Gold, Silver, Platinum and Diamonds

November 25, 1999

Gold miners are livid and have asked the BofE to disclose details of its recent gold market operations, in the light of complaints of market manipulation by central banks. Peter Hambro, President of Mines & 'Or de Salsigne, Chris von Christierson, Chairman of Rio Narci and John Morris, CEO of Gold Mines of Sardinia say: It is time for the BofE publicly to state what it is and has been doing in gold and derivatives. Earlier Robert Champion de Crespigny, Chairman of Normandy, attributed the latest price fall to bank manipulation designed to protect option exposure.

Cambior, said it reduced its hedge position by 1.3 million ounces by purchasing one million ounces of gold for an average price of about $300 an ounce and by the closing out of other positions totaling 300,000 ounces.

Ashanti, reported it had reached a three year agreement with its 15 counter parties on its hedge book, exempting it from any requirement to post margin on cash amounts tied to risk, on its hedge contracts until 12/31/02. In return the company will issue to the counter parties warrants that convert directly into Ashanti ordinary shares representing about 15% of equity. Those new shareholders are UBS, J. P. Morgan, Deutsche Bank, Chase and Goldman Sachs, whose total exposure to just this one situation is some $219 million. The margin call was for $230 million after gold rose over $320 an ounce. Since then central and bullion banks have covertly intervened in the market pushing prices as low as $288 an ounce. That is called averaging your shorts. These banks collectively should adapt a new motto, "We lie, cheat and steal in order to maintain profits." Ashanti estimates a $10 change in the gold price alters the value of its portfolio by $97 million.

As you can see Cambior has bitten the bullet on part of its hedge position taking losses. Ashanti has papered over the problem.

Ashanti, which was brought to its knees and almost defaulted in October, forgot they were supposed to be in the mining business and were holders of cheap high risk derivatives known as exotics. These exotic derivatives, purchased from Goldman Sachs, etc., were supposed to be an insurance policy.

The affair has left Ashanti crippled and focuses attention on investment banks and the part they play in the bullion market, Goldman Sachs was a long standing corporate adviser to Ashanti. It was the leader of counter parties and a member of the syndicate of banks that had lent Ashanti $270 million to finance its mining activities, which is a conflict of interest. No, so called Chinese walls exist in investment banks. That is why repeal of Glass Steagall will turn into a looting exercise by financial institutions. Goldman had Ashanti so hung up that they sent Dr. Ewan Kirk, a rocket scientist in derivatives, over the Chinese wall. He discovered his firm, Goldman, had Ashanti on the hook for 70% of its gold reserves, or 15 million ounces. The derivatives Goldman and other investment banks sold to Ashanti had unquantifiable risks and are known as toxic waste because they sat there quietly and contaminated everything. Goldman structured everything in a reckless, unprofessional criminal endeavor to enrich themselves at the expense of their client. Not that the client is blameless, they thought gold was going lower and wanted protection. This is why derivatives should be banned. The buyer only knows and understands what the seller tells him. More often than not the sellers are crooks.

Gold shares have given up most of their gains. The TSE Gold Index is only 3% above its level when gold broke out. The current weakness in these shares are an opportunity to accumulate seniors such as Homestake, Agnico-Eagle and Gold Fields and selective juniors such as Cusac Gold. We'll have more recommendations soon. The perception on gold and gold shares has changed and we are in another support area. An excellent opportunity to buy for long-term.

The October 19th Bulletin magazine, published in Australia, had an article by Anthony Hoy, which was entitled, "Diamonds are for ER". ER is Elizabeth Regina, Queen of England. The article said, what we've said for over 30 years, that ER is the largest non-institutional shareholder in Rio Tinto. Rio Tinto has been the chief financier of the Royal Institute of International Affairs, the British version of the CFR. Now you can see why elitists do exactly as they wish. They have a monopoly that is run by slave labor, overseen from Buckingham Palace.

Silver fundamentals are impeccable yet it is range bound between $5-$5.50 an ounce. Warren Buffett's Berkshire Hathaway bought silver almost 3 years ago and Microsoft's Chairman, Bill Gates investment fund, Cascade, bought 10% of the shares of Pan American Silver. Can these giants of industry be wrong?

We are told traditional importer China is an exporter of some 21 million ounces, 2.5% of the 841 million ounces of global supply. India, silver's chief buyer, annually taking 14% of supplies, saw a 20% drop in demand in 1998. Overall 1999 demand is off 11% through August despite a 4% drop in local silver prices. Mine production costs run $4-$4.50 an ounce, which make them profitable. In order to lock in profits 10% of world mine production, or 50 million ounces, have been sold forward. 10% is not a market hindrance and is normal. Output continually falls short of demand, yet supposedly there is 5 year's worth of stocks available. How can this be as depositories report lower inventory and many silver warehouses have closed in recent years. That includes Bank of Delaware, BofA, Wilmington Trust & Citibank, which leaves a handful How can it be profitable for silver lease rates to remain under 1%? Although today the rates have risen to 3% for 6 months. Is is no longer profitable to store metal. Retail demand remains brisk. Silver is cheap at $5.00 an ounce as are the shares of silver mining companies. Silver could easily go to $6-$7 an ounce. Silver is off and gold is up. Off 7% and up 20%. Other commodities are up substantially, such as nickel and copper. Higher silver prices is an event waiting to happen.

Shareholders of the bankrupt Bre-X Minerals will not appeal a court ruling that prevents them from suing brokerage houses and analysts who recommended Bre-X shares. Only in Canada, where corruption obviously flourishes. Under the Canadian court system only minorities, gays, perverts and criminals flourish. Thus the Ontario judge dismissed the action against Nesbitt Burns and its analyst, Egizio Beanchini. Now the shareholders can go after the former mining company and its insiders from which, if they win, they'll get very little.

We are recommending the following gold stocks. You should personally get in touch with the companies if you are going to make an investment decision. We are not compensated by these companies, nor do we own their shares. Homestake (HM), Agnico Eagle (AEM), Gold Fields Ltd (GOLD), TVX Gold (TVX), Freeport MacMoRan Copper and Gold (FCX), Battle Mountain (BMG), and Harmony Gold. They are all way under priced and have little if any hedge positions.

Chris Thompson, Chairman of Gold Fields, says, "I believe hedges have largely or partly contributed to the low price we have had to live with. It is folly for us all to continue to do so." Gold Fields Mineral Services said in early September "that the miners were selling both when the price rose, and when it fell and that it was the enormous growth in hedging and short selling that drove prices down." Hedgers argue that Thompson's approach is unwise and his purest strategy will ensure the company performs worse than its peers. Barrick insists it will continue to hedge and that attitude has driven its share price lower. Anglo Gold and Placer retain substantial hedge books. In Australia Normandy, Sons of Gwalia and Delta, continue to maintain major hedges. Ashanti at one time was 70% hedged and Cambior 60%. Harmony is unhedged. Newmont was unhedged until its August switch to hedging and it got killed. Newmont says, never again, will it be doing anymore hedging.

Shares in unhedged companies respond strongly to gold price movements, because profits are correspondingly volatile. From here on out producers are going to have to go into precise detail on their hedges. If they don't they'll be sued. Except when demanded as a condition of borrowing producers should have less than 12% hedges. Otherwise they are just gambling with shareholder assets. All managements who hedge beyond that should be replaced and legal action should be brought against them.

I have just come across one of the most unusual gold investment that I have ever seen. In early 1998, Tesoro Gold Company was organized by experienced mining men to acquire control of gold reserves that were grossly undervalued by artificially low stock valuations of the companies that held those reserves.

Tesoro has completed its first such transaction, acquiring control of Combined Metals Reduction Company and its Walter Lane Property where we may see the next major cluster of Nevada gold deposits, as well as a small open pit gold mine in Northern Arizona that is developed, constructed and permitted. This mine's reserves and simple metallurgy has been attested to by eminent professionals. Mined ore is stockpiled in the pit and at the crusher, awaiting processing... and working capital. Approximately $15,000,000 has been spent to prove the reserve, develop the mine and construct the facilities.

Tesoro has organized a limited partnership (Mohave Partners) to operate the mine and receive an additional 9,000 ounces of gold from the Walker Lane property. Partnership Units are $5,000, deductible for federal income tax purposes, and the partners receive tax-free distributions of gold! Until the limited partners receive all of their money back in gold, no one else receives anything. Thereafter, the limited partners receive 25% of the Mohave gold until the mine is permanently closed, plus the 9,000 ounces from Walker Lane.

The Russian Duma has amended legislation governing platinum exports allowing Almaz to recommence exports. If President Yeltsin approves and signs the legislation supply to the market will increase. We'll keep you posted. South Africa should produce 3.82 million ounces in 1999, 75% of total supply. But the total will still be nearly 6% less at 5.06 million ounces, while demand will be up nearly 4% to 5.59 million ounces. Jewelry now accounts for half of consumption at 8.3 million ounces with 65% coming from Russia and 25% from So. Africa. There is a global production deficit of about 3 million ounces, which comes from Russian stockpiles. Norilsk, will spend $3-5 billion lower costs, but not increase production.

Overall gold demand for the 3rd quarter was a record 877 tons, says the World Gold Council. This is the second highest demand on record. This estimate is based on 80% of world demand, which means demand was probably near 1,100 tons. We expect final quarter figures to be even better due to strong holiday, millennium coin purchases, and middle east demand due to higher oil prices. Demand for the first nine months was 2,471 tons versus 1,470 tons in 1998 and 2,289 tons in 1997. There has been some inventory buildup, but it is hard to say how it will effect total yearly volume. Even if demand is only at 1997 levels it still represents an excellent year for gold.

DeBeers is resuming diamond exports after an eight week delay caused by a dispute with the Diamond Board over undervalued diamonds. The Diamond Board is funded by producers, master cutters and rough gem dealers. DeBeers has three members on the board. The cabinet is expected to discuss revised legislation next year.

Silver Prices: Will Lower CPI Data Flip the Trend to Bullish?

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