND AMUSEMENT ONLY. THE AUTHOR IS NOT SOLICITING ANY ACTION BASED UPON IT, NOR IS HE SUGGESTING THAT IT REPRESENTS, UNDER ANY CIRCUMSTANCES, A RECOMMENDATION TO BUY OR SELL ANY SECURITY. THE CONTENT OF THIS LETTER IS DERIVED FROM INFORMATION AND SOURCES BELIEVED TO BE RELIABLE, BUT THE AUTHOR MAKES NO REPRESENTATION THAT IT IS COMPLETE OR ERROR-FREE, AND IT SHOULD NOT BE RELIED UPON AS SUCH. IT IS TO BE TAKEN AS THE AUTHORS OPINION AS SHAPED BY HIS EXPERIENCE, RATHER THAN A STATEMENT OF FACTS. THE AUTHOR MAY HAVE INVESTMENT POSITIONS, LONG OR SHORT, IN ANY SECURITIES MENTIONED, WHICH MAY BE CHANGED AT ANY TIME FOR ANY REASON.

Copyright © 2002-2007 by Antal E. Fekete - All rights reserved