Several new developments – other than the factors discussed two weeks ago – over the past few weeks are very positive for the gold price.
The first is of particular interest and source of enjoyment for the author, who has for a long time met ridicule from various quarters when the topic of official intervention in the gold market is raised. For a long time during the 90’s, even when knowing full well that the gold market was not trading normally, the author still could not accept that there was what can only be described as a full blown conspiracy among various players – including the bullion and central banks – to keep a lid on the gold price.
However, during the past 3 years and more, it became clear to even this sceptic that the conspiracy was not only alive and well, but also succeeding admirably in their efforts to contain the price of gold. Yet the evidence is largely circumstantial; on being informed of what facts are available, most people thought it a joke and responded either by saying nobody could think that Greenspan and his peers would stoop so low as to manipulate the gold price or by stating that anyone who enters a market influences the price in some way and if the bullion banks can make money by shorting the gold market, well, good luck to them. It’s a free market.
Opinion on the court case that Blanchard – the US precious metals dealers – have lodged against JP Morgan and Barrick gold mine on the basis that they have colluded to lower the gold price, must run heavily in favour of Blanchard winning the suit. Otherwise the lawyers for JPM and Barrick would not have dared to risk the plea that the suit should be dismissed on the grounds that other parties, to wit the central banks, are members of the whole consortium which includes JPM and Barrick. Since central banks enjoy sovereign immunity they cannot be brought to court and thus, since major participants in what can now only be perceived as a conspiracy are not in the dock, the case has to be dismissed.
This is a brief and simple summation of the plea, but it conveys the important information that the lawyers acting on behalf of JPM and Barrick as much as admitted to collusion on a grand scale – conspiracy! – exactly what GATA and its supporters have said for so long and for which views GATA are regarded as way out nuts by the regular media in the US. And many others.
As this news gets digested, two things may happen; some investors might withdraw from the gold market in the belief that the central banks will succeed indefinitely in keeping gold down. Others will know that over the longer term the free market always wins and that gold therefore today offers an opportunity for vast profits, once it breaks free of the stranglehold. It is only a matter of time, since it is already evident that the supply of gold needed to keep a lid on the market is running low.
This news comes on top of more than one class action suit filed by Barrick shareholders who believe they were lied to when Barrick quoted operational problems to explain some recent poor results. They now believe it is the higher gold price that is making Barrick’s gold hedges unprofitable that is the real reason for the poor performance, not operational problems. The JPM plea, which has been turned down by the judge, will be grist on their mill and strengthen their own suits for damages. With Barrick now having to really mind its step – even to using its multi-billion cash hoard to cover its short positions as a gesture of trying to rectify the situation – one of the main sources of gold, other than the central banks that can be shorted - may well be closing down; perhaps even becoming a buyer.
And if the Blanchard case should proceed to the discovery process, the lid may well be raised on a true Pandora’s box of lies and deceit and perhaps even worse.
Secondly, as we all know, Japan has been more than just toying with deflation over the past decade or so. In desperation at its lack of success to put new life into the economy, the government is now considering a tax on cash and time deposits to prompt Japanese households into spending some of their $12 trillion of savings. The contemplated tax is said to be in the 3-5% range, compared to the less than 1% interest currently being earned.
If it becomes fact, this tax will probably kick in with their new financial year, in April 2004. At the same time, new anti-counterfeit notes could come into circulation. Hoarders of cash will face the prospect of paying a tax to exchange their old notes for the new ones or lose the full value of their mattress money.
The belief is that money will now flow into the stock exchange and into the purchase of property; perhaps also into the purchase of consumer goods. However, it is practically certain that – given Japanese culture and tradition – some of the savings and cash will be used to stock up on gold in order to avoid paying the tax. The total amount of gold ever mined, say 140 000 tons, at $350/oz is worth about $1,6 trillion. If only 0,1% of Japanese savings of $12 trillion were to flow into gold, the $12 billion would purchase 1060 tons at $350/oz – much more than what India imports in a year and almost half of annual mine production.
Given the tight gold market of today, that could send the price into uncharted territory. And the more it climbs, the more the Japanese will switch endangered savings into gold. While the tax is still being debated and with 10 months to go before it could take effect, matters are still fluid – but do not be surprised if prudent Japanese begin to buy gold in real quantity during the next few months.
The third positive factor is what Newmont has done with respect to the Yandal gold mine in Australia – a mine that became a Newmont subsidiary as part of the Normandy take-over. Yandal, in line with several other Aussie gold mines, had sold forward a substantial amount of gold, even a good bit more than their known reserves. Now, with gold above $350, these hedges are deep in the red and some of the counter parties wanted to cash in on their profits before the contracts expired – as they could do according to the terms.
This would have cost Newmont a good deal of money, so they countered in effect with a threat that Yandal will go bankrupt and be liquidated, in which case the creditors had to take pot luck. However, being a company with a solid reputation, Newmont decided to be the gentleman and made an offer to purchase the outstanding hedges at 50c on the dollar. The offer is only valid if all the counter parties accepted it, which 6 of the 7 promptly did. One had held out hoping to structure a better deal.
If gold mines that are heavily hedged can get out of the claims against them at half price, the bullion banks are not going to be as keen and as liberal with offering forward sales deals as before. This will reduce the amount of gold that flows onto the market in the form of short sales and – with rising demand from concerned and nervous investors from all over the world – any reduction in supply is good for gold. While the first two factors operate on the longer term, this third one is likely to have an effect very soon.
From this it would not be surprising if gold begins a new and hopefully a sustained rising trend quite soon, hammering away at last ditch attempts to keep the lid intact at suitable psychological levels, such as the $370 barrier. But once it gets going now, being fueled by much wider concerns than before, it can be expected to build up speed.
© June 2003 Daan Joubert
All rights reserved to Daan Joubert and www.GOLDSignals.com www.SAGOLDS.com and www.HugoCapital.com
-- Posted Monday, 16 June 2003
