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THE
ROCKET SCHOOL OF ECONOMICS


"May I come into your parlor?"
- said the fly to the spider.
by Professor von Braun

July 1st, 2001

If you were a Homestake shareholder, having purchased these shares because they were a non-hedged gold producer, you certainly received an unpleasant surprise last Monday. It seems that the Homestake CEO could not sell his company quick enough. For Barrick's CEO, a Mr. Randall Elephant, who must have been delighted, perhaps Christmas did come early this year.

Owning shares in mining companies is a risky business these days, as you never really know what the senior management is up to. As we have said before, one is better off owning bullion, rather than risking one's capital in a market arena that can be full of surprises, most of them negative in outcome. The poor old shareholder is often the last to know what's going on and usually ends up owning wallpaper material.

The world of gold mining stocks is getting smaller and smaller. Getchell Gold has gone, as has Battle Mountain Gold, now Homestake, Alta Gold went under, and Franco Nevada gave its producing mine to an Australian company in return for a large supply of wallpaper material. Rumors abound about Newmont as well, but they appear to not have been prompted into action by the closing of the pooling window that put such a sense of urgency in Homestake's senior management. Unless of course the party they may have been talking to decided they too were at risk.

What is left of the various gold funds and their respective management should find it relatively simple to decide where to put the money they manage as the choices are getting less and less. There is the likelihood of more downside surprises as this 21- year bear market enters its final phase.

With gold at $270 an ounce most mining companies are in serious trouble. The actual cost of production, as opposed to the cash cost that is announced, is considerably higher than $270. There is debt servicing, head office expenses, reserve replacement, etc. This is where the problem lies, there is not enough of a profit to go round and it is only a matter of time before something gives. It is indeed a strange world when gold production has become a liability.

What seems to go unnoticed is the fact that most of these companies have investment bankers advising them and one wonders as to who was advising Homestake? Was it somebody friendly to Barrick? Letting an investment banker have access to your books is a bit like putting the bank robber in charge of the vault. It's them that are indirectly responsible for the gold market and the conditions that have created this dismal market.

Should there be a massive short position in terms of gold that has been borrowed from the Central Banks and sold into the market, well what better way to cover one's derriere than to secure existing gold production by way of putting it under the nominal control of as few owners as possible. Let's go global and secure US, South African and Australian gold production just in case we need it may be the driving thought behind the "how do we get our gold back" question that at least one Central Banker has raised.

Market conditions such as what we are seeing can do strange things to the thinking of senior management and I am sure that they are clutching at straws at present. They appear to be just ripe enough for a modern day version of Henry Morgan the pirate, a well-dressed investment banker, to walk in the door and charge them exorbitant sums for "advice" about what to do. Without of course ever telling the poor old gold mining CEO what the real plan is here.

Any farmer knows that prior to sending the sheep to market, it is best that one puts the sheep in a pen first. And one pen is better than two, or three.

It will not be long before nearly all US gold production is under the control of three or four companies. That's a large chunk of world production with only a small portion of it US owned.

The real question is who is advising these companies and whoever they are, what if any is the size of their gold related derivative portfolios. One suspects that mine production and mine reserves are being looked at for reasons other than to benefit shareholders. After all, spiders do eat spiders.


The Prof can be contacted by email at profvonb2@aol.com

Copyright by Professor von Braun. All Rights Reserved. Reprinted at USAGOLD by permission.

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The Rocket School of Economics -- The Lecture Series Index

  • 22 May 2009 -- An Often Overlooked Issue!
  • 28 Mar 2009 -- Problematic Banking Systems!
  • 14 Nov 2008 -- What Exactly is an Asset?
  • 23 Aug 2008 -- Through the Looking Glass?
  • 02 Aug 2008 -- Compounding to the Downside!
  • 26 May 2008 -- Back to Basics Again!
  • 31 Mar 2008 -- The Broken Watch -- Part 2.
  • 27 Mar 2008 -- The Broken Watch -- Part 1.
  • 06 Feb 2008 -- The Financial Equivalent of Faulty Towers.
  • 10 Dec 2007 -- Monetary Systems & Productive Assets.
  • 14 Feb 2007 -- Divorced from Reality
  • 06 Sep 2006 -- Gold, Bankers, the Trade Deficit and Unsettled Transactions
  • 19 Jun 2006 -- When is a Reserve Not a Reserve?
  • 31 May 2006 -- The significance of August 15, 1971.
  • 08 Apr 2006 -- Keep Your Eye on the Ball!
  • 30 Mar 2006 -- What came first?
  • 11 Mar 2006 -- An Unanswered Question.
  • 08 Jan 2006 -- Where have all the projects gone!
  • 11 Dec 2005 -- Gorillas, Rising Gold Prices and Depreciating Paper Currencies!
  • 23 Oct 2005 -- Custodial Risk.
  • 16 Sep 2005 -- An Inherent Flaw.
  • 08 Aug 2005 -- Central Banks and 'Reserves'.
  • 31 Jul 2005 -- Central Bankers, Actors and 'We'.
  • 17 Jul 2005 -- Unintended Consequences! -- Part 3.
  • 07 Jul 2005 -- Unintended Consequences! -- Part 2.
  • 25 Jun 2005 -- Unintended Consequences! -- Part 1.
  • 14 Jun 2005 -- The Two Greater Fools Theory.
  • 03 Jun 2005 -- Real Money, Funny Money and YOU -- Part 4.
  • 30 May 2005 -- Real Money, Funny Money and YOU -- Part 3.
  • 26 May 2005 -- Real Money, Funny Money and YOU -- Part 2.
  • 21 May 2005 -- Real Money, Funny Money and YOU -- Part 1.
  • 09 Nov 2002 -- Carrying a Big Stick.
  • 17 Sep 2002 -- Wishful Thinking!
  • 27 Jul 2002 -- Gold Bugs Beware -- part 2.
  • 10 Jun 2002 -- Gold Bugs Beware!
  • 06 Apr 2002 -- Currencies versus Gold.
  • 26 Jan 2002 -- Bear Market Strategies.
  • 01 Jan 2002 -- 2002 -- A Perspective.
  • 20 Oct 2001 -- The Storm Clouds are Gathering.
  • 30 Sep 2001 -- What to Say?
  • 01 Jul 2001 -- ...Said the Fly to the Spider.
  • 14 Jun 2001 -- Upward and Downward!
  • 28 May 2001 -- Volatility Time, Again!
  • 14 May 2001 -- The Coming Bull Market in Gold Stocks?
  • 24 Feb 2001 -- High Hopes, Wishful Thinking & The Absurd
  • 20 Feb 2001 -- Who Put the Holes in the Swiss Cheese?
  • 22 Jan 2001 -- US Dollar Admits Identity Crisis!
  • 16 Jan 2001 -- Dear George W.
  • 24 Nov 2000 -- The Bubble Has Burst
  • 11 Nov 2000 -- The Media, Bull Markets & the Gold Price
  • 02 Nov 2000 -- Gold Stocks
  • 29 Oct 2000 -- Oh The Tangled Web We Weave ...When We Set Out to Deceive
  • 24 Oct 2000 -- A Mystery!
  • 16 Oct 2000 -- A Peso Here ...and a Few Thousand Pesos There
  • 10 Oct 2000 -- The Unfolding
  • 30 Sep 2000 -- What's Wrong with THIS Picture?
  • 25 Sep 2000 -- Buy Gold Now!!
  • 23 Sep 2000 -- The Times, They Are a' Changing
  • 15 Sep 2000 -- Time WILL Tell!
  • 27 Aug 2000 -- SS "Paper Assets" Begins to Take on Water
  • 06 Aug 2000 -- The Indian Summer
  • 26 Jun 2000 -- A Yellow Brick Wall
  • 22 May 2000 -- The King IS Naked
  • 30 Apr 2000 -- Goodbye Yellow Brick Road
  • 18 Apr 2000 -- Beware the Ides of March, April and May
  • 08 Apr 2000 -- Really, Sir Aldot!
  • 25 Mar 2000 -- Where To From Here?
  • 18 Mar 2000 -- The Gnomes of Zurich
  • 12 Mar 2000 -- The "New" Economy??
  • 06 Mar 2000 -- Two Questions
  • 04 Mar 2000 -- Iceberg Dead Ahead!
  • 28 Feb 2000 -- The Wizard of Oz
  • 06 Feb 2000 -- Here We Go Again!!
  • 15 Jan 2000 -- Comments on the Gold Market
  • 29 Dec 1999 -- No Raw Ingredients Required
  • 28 Dec 1999 -- No Way Out
  • 14 Dec 1999 -- Ho, Ho, Ho!
  • 07 Dec 1999 -- Greenspan's Bubble
  • 03 Dec 1999 -- Early Warning Signs


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