THERE'S TROUBLE IN OIL, GOLD AND BONDS---

WHAT'S IN STORE? MARKET CRASH? WAR?

____________________________________

MIDAS COMMENTARY FOR FEBRUARY 3, 2000

By Bill Murphy www.LeMetropoleCafe.com

Spot Gold $286.60 up $2.30 Spot Silver $5.24 up 5 cents

Here is what we hear is going on in Financial Land.

Treasury bond yields have collapsed, dropping from 6.76 to 6.06 percent before settling at the end of the day today at 6.15 percent. The yield curve has inverted Sharply; long-term yields are now less than shorter- dated notes. Ten-year notes closed today 30 to 40 basis points higher than Treasuries.

The incredible speed at which this has occurred has rocked traders and investment houses in the credit market trading game. Last week I alerted Cafe members what was going in this, but because of the tremendous financial market implications, I will touch here briefly on what has been set in motion.

The U.S. Treasury Department has made a decision to restrict the supply of 30-year bonds. This sudden change in policy has caused a surge in price of 30-year Treasuries, as demand has overwhelmed supply, much of it due to technical considerations. The dramatic rise in the price of bonds and the reduction in long-term yields has caused a rapid inversion of the yield curve.

Some financial institutions have been caught with wrong-way trades on. These institutions have been "long" the short-dated instruments and "short" the Treasuries. Now those trades are under water, as the Treasury market has exploded up.

This development is not good for most banks either, as by the natural course of their business they are borrowing short and lending long. This quick inversion has to reduce bank profits.

Rumors began flying at mid-morning that a major bond dealer was in trouble. I heard this early from a Denver source. Then a Canadian source said it was Bank of America. That was followed by a New York source identifying Goldman Sachs as the one in trouble. A Chicago source told me the same thing. Then a European bond dealer told me the rumors over there kept bringing up Deutsche Bank and Goldman Sachs.

The Chicago source said the problem was astronomical, a derivative blowup. That source, who long has had Washington sources, also told me that the Federal Reserve was in emergency session, contrary to what the Fed said in public today.

More of the same just in from another Cafe member:

"I have very good (trading floor-based) connections in the Chicago Board of Trade. According to my sources, Deutsche Bank is the bond dealer in trouble. Your recent bulletin indicated that the Fed denied calling a meeting to address the dealer's troubles, and that may be an accurate answer. But I have heard that rather than calling an emergency meeting for the dealer, the Fed called the meeting to discuss the condition of two hedge funds that are in deep trouble due to the change in the yield curve. Those two firms, according to my sources, would be Merrill Lynch (very interesting, given its recent flight from the commodities business) and the traders that left Long-Term Capital Management to form their own fund. I can't swear by the stories that I've conveyed, but I know the sources and have good reason to believe them."

This would not be the first time Merrill Lynch got in trouble with fixed-income trading. Remember Orange County! Wouldn't that be something if the LTCM crowd and Mr. Meriwether are right back in the soup again?

Another LTCM-type bailout? I would hope not. How many chances should this guy and his hapless crew get?

A denial by the Fed should be no surprise. Somewhere in one of my old Midas commentaries I have a Wall Street Journal quote from Allen Binder, former Fed official and now a Princeton professor, who said something like:

"The last role of a central bank is to tell the truth to the public."

This just in, hot off the Bridge News wire:

"Goldman shares slip on talk of fixed-income loss.

"Sources dismiss rumors of abnormal bond losses at Goldman.

"Goldman Sachs' share price closed the day at 85 3/8, down 5 3/4, while the general market closed much higher."

In addition, Goldman Sachs has been the big gold buyer with gold rallying around $5. Does it have something to do with the firm's rumored fixed-income problems? Too early to tell, but if Goldman does have serious bond- related financial problems, it would make sense for the firm to pare back on short gold positions.

Ironically, Goldman was finding it hard to buy gold today. They would come in and bid and the offers would dry up -- for Goldman has become such a big factor on the Comex that traders all want to go with them. It looks like they may be a bit too big for their britches at the moment.

But the collusion crowd does not have too much fear just yet. Right at the close Hannibal Cannibals -- Chase Bank and J.P. Morgan -- sold the market down.

That makes sense too. Goldman has to lighten its short gold positions, so fellow cabal members Chase and Morgan pick up the slack at the higher end of the recent gold trading range.

More on gold later.

Crude oil closed at $28.10 right off a contract high close, with both heating oil and gasoline closing up around 2 cents per gallon. This was an impressive close. Crude had reached $28.40 per gallon when the World Bank put out the following headline to the press:

"OPEC to increase supply and increase quotas next month." The price of oil immediately swooned before coming back to close up 48 cents per barrel on the day.

All the oil stories the Cafe is receiving from all over tell us the oil product market is incredibly tight.

Here are some excerpts from those stories:

"www.greespun.com 2000-02-02 15:40:39 EST

"OUTAGES OF NORTHEASTERN OIL WORSEN; SPOT PRICES SOAR

"Pay no attention to that March NYMEX price today. It is not indicative of the soaring prices being paid for prompt heating oil, diesel, jet, and kerosene at Northeastern bulk locations. Prices this afternoon have soared to 40-50 cents/gallon over the NYMEX and there are many many instances of terminals with no fuel for oil-starved jobbers, retailers, and end-users.

"NYMEX March heating oil futures ended the day around 75.40 cents/gallon, showing a loss of 1.79 cents/gallon on the session. But some spot prices in the Northeast are up 20-25 cents/gallon on the day, with desperate buyers not finding product even at the elevated prices.

"Latest word indicated that buyers had paid 45 cents/gallon over the NYMEX for prompt heating oil, or more than $1.20 gallon. Buyers were bidding but not finding low-sulfur diesel in New York Harbor at $1.22 per gallon, and kerosene buyers couldn't find product at 50 cents/gallon over the NYMEX.

"Outages were more the rule than the exception. There was no No. 2 oil in New Haven, and Providence was about to run out, sources said. Boston was very low on diesel and heating oil, with virtually no kerosene. There was no diesel or heating oil to be found at Long Island terminals and Newark had barely any low-sulfur diesel at its numerous terminals."

"2000-02-03 10:55:32 EST "NEW YORK UP ANOTHER 5-15 CENTS/GALLON "AS DESPERATE BUYING PERSISTS

"Feb. 3 (10:45 A.M. EST) -- More record prices have beenwitnessed in the N.Y. Harbor spot market this morning as desperate buyers try to get product to terminals before the weekend. Premiums to the NYMEX have advanced to almost burlesque levels, pushing absolute values for heating oil and diesel to nearly $1.40/gallon. Outages persist throughout the Northeastern system, and dislocations are extended spider-like to areas in western Pennsylvania, Virginia, the Carolinas, and southward."

Of course oil is a very important commodity. Historically, it has had a great influence on the gold price. If it continues to truck on higher, as I have been saying for months now I think it will, it will attract more buyers to the gold market, making it harder for the collusion crowd to continue their manipulation game.

Now that there is a problem for many firms in the fixed-income arena, the last thing the Fed/Treasury bullion banking crowd wants to see is a sharply rising gold price, which would be a clear signal that there really are problems in Banking Land.

They will make another of their desperate stands to stop the price of gold from accelerating as spot gold trends toward $290. We know that. But they lost control of the gold market before and they will lose control again -- maybe next time for good.

All the signs are pointing to a loss of that control sooner rather than later. The Fed just raised interest rates and announced that inflation is a concern. The collapse of the 30-year bond yield makes no sense until you understand that there is a short squeeze that has nothing to do with fundamentals.

The Fed and Treasury have a Fric and Frac routine going here.

The lower bond yields mean lower mortgage rates, which should stimulate the economy just fine. Great! -- the Fed raises rates to slow an overheated economy while the Treasury initiates a bond-buying panic that will produce just the opposite effect of what the Fed is aiming for.

Meanwhile, the swiftly inverted yield curve creates some serious unintended consequences. Rumors of massive trading losses by big bond dealers are worldwide. That creates a big positive for the NASDAQ, which goes berserk to the upside as stock investors now believe that the Fed cannot raise rates anymore in this environment. The "too big to fail" scenario asserts itself one more time. The moral hazard stock market meltup continues.

The stock market wealth effect continues to create more confidence in the stock market-investing U.S. public that has depleted its savings to a record low. Financial safety backstops are a thing of the past.

"Put all your money in the stock market or be left behind" is the feeling of the times. As the stock market goes up, the public probably will keep on binge spending, again contrary to what the Fed's interest rate increase is trying to accomplish.

What this means to me is that the day of the gold reckoning is coming closer. The volatility in markets is really picking up -- except in managed gold, of course. The markets are going bonkers.

Take Amazon.com. Frank Veneroso told me today that Amazon reported $184 million in losses compared to $22 million one year ago. That was the report to the public. But to the Securities and Exchange Commission, following Generally Accepted Accounting Principles, Amazon reported $323 million in losses compared to $46 million last year. That was on $676 million in revenue compared to $250 million last year.

What am I missing? The more this company grows, the more it loses, even as competition in its business grows.

Nutsville! The more a stock makes no sense, the more it is removed from normal stock market valuation practices, the more traders pile into it.

Many contributors to the Cafe focus on out-of-control credit growth and derivative markets in this country, and for good reason. The gold market exploded to the upside when it was announced in late September that gold lending would be curtailed. The speed of gold's move up was increased by too many derivative positions on the books of gold producers that had extreme upside market exposure. Excessive derivative exposure also led to the yen's explosive move up in 1998, and now in this bond move. Model T Ford market moves of the days of old now move at the speed of souped-up Ferraris.

The shorts in the gold market have a big problem in a big-picture sense, which I have discussed ad nauseam. What is exciting is that recent market action and the lunacy of so many markets are bringing the day of reckoning closer.

Here is the typical gold mentality of the establishment brokerage firm about gold:

Some market commentary from one of them on gold today:

"Steady, led by near-term tech action. Comments out of U.K. Treasury on gold sales and talk about India looking at higher yield equity investments not having the desired effect."

That is how obvious the manipulation game has become, even though the establishment has mocked the Gold Anti- Trust Action Committee for telling what is really going on.

Again, that is why the generalist money mangers won't buy the big-cap U.S. gold companies. The XAU could manage only a .16 gain today and closed at 60.83, less than 2 points off recent lows.

Reginald Howe's most recent gold market commentary bringing suspicion upon the U.S. Treasury and its Exchange Stabilization Fund is getting well-deserved wide circulation; it was posted today at www.LewRockwell.com. The Exchange Stabilization Fund figured in the first question GATA asked Fed Chairman Alan Greenspan and Treasury Secretary Lawrence Summers in its open letter to them in Roll Call on Dec. 9, 1999.

GATA's first question read:

"Does the Federal Reserve or the Treasury Department either on their own behalf or on behalf of others, including government agencies, such as the Exchange Stabilization Fund, lend gold or silver, facilitate the lending of gold and silver, or trade in any securities, such as futures contracts and call and put options, involving gold and silver?"

We are still waiting to hear from Secretary Summers, and GATA Secretary/Treasurer Chris Powell has already written back to Sens. Christopher J. Dodd and Joseph I. Lieberman to find out why Summers has not responded as Fed Chairman Greenspan did. Again Powell made special mention of the Exchange Stabilization Fund.

The Europeans raised rates today. Our bond yields cratered. The overvalued U.S. dollar was stronger earlier in the day then sold off sharply against the Euro and Swiss Franc. About time. Technically the dollar looks very bearish short-term.

Greenspan was confirmed today by the Senate to continue as Fed chairman. The four "no" votes were cast by Democratic Sens. Paul Wellstone of Minnesota, Tom Harkin of Iowa, Byron Dorgan of North Dakota, and Harry Reid of Nevada.

These senators will be hearing from GATA soon.

The following is an excerpt from an email I received the other day:

"I am Martin Armstrong's son, Martin Jr. He informed me of your conversations and expressed a need to talk to you again. As you know, he has been put into prison due to our wonderful justice system. Oh yeah, I'm sure you know they have also taken away the funds for his lawyers. What a country! Anyway, I feel a strong need to bring to light the actions against my father.

"I have finally been able to meet with Father this past Friday. He was put in solitary confinement for a week and a half until the criminal judge requested his move into general population. The funny thing is that until the judge's order, the jail was said to be "too crowded" for such a move."

Chris Powell and I have no opinion on the charges against Martin Sr., but we feel strongly that he should be accorded the right of every American to defend himself and not be treated as guilty BEFORE a trial. More on this later.

The Ashanti verdict was due today. We heard nothing. South Africa's Anglogold has jumped into the bidding for some of Ashanti's prized assets, according to sources close to the affair. Ashanti's fate could affect the gold market in a material way. What happens to Ashanti's hedge book? Will a good part of it have to be closed out? Will Goldman Sachs' bond market problems influence the Ashanti outcome?

YES! A night for just-ins:

"CLASS ACTION LAWSUIT FILED AGAINST ASHANTI OFFICERS AND BOARD OF DIRECTORS.

A class-action lawsuit was filed today by a New York law firm against the Board of Directors and officers of Ashanti Goldfields Co. in Ghana, Africa. It is for shareholders who purchased Ashanti stock between July and October of last year. The details will be all over the press tomorrow.

This is a big event for the gold market. In essence, the suit was filed because of Ashanti's excessive hedging policies. That now puts all boards of directors of gold producers on notice that they may be held accountable if their hedging policies are too aggressive and penalize shareholders in the event of a rising gold price.

YEAH!

If the supposed smartest minds in the gold world -- the investment bankers led by Goldman Sachs were advisers to Ashanti, and they blew it -- how can any board of directors of any gold company be comfortable with any excessive hedging structure? Almost no one thought that the $84 rise in gold in late September was possible. That fast a rise was not even entered in the computer models presented to the Ashanti officers by Goldman Sachs.

Yes, indeedee. This is big news for the big picture. With 10,000 tonnes of gold loans outstanding, what are the shorts going to do if a bond market runup like today's occurs in the gold market again? Another yen- type move! Another $84 gold type blitzkrieg move? What if that move is $284 in gold next time. Yen can be found. Money can be printed. But gold?

Is the United States willing to donate the 8,000 tonnes we supposedly have in Fort Knox (or under Fed/Treasury auspices) to bail out the collusion bullion dealer crowd? How will Greenspan and Summers explain that to Congress and the American public? How will the dollar fare in such a scenario? Yikes!

Hello, Barrick Gold. I have a question. When is your next hedging seminar for your Board of Directors?

Speaking of upside risk for gold shorts.... Sources tell us that two hedge funds in particular have put the gold carry trade back on in major-league fashion and are risking $2 to $4 higher than tonight's close. We hear that they are short more than 7,000 contracts.

The trade is understandable. Go heavily short using the collusion crowd's $290 defense point as a stop-out number. Recent bond trade problems in the bullion banking arena and this Ashanti news may be "Murphy's Law" taking effect against that trade.

One last note on Ashanti. A birdie told me that the new D-Day for Ashanti is one week to one week and a half from today.

Gold's one-month lease rates hit a new low today: .25 percent bid.

More evidence of how the manipulation of the gold market has reduced interest in the gold market: The open interest figures on calls continue to drop. They are down from 611,000 in October to 413,000 at the end of January. This has to be a bullish sign. Markets tend to make the big moves up just when everyone has given up on that ever happening.

Want to really get mad? Spot platinum closed at $504.50. Spot palladium at $509. Kudos to the Cafe's John Brimelow. He has been right as rain on these two commodities. I say "mad" because if the gold market was not being held down by the collusion crowd, these are the numbers we would be talking about in the gold market. What would those kind of prices do for your gold share?

For those of you who say I am a part of GATA because my gold share investments have done so poorly and I am a poor loser: Your dang tootin' I am mad, disgusted at the scandalous fraud perpetuated on all of us who thought we were investing in a free market. If finding out that I have been playing a game that was rigged against me so that others could make fortunes at my expense makes me a poor loser, then yes, I am a very poor loser -- and a quid-pro-quo man. They had their way. GATA is going to find a way to have ours.

Somehow, some way they are going to pay for their arrogance. Mission not impossible.

Back to platinum and palladium. The Defense Logistics Agency has asked the U.S Mint to return 200,000 ounces of platinum that it lent the mint in 1997. The reason: The agency has no platinum left and cannot fulfill a 4,500-ounce commitment for fiscal 2000. The mint says that if it returns the platinum, it will threaten its American Eagle bullion program.

Meanwhile, South African sources are looking for $600 palladium soon. The Russians are looking for $800.

Reason: The palladium they put out for bid was scooped up so quickly that they know how desperate buyers are.

Remind me some time to tell you about some hilarious stories about a former Russian partner of mine (from Leningrad) during my Shearson brokerage days.

OK. That is it. All I can think of when I hear these $500-$600 precious metals numbers is that this should be us talking about the gold price. That is where the gold price would be if the the goon squad was not holding down the gold price with help from U.S. officialdom. Many times throughout precious metals trading, palladium and platinum have forecast the price of gold.

I still expect that they are doing so again.

-END-