Gold Mines Exposed
(as gold bull market enters overdrive)
By James E. Sinclair & Harry D. Schultz
--WHY gold will go parabolic --HOW good gold news will be fatally bad news for many (most?) mines--as the price rises. --"Hedges" is wrong word. They aren’t hedges! A pity.
To clarify our position on hedging, we believe it’s the right on any commodity producing company to set a price for their product in the future so as to be able to accurately project/ budget future expenses against a known revenue. Our concern is not hedging. Our concern is the vehicles that are being used to hedge. And also the use of these instruments to bring on new production in a "negative market" for the commodity gold, which would otherwise have reversed its price negativity, ie, a market price below total cost, then around $350. We experienced a 22 year bear market in gold prolonged artificially by the constant financially unnatural increase in production, not justified by natural market forces.
It’s a miracle the gold producers did not kill their own golden goose stone dead beyond revival. Now the gold producer’s foolishness threatens gold's monetary application by artificially forcing gold too high in price, too early, before the fundamental equation is wholly behind it. Now that the ineptitude of the gold producing industry failed to kill gold on the down side, it seems they are about to try & kill gold by inadvertently forcing gold too high before its time. All the while the management of the gold producer sit in their ivory towers, smugly considering us alarmists. For over 40 years, We (separately or jointly) have analysed the price of gold more acutely than anyone in the exploration, development, advisory, media, mining field. But the leaders prefer to listen to only those who have sold them these instruments of financial incapacity.
The instruments being used today are non transparent, unregulated, non market priced, private treaty unlisted arrangements. These instruments have no clearinghouse facility therefore they present significant counterparty risk. What a bill of good the gold banks have sold to the gold industry. It is in grave danger of significant financial problems as a result. It’s so perverse these problems are brought on by the very bull market we have so long desired.
The truth is out---U read it first herewith, & in HSL. HSL is the Free Gold Press leading edge. We are warriors in the war for sound money, transparency, governance & level playing fields; which is the stuff Free Markets are made of.
Let's have a fast review before we
reveal to U the shocking truth of greed gone wild in the
1/Gold almost never leads a rise in the commodity market. Yet today it is.
2/Gold is rising for other & sound reasons.
3/ Many key commodities (Soy, Wheat, and Sugar) are far below their cost of production & have been for the normal multi-year inventory takedown period.
4/The equation that is the soundest fundamental reason for a gold bull market is a growing current account balance (overseas holders of US $¹s) with a growing US budget deficit plus a classic technical top in the USDX (index measuring $'s performance trade weighted) & a lower bond market.
5/The Federal Reserve is in the tightest box since it was (illegally) founded in 1913. Its mission then & now is to prevent liquidity meltdowns. The Federal Reserve later this year will not lead interest rates higher but only follow the mkt in catch-up action to the market reality of higher rates. If the Federal Reserve dared to lead interest rates higher in 2002, U would see NASDOG below 1000. That is being boxed in!
6/US stocks show ongoing weakness, confirming a bear mkt.
7/ Notional Value of a derivative becomes Real Market Value at $354 gold as a product of risk control systems used by all gold banks and derivative traders. This is a key element of this analysis as the numbers U are about to see become real $ figures in the marketplace.
Anyone in gold knows that a 22 year bear market is a very long time. U also know the fundamentals that sparked the boom of the 80s & 90s has a lot to do with accounting mirrors & the Madness of the Crowd syndrome. Much has occurred in gold during this period & the biggest event is the advent of Gold Banks, Gold Derivatives, Gold Leasing & Financial (not Mining) leadership (virtual control) of gold producing companies. Gold producers became commodity traders. The Treasury Depts of gold producers became incubators of Chairmen & CEOs. The big guns made more money shorting the gold mkt via derivatives than they did mining gold. They first got short not by logic but as a gimmick‹sold to them by gold banks to obtain development money. They thus helped the gold mkt go lower by constant selling of future product.
As proponents of Free Markets, we have no objection to a commodity producer seeking to fix the sales price of the item they produce. They need to know a hard revenue figure in order to project spending. But that is not what happened in the last 10 years. Producers liked the profits from being short gold & loved non-recourse loans for production that require shorting the production. It is now time we all stopped calling these maneuvers hedging. It is not. It is shorting gold. Yes, it’s hidden in a maze of sometimes incoherent derivative transactions but the bottom line of a commodity spread is that it is a short sale.
The producers were not satisfied with the Comex 2-year facility to short gold. They did not want to put up the margin requirements. Rather they stampeded into the New Age Derivative market of the gold banks. Here they could deal in so-called No Margin Call Hedges which are in the main loan lines against in-ground production without margin requirements or complex put/call arrangements. They bought already constructed packages of derivatives as required by their lenders on development loans for new production, often without putting up cash out of treasury first. To prove that the company itself had little knowledge of what they were doing, Ashanti had to call in a rocket scientist from Goldman Sachs just to figure out how deep they were in a financial hole when gold crossed $325 in the summer of 2000. Many of the present gold producing hedgers are dependent on in-house accountants or their gold bank to explain what they are doing. We submit that the board of directors of these companies if questioned individually would not have a clue about what they hold in their " clear & present danger" positions.
We know who does know. We can only identify these people to U as Dr. No & Hung Fat. They are running the gold market now, not the cartel. The cartel thinks it has an upper hand but it is in a bear trap that has already snapped closed on their financial legs. The Gold Cartel is so fat, egotistic & ignorant they don’t yet know they are dead in the water.
Here is what Dr. No and Hung Fat know;
Major Central Banks Gold Holdings: The Long Position --Here are the facts about mine shorting that they & the cartel don’t want U to read. We dug them out via our specially hired R&D team:
Major Central Bank's Gold Holdings
Total Nominal Value of derivatives on the books of the Commercial Banks of the reporting 48 nations of the IMF survey. 900,000,000 oz. or $278,000,000,000 @ $320 gold = USD$288,000,000,000
Gold producers need to know what they’re up against. Gold Producers are the smallest presence in the Gold Derivative market! FYI, at $354 gold producers only 11% of the total notional value which then will be a real value. ----Now U know the Shocking truth of the greed driven gold banks.
Gold Producers are ONLY 11% of the TOTAL World Gold Derivative ounces and value.
Who are the others? They are the Wise Guys. On Wall Street, we call those who are in the gold derivative market without a commodity producing reason, the Wise Guys. These Wise Guys are the Carry Trade who are, like the producers, short gold spreads & entities that have used the gold lease derivative market for financing their business that has nothing whatever to do with producing, rendering or selling gold. Dr. No & Hung Fat are not gunning for the producers. They are after the Wise Guys. The Gold Derivative market is a cornered short sided market in a corner. This is a titanic secret market struggle between giants. The recent 300pt DJIA 1-day wonder rally is an example of what can happen when the short side of anything gets crowded. Gold is, in a volume sense, a peanut market but with a short corner of such mammoth proportions that anyone with one synapse speaking to another can understand how dire is the condition of the derivative dealing gold banks.
Now what does a cornered rat do?. When Jesse Livermore cornered the coffee mkt in the early 1900s he had everything fundamental going for him. What he forgot was the political connections of the coffee importers & the US govt. The importers were short to Livermore who was long. They called their pals in Washington & demanded price & import controls. Poor Jesse got walloped on that position because he forgot to calculate what short rats will do when cornered. Dr. No & Hung Fat are too smart to make the mistake Jesse Livermore made. They know exactly what the derivative shorts will do & when. Nothing is new on the face of this earth. They will call the Central Banks & demand the Cavalry comes to the rescue. U must have seen recently the Cartel looked downright non professional in their selling into a bag held by these two great Asian traders. The Cartel is losing its power & only providing an easy accumulation of more positions for sources of money that make the cartel look poor in comparison.
Now let’s assume Dr. No & Hung Fat push gold, in time, above the critical $354 & the derivative melt down is at 2000 degrees F. The Commercial Banks scream to their power sources. The Central Banks line up to sell their gold, with the exception of those under the Washington Agreement. All they can offer is: 561,065,075 ounces worth @ gold price $354: $201,422,361. But the derivative short position is 900,000,000 oz with a value @ $354 of $ 318,600,000,000.00 That means the situation now is that the derivative gold short position is equal to all the gold held by all the central banks outside of the Washington Agreement. U now know why the Washington agreement came into place in order to prevent just what is happening. Those Central Banks, seeing the figures, hoped to slow down the gold derivative trade by freezing their participation in it. Now U know why traditional gold dealers are leaving the gold mkt & expunging these instruments from their books.
If all Central Banks in the world sold all the gold they held in a derivative melt-down they would make the following offer: All Central Banks = 890,579,485 ounces of gold held to a Short Derivative Position forced to cover of 900,000,000 oz. Assuming that central banks then held no gold at all, the gold price would be in the hands of Dr. No & Hung Fat who would more than likely sell a segment for over $2000 per ounce with the attendant negative effect on the US Dollar, making gold even more valuable.Thus it is reasonable to assume Central Banks will not sell all or even a large part of their remaining gold. It will then be their primary reserve asset, growing in value, & like the 70s they are more apt to buy then sell regardless of silly rhetoric.
In conclusion, we again say to the gold producers, expunge your books of all derivative contracts. U have alternative means of financing your development projects today. You can go recourse on your loans for new production without fear of financial problems. Your financial problems lie more in the counter-party risk of the paper gold short derivative spreads U hold now! There is no free lunch & there’s no commodity contract without a margin call. We do not oppose hedging done correctly, in open, listed, clearing house indebted instruments.
(This is an HSL/FMU copyright article. Permission to reproduce is hereby granted, provided phrases are not quoted out of context & provided full by-line credit is given with email addresses: www.HSLetter.com and www.Tanrange.com)