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20 Tons of Gold Sold at $268
(May 15, 2001) Today’s Bank of England gold auction was 3.7 times oversubscribed, and priced within a few cents of the active trading markets. Gold has now closed at higher prices for six weeks running, as increasing numbers of investors are starting to see the wisdom of owning this traditional value holding. Our noted friend Leonard Kaplan checks in with his (mildly) bullish gold outlook.
Ahead of the Federal Reserve’s meeting this afternoon, and the question of a further rate cut, The Bank of England held its first open auction of 20 tons of gold from reserves. Previously, auctions had been held of 25 tons of gold every other month, starting back in May of 1999.

Today’s sale was right in line with expectations: the price of $268 essentially right at market, the 3.7 oversubscription rate just about average for an active auction. Bids came in with a scaling factor of 72.3619%.

If we were curious to know what the phrase “scaling factor” actually means, we would turn to our good friend Leonard Kaplan of Prospector Asset Management, a man with quite a technical knowledge of international gold trading. Recently, the Perth Mint in Australia, producer of Australia’s gold bullion Kangaroos and Lunar Calendar series ( commissioned Mr. Kaplan to write on the state of the precious metals markets, and he gave us permission to quote from that article:

"Duty-bound to accept the honour of reviewing precious metals markets for the months of February through April of this year, I find that the past three months have, arguably, been the least interesting in years. However, while precious metal prices have been stagnant to lower in rather quiet and boring trade, the fundamentals of the markets have become vastly more interesting. Both internal and exogenous economic factors have emerged which may soon alter the landscape.

The main influences on the gold market, these past months, have been lease rates and the value of the US Dollar, especially against the ‘gold’ currencies of the Australian Dollar, the South African Rand and the Indian Rupee. As the US Dollar remained strong, the price of gold was pressured, as producing countries, South Africa and Australia, with costs in their local currencies and income received in US Dollars, were strongly encouraged to sell, to add to their already extensive hedge books. Meanwhile, the strong US Dollar discouraged demand in India, the world’s largest gold market, as the metal seemed expensive in the local currency. The other influence on the market was internal, rather than external, as lease rates were carefully watched by both the speculative and industrial sectors of the market.

A New Dawn?

As the past several months have proven difficult, there is significant reason to believe that we may have entered a new dawn and that gold and silver prices may improve on current levels. The internals of the gold market have been altered and may produce rising prices in the next few months, albeit slowly rising prices.

Reduced Supply

The first factor worth considering is the combination of lower US interest rates and a gold lease rate that has remained firm, now trading at about three times the 10-year historical average. Due to this confluence, forward rates are now the lowest we have seen in many years. Such thin contangos in gold discourage producers from the practice of forward selling, as they receive only about $6 per annum when they sell forward, rather than the $14 to $15 per annum seen in recent times. There is anecdotal evidence, presented by several analysts, including the World Gold Council, that the reliance on derivatives for producer selling is dwindling. As such, we could see some diminution of supply.

Bullish Chart Formation

Next, the meager forward rates also discourage the massive speculative short selling seen in recent years. Such short speculative forays by large hedge funds are also made less comfortable by the fact that we may have traced out a long-term technical ‘inverted head and shoulders’ chart formation. This is normally interpreted as a bullish trend and is significant in that prices have successfully tested the low $250s on several occasions.

Weaker US Dollar?

There is widespread belief that the persistent strength of the US Dollar may dwindle in the coming months as interest rates in the US are carried lower by the actions of the Federal Reserve. And, as such, industrial and investor interest and demand may be re-kindled in India and other gold consuming nations, as noted above.

‘Mild Bull Trend’ in Near Future

But the investor operating at the margins of the supply/demand fundamentals is the wild card in the equation. Based upon current conditions, I believe that the gold market, and the silver market in sympathy, will be in a mild bull trend in the near future. Should the investing public decide to participate, in even the smallest way, prices could trend much higher and much faster than imagined. After all, the gold market is infinitesimally small in comparison to other world financial markets.”


Mr Kaplan goes on to point out that the entire aboveground supply of gold in the world is some 140,000 tons, worth today about $1.19 trillion in U.S dollars. It’s amazing to consider that you can pick out 3 or 4 Nasdaq stocks that have combined to lose that much in market capitalization in the past 12 months.

Yes, 3 or 4 U.S. stocks have, in a year, lost in combined value the equivalent of literally ‘all the gold in the world.’

Or think about this: the total shares of every publicly traded gold mining stock in the world could be bought today for less than $40 billion. That’s the market capitalization of all the world’s gold mines in the U.S., Canada, South Africa, Australia, South America, Indonesia, etc.

In contrast, today’s market puts a value of $494 billion on the software company Microsoft. That’s more than twelve times the present value of all those gold mines.

Put another way, the current market valuation of Microsoft is about 41.5% of 'all the gold in the world.' That makes Microsoft stock worth 58,000 tons of gold at today's modest gold prices. It took from prehistoric times until the early 20th Century before our species was able to get that much gold out of the ground. Bill Gates matched it in fifteen years.

Leonard Kaplan finishes with this thought:

“Just imagine what might happen if a tiny fraction of investors decide to forego the current investment mania of selecting their investments in terms of momentum and resurrect the aging but proven portfolio theorem of buying "value". “


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