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The Gnomes of Zurich
by Professor von Braun
March 18th, 2000
An article in the Financial Times dated 16th March, suggests that political opposition to plans to halve Switzerland's gold reserves and sell off 1300 tonnes over the next five years have nearly evaporated. It seems this plan is close to being implemented and the first round of selling is expected to begin in April. So much for Swiss conservatism.
Apart from the fact that confirmation of this potential sale should see the Swiss Franc decline from its present levels, the gold bears should be able to extract maximum mileage from this event. Which means both a potential price decline and more physical metal available for the writers of paper contracts to write even more paper contracts on.
To understand the gold market at present one has to disregard the supply and demand numbers and look at what really is going on. As we have mentioned before, the daily trading volumes of the LBMA, the NY Comex and the OTC markets is in excess of 1800 tonnes per day. Nearly the entire "official" mine supply on a yearly basis is traded daily.
However as most of these trades are paper contracts, the actual physical metal changing hands is only a small portion of the total daily trades.
Given the fact that both UBS and Credit Suisse-First Boston are market-making members of the LBMA and are Swiss based, it is unlikely that the Swiss National Bank will dispose of this gold on its own. It is more likely that they will consult with and sell through their friends at UBS and CSFB.
In other words, once again the chicken farmer will ask the wolf to help him sell the chickens. Apart from the fact that this does not bode well for rising gold prices, one can rest assured that both Mr. UBS and Mr. CSFB will have their respective eyes on this large amount of gold and will be making all sorts of suggestions as to how to extract maximum value by way of income. One could expect more leasing of gold to occur, which means that two members of the LBMA have some fresh ammunition.
We believe that it is important for this sale to commence as it is one of the few large amounts of disposable gold reserves left, another being the 1300 tonnes held by the IMF. Once the threat of the sale is removed one would expect the market to decline when the actual selling takes place.
This decline, while not pleasing those in the gold bug department, may end up being the last one in a 19-year decline. Should this occur, then one could expect, as the supply of physical metal dries up, something that resembles a return to a more "supply and demand" orientated market.
The rising oil prices of recent times, while being felt at the pump, are having an impact in another area as well. The cash cost of producing an ounce of gold has increased over the last few months, in some cases by as much as 10% and all gold producers will be feeling the effects.
This industry certainly has its dilemmas at present and in a sense both hedged and unhedged producers of gold are a risky bet. We have been saying for some time that not all gold stocks are created equal and currently there are increasing risks associated with both. Should the price once again decline further, unhedged producers, now faced with rising production costs will be hurting even more. Should the price begin to rise, there is the prospect of further Ashanti's. Which will come first? We suspect at some stage, both possibilities will occur.
The "market-making" members of the LBMA are also active participants in the global investment banking and stock-broking circus and they are not too concerned about what happens to the mining industry at present, nor are they concerned about shareholders in mining companies. All they are concerned about is receiving commissions and fees from writing paper contracts, as well as being able to concoct more exotic styles of transactions, while of course removing a few chickens from the farmer's view.
While a number of commentators are recommending gold mining stocks we have noticed that there is a trend towards using the word "selective" which is nice to see. Blanket recommendations in this market are dangerous and if followed could be hazardous to ones financial health. Having received many e-mails requesting information on how and where to invest ones "risk" capital we continue to suggest that access to good research is paramount.
One of the ways to play the longside of this market, apart from buying and taking delivery of physical metal, is to look for any companies that have fully permitted mining projects that are on hold until this market becomes less muddied than what it is at present. Needless to say there is not a lot of them about but they do exist. We know of one in particular and would be happy to provide contact details to serious enquirers.
The Prof can be contacted by email at firstname.lastname@example.org
Copyright by Professor von Braun. All Rights Reserved. Reprinted at USAGOLD by permission.
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