Solid Gold

The Incredible, Malleable Metal

SAN FRANCISCO -- As promised yesterday, I've got more about what's happening in the gold market. But don't call it a rerun.

The recent rally in gold receded today, as the price of the Comex December gold futures contract fell $6 to $302.50.

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"It's a vacuum, [with] no sustained bid throughout the entire session," said Gregg Schreiber, vice president in institutional futures sales at Bear Stearns . "A good amount of the shorts out there are now either flat or have reversed and gone long. That's why we're seeing a pullback. "

In addition, some options expired yesterday which "added to the volatility," he noted. "If you were short expiring $300 calls two days ago, no one would have imagined them trading into the money. A lot of people were scrambling, but that bid is completely eliminated."

The bigger question is where the price of gold goes from here after the "phenomenal surprise" from the European central banks and subsequent market "adjustment," Schreiber said. "My feeling is we still work higher" in conjunction with overall increased investor interest in commodities.

"Stocks are languishing [and] the technical picture will encourage hedge funds to shift assets around to [begin] emphasizing more commodities," the trader forecast. "They're in vogue." (Who needs Net stocks, anyway?)

Like many, Schreiber's heard the horror stories about hedge funds being decimated by big short positions in gold. The trader declined to discuss specific names because some of the "usual suspects" are clients.

However, the explosive action in the past two days "justifies" the scuttlebutt about big short positions, the trader said. "I don't think it's exaggerated."

But just how big the short position was (and remains) is the subject of contention. A few readers took exception to my statement yesterday that the level of short interest reported by the Commodity Futures Trading Commission as of Sept. 21 was a record. Jim Bianco of Bianco Research noted short positions of speculators alone was as high as 97,713 in early April vs. 65,077 for Sept. 21. (FYI, I got the 99,878 figure for "noncommercial" short interest by adding the positions of large speculators and small traders from the CTFC's "traders' commitment" report in Barron's.)

Reached today, a CFTC official suggested I look at its Web site, which I found interminably slow and generally unhelpful (but good enough for government work).

Regardless, CFTC figures aren't necessarily the best way to gauge short interest in the yellow metal.

In a conference call Tuesday, Nesbitt Burns mining analysts Egizio Bianchini and Jeff Stanley said a net short position of 4000 tons is a "conservative estimate," and compares with industry production of 2545 metric tons in all of 1998, according to Golds Fields Minerals Service. (BTW, when gold folk talk tonnage, they don't mean 2000 lbs. A metric "tonne" of gold = 32,151 troy ounces.)

"We'll all chasing our tails," Bianchini confessed when asked on the call about claims the short position is much larger. "We keep hearing this 10,000-ton number and I find that hard to believe. On the other hand, we're hearing stories Martin Armstrong [of Princeton Economics International] was short 700 tons. That's one entity."

A press release at Princeton Economics' Web site effectively denied the charge. Armstrong could not be reached.

Stanley also said -- without couching (or even chairing) the comment -- "We've learned Long Term Capital Management is short 400 tons," despite repeated statements to the contrary by the fund's spokesman, as reported yesterday.

"We believe the potential is out there for short positions to be materially greater than" 4000 tons, Stanley said. "A $40 to $50 move in gold prices generates substantial liability for a lot of financial institutions."

Neither Bianchini nor Stanley replied to calls seeking comment today.

On the Other Hand

But just what kind of "institutions" are at risk? Market players and the media (guilty as charged) have focused on the alleged exposure of hedge funds. But Dwight Anderson, a vice president at Tudor Investments, said that is misguided (although he declined to discuss the positions of either Tudor or his previous employer, Tiger Management).

"The story of hedge funds taking billion-dollar losses is nothing but apocryphal," Anderson said. "Of the major, large, high-profile hedge funds, I am not aware of any [which are] materially short gold. It's impossible to know for sure, but I'd be surprised" if the rumors prove true.

Rather than hedgies, he submitted that bullion banks who leased gold and small gold producers with leveraged positions are at the greatest risk to gold's recent ascent.

"Bullion banks" is a generic term referring to any number of financial institutions involved in gold financing, including the clearing members of the London Bullion Market Association.

Anderson did not specify, but reported hearing of losses in the "$10 million to $30 million range" and "one house" with losses over $50 million.

But that angle of the story will have to wait, because I also promised ...

Panning for Picks

John Hathaway, manager of the roughly $20 million Tocqueville Gold fund, said, "the entry point isn't as good as it was two weeks ago, [but] it's not too late. It's still early days" for the resurgent gold stocks.

The fund is long names such as Anglo American (AAUK Quote), Placer Dome (PDG Quote), Harmony Gold Mining (HGMCY Quote), Gold Fields South Africa (GLDFY Quote), Homestake Mining (HM Quote) and Newmont Mining (NEM Quote).

The "theme" is mining stocks "not hedged in a suicidal way," the fund manager said, adding he "plans to buy the pullbacks" in these names which occurred across the board today.

Newmont was upgraded by the Nesbitt Burns' duo, in conjunction with an increased target for the price of gold to $315 from $285.

They also upgraded Rio Narcea Gold Mines and Viceroy Resources, while simultaneously downgrading Franco-Nevada Mining and Meridian Gold; all trade on the Toronto Stock Exchange.

Bianchini said the recommendations came down to which firms are "leveraged to rising gold prices" and which are not.

So that leaves the issue of why central banks did what they did still unattended. I'll address that issue tomorrow, barring natural disaster, a better story or you telling me to let it be. Let me know what you think:

Regarding the Story of the Gold Market

"We Care a Lot" is not just a song by Faith No More Get off gold! Get off gold! Give us more, but keep it short and sweet. Will refreshments be served?

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