Gold & Silver Potpourri

September 23, 2002

Barrick plans to reduce its forward sales position by 1/3, to 12 million ounces from 17.9 million by the end of 2003, this would equate to 15% of the company's current gold reserves as compared to 22% today. This is still a large hedge position and considering the horrible damage Barrick has visited upon owners of gold and gold shares over these many years, we still recommend the stock as a sell.

The First China Silver Conference was held in the Inner Mongolia Autonomous Region. Attendees heard that silver was in short supply and that silver supply through traditional channels had failed to meet manufacturers&Mac185; demand for 12 years. Last year the shortage was met from government reserves, particularly from the US & China. China supplied 4 million tons of the total 86 million ounces of silver traded last year by governments on the global market. It will be interesting to see how much China sells this year and next. They could well be cooperating with the US government, suppressing prices.

A recent Merrill Lynch update on the gold sector found: Rating on cash flow for 2002 had *AEM first and *GG third; on cash cost *GG was second with $93 and *AEM third with $145; total cost per ounce *GG first at $119 and *AEM third at $195 per ounce. As you can see these are two top unhedged gold and silver producers.

The proof of the pudding is in the tasting. The XAU is up about 35% this year and the HUI, which is almost unhedged, is up over 100%. Gold is up 14%. Gold funds have doubled or tripled in size. The gold mining industry shares are still only worth $60 billion. That presents super leverage. As yet, the amount of money put into gold and silver shares, bullion and coin is a pittance compared to other investment medium. There has only been $107 million go into American Eagle coins. What this all means is that once investors catch on these investments will explode. Some of these 30 cent gold shares could easily go to $30. We have seen it happen before over the last 42 years. We are facing world wide financial, fiscal and monetary systemic risk, which engenders a flight to quality. Just as in 1930-32 the gold shares are predicting a deflationary depression and most professionals are too stupid to see it or have a vested interest in lying to their clients. If you want to participate consider two of the best-unhedged mining companies in the world, *Agnico-Eagle (AEM-NYSE) and *Goldcorp (GG-NYSE).

There is no question in our minds that George W. Bush is trying to get us into war as fast as possible in order for the conflict to precede the collapse of the stock market. Profits are not standing up. The S&P estimates of $57.50 are now down to $48.50 to$51.00. Our estimate last November was $45.50. Profits from financial companies over the past five years have been a disaster as previously set interest commitments are ripping bottom lines apart. On top of that pricing power is gone, inventories are again up and sales are drying up.

JPM's shares are falling again soon to revisit $19 a share. Who would want to buy stock in a company with 35% of the $72 trillion in world derivative exposure? Every professional worth his salt also knows they are manipulating gold and if they make one major mistake, or gold climbs higher based on some event, their company will collapse. The same is true at Citicorp, AIG, BofA and Goldman Sachs, etc. On the other hand are all these positions for the US Treasury? We don't know but sooner or later we are sure to find out. As we said 2-1/2 years ago the central banks and agencies are short or have sold 15,000 to 29,000 tons of gold and that gold is gone forever. Without that overhang, with producers reducing hedges, with a 1700-ton annual shortfall of production to demand, we can most assuredly tell you gold is going higher, much higher. Now you know why we predicted war as a cover three years ago. This is going to be a wild ride and those in gold and silver should do very well.

As we predicted, a federal judge dismissed fraud claims against 11 insurers, which is a big setback to JP Morgan. It is now stuck with $965 million in losses on gas and oil trade with Enron. The insurers refused to pay because the deals were shams intended to hide loans.

Newmont is very slow exiting their hedges and very uncommunicative and arrogant in their treatment of shareholders. In addition their dumping of their shares in Lihir has endeared them to no one. It is now very obvious they took over Normandy knowing the losses they'd have to absorb if they attempted to exit their hedges. We have been a seller of the stock and remain so until those hedges are bought in.

The recent release by Normandy was very misleading. Normandy may have reduced their hedges, however Newmont still had 6.6 million ounces on their books as of the end of the second quarter. Newmont's hedge book was a negative $364 million. That means they still are in tough shape if gold goes up.

Here are a few excerpts from Robert L. Preston's "How to Prepare for the Coming Crash." While every effort has been made to deceive the public and quite amazing to me is the caliber of people who have been deceived, not everyone has had the wool pulled over his eyes. Back in 1959, people began to sense that something was going wrong with the finances of our money system. They felt insecure. They couldn't explain it. Certainly they couldn&Mac185;t defend their fears before the host of super intellects in the economics departments of Washington and the universities. But in their own quiet way they began to do the only sensible thing they could have done. They began to store silver coins. The government said it was foolish &Mac173; why they had lots and lots of silver. Just listen to what President Johnson had to say:

Some have asked whether silver coins will disappear. The answer is very definitely NO. Our present coins won't disappear and they won't even become rarities. "If anybody has any idea of hoarding Silver coins, let me say this. The Treasury has a lot of silver on hand, and it can be, and it will be used to keep the price of silver in line with its value in our present silver coin. There will be no profit in holding them out of circulation for the value of their silver content."

All of the bold and positive statements of the politicians to the contrary, the intrinsic good sense of most people has told them that this nation was in trouble and headed down the wrong road. Less than two years after President Johnson made his statement on silver coins, most of the true silver coins had been replaced by worthless nickel-plated copper ones by the government. How many are so naÔve as to believe that dollars with four cents' worth of gold, and dimes and quarters worth about two or three copper pennies are going to be able to maintain a nation&Mac185;s economy for very long.

All the laws in the world, making gold and silver illegal as money, will not alter the basic law of economics that says a man must receive value for value. When billions and billions of dollars created out of nothing first hit the market, they seem to stimulate it and make the economy expand; but actually in a short while they do just exactly the opposite. When nothing has been produced with that paper dollar, no service or product created of equal value to the amount shown, then instead of adding to or creating something within the economy, it robs it, draining away that amount of goods and services from the people and giving it to the ones that created it. The further down the line the dollar goes after it gets into the economy the less it does, and pretty soon it gets to be a negative factor. By the time it gets to the widowed, the sick, the poor, and the pensioned, it has become a big deficit that robs them, robs them of what they need so desperately. Inflated paper money robs the needy and pays the money baron who created the monstrosity.

Once a government starts on this false money business, it has no choice but to ride it to the end. We are down the road too far to turn back. I began my study of this matter in the hope of finding a way to turn the tide. But the process is too far gone. Now what the government is trying and has been trying to do is to halt the inflation, or at least to slow its advance. But when they try to slow it down, the day of reckoning starts to catch up, business starts to slide, businesses fail, people get put out of a job, the unemployment rate climbs, the government gets frightened so it pumps more money into the economy.

Investors who have held stocks and funds for five years are now about even. One more move downward and they will be liquidated. That may have begun with funds losing $52.6 billion in July. The funds are not gathering cash they are spending it. When heavy liquidation comes they'll have to do some mighty selling. The Dow dividend payment is still a paltry 2.2%. So what is one to do? That's simple; one buys gold shares and should have been doing so since April 2000 when we recommended one to do so. People who hold paper currencies are getting screwed, even if they are in Treasury paper.

Bonds are still certificates of confiscation in the final analysis Gold has moved up while the TIPS spread, the yield premium regular Treasuries pay over inflation-protected securities, has contracted. Gold is where the stock market was in 1982 at about 800. That Dow went to 11700. Are you getting the picture? Gold would have to go to a minimum of $1,800 an ounce just to play catch-up. After that, who knows? Markets are famous for overdoing things. We could see $2,000-3,000 an ounce. Can you imagine where gold stocks would be? *Goldcorp over $200 and *Agnico-Eagle over $400 a share. All those exploration and rising junior producers could all go from 50 cents to $50 a share. In the 1930's Homestake made a move (see chart), which could easily be emulated by *AEM and *GG and Durban Deep and ERPM went from 25 cents to $52 and $55 respectively. That's a fact, we were there, and our clients made fortunes. Gold is so cheap and it acts so beautifully. This is your last chance to join us on this wild journey, don't be left behind.

THE INTERNATIONAL FORECASTER
An international financial, economic, political and social commentary.
Published and Edited by: Bob Chapman
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Robert Chapman bif4653@comcast.net

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