The Comptroller of the Currency tells us that US commercial banks’ derivatives holdings outstanding had increased to $76.5 trillion by the end of the first quarter of 2004, a level 24% greater than in the first quarter of 2003. This means the US banking system is vulnerable and the potential exists for a systemic meltdown triggered by a chain-reaction derivatives failure. Bank concentration is adding to exposure as well, because large banks have an immense volume of highly leveraged derivatives, some in gold that have large losses. In a world of growing inflation and rising interest rates any instability could turn the $300 trillion plus derivates market upside down. These electronic bookkeeping entries could collapse with the speed of light. In 1998, LTCM, just one deal, almost brought down the financial system. In the first quarter of 1995 US commercial banks held $17.5 trillion in derivatives; today they hold $75.6 trillion. Banks have transmuted themselves from lenders to agriculture and industry to casinos. Ninety-one percent of bank-held derivatives are OTC and are especially tailored to financial institutions, often having exotic and complex features. JP Morgan Chase has $39.6 trillion in derivatives. That is almost four times GDP, which is $11.5 trillion Bank of America has $14.9 trillion and Citibank $14.4 trillion. The top seven banks own 96% of the total. The banks hold $76.5 trillion in derivatives, versus $7.8 trillion in bank assets and $715 billion in loan equity. A guess is US banks hold $85 trillion in derivatives. The BIS, the Bank for International Settlements, the bankers’ bank, says worldwide there is $233.9 trillion in derivatives, 84% of which are over-the-counter. The US is moving into the same negative situation that the UK is already in and that’s that there are only six banks in the UK. Thus, we go on our merry way, the public not having a clue of what jeopardy their financial system is in.

            Attorney General, John Ashcroft says he wants the so-called “Blanket Letter of National Security Findings” signed, so he can issue secret arrest warrants and eliminate the need for law enforcement to request individual letters from the Department of Justice or other agencies. There are six bills pending to strip you of more of your freedoms and rights, the worst, which we have mentioned before is HR 3179, the Anti-Terrorism Intelligence Task Improvement Act, sponsored by James Sensenbrenner and ex-CIA operative Porter Goss (R-FL), who has blood all over his hands. The rest are the Pre-Trial Detention and Lifetime Supervision of Terrorists Act of 2003 HR 3040 and S1606; Terrorist Penalties Enhancement Act of 2003, HR 2934 and S 1604 and HR 3037, Anti-Terrorism Tools Enhancement Act of 2003.

GOLD, SILVER, PLATINUM, PALLADIUM AND DIAMONDS

            Gold Fields says if the rand price of gold continues to hold at below R80,000/kg, then a new strategy will have to be adopted, which will involve the closure of loss-making shafts, and retrenchments. That means 25% of South African production is at risk. The company may start cutting jobs after a 60-day review process. The four shafts in question are already losing R40 million a month. 2,000 jobs were cut in the last 9 months, with 800 being lost in the June quarter. As long as the rand remains in its current range we can expect continued layoffs and a fall in gold production that will surely drive gold prices higher. One of the most interesting comments by management, which bears out what we have been saying for five years is, that they have been high grading their properties. They also spoke of the rand falling against the dollar. We find this thinking very optimistic inasmuch as when interest rates rise the dollar will fall not leaving rand holders much room to compete. Gold Fields is operating at some very deep levels and the deeper you go the more difficult mining becomes. They and all South African miners may soon have to contend with a proposed 3% royalty and if that becomes law there won’t be much left in the way of profits. Presently 60% of production for Gold Fields is in South Africa, but only 30% of profits are generated there.

            After taking a recent look at the platinum market we still see a shortfall of production to consumption over the next 3 years of 100,000 to 300,000 ounces a year. As the recession takes hold next year, along with higher interest rates, we see a fall in vehicle production so when we go out over three years the shortfall will diminish.   In 2005, the speculation aspects will hold as gold and silver move higher, which will be of great benefit to the platinum price, where otherwise it may have become weaker. At $937 an ounce, jewelry demand began to falter and even in the $800s it won’t grow as gold jewelry and white gold jewelry are so much cheaper to purchase.  Thirty-eight percent of platinum demand is from jewelry, so once platinum approaches $900 again you will see a distinct dry up in demand. It is as well sometimes very difficult for the untrained eye to discern the visual difference between platinum and white gold, thus already white gold is giving platinum a challenge, particularly in China. In spite of the production shortfall, we also believe the platinum price got ahead of itself in relation to the gold price on a historical bases and that should impede upward platinum price movement until gold does come catching up.

            Japanese imports of gold increased three-fold in June 2004, up 195% in May and 252% higher than in June 2003.  The June import total is the second highest monthly import total on record back to 2001.

            We see absolutely no hope for the South African mining industry. Last year it only contributed 7.1% of GDP, down from 7.7% in 2002. This is due to declining gold production, a strong rand, which has cut revenues and to the blatant manipulation of gold prices by the US Treasury, the Fed and other central banks. Eighty-eight percent of South African mines are operated at a loss and that figure will rise without government intervention. A higher rand would put many mines out of business. We expect the rand could easily go 10% higher later this year as the US dollar falls further. The Marxist ANC government has a price stability model, which they follow and use interest rates as a method to manipulate the economy leaving their currency to fend for itself, much the same as the US has done. Inflation is 6%, unemployment remains at 50%, the prime rate is 11.5% and AIDS is ravaging the country. All three, inflation, unemployment and interest rates are headed higher. These unusually high interest rates have drawn lots of hot money - money that jumps from place to place in a nanosecond. In the last five years costs have increased by 40% and the end of those increases in inflation are nowhere in sight. Tourism is stagnant because of an expensive rand, high prices, crime, AIDS and the now dreadful South African Airways. Mining and business in general would like to see lower interest rates and a lower rand rate. If they get that, they will get higher inflation. Throw in massive mismanagement and you see there is nowhere to go. After the ANC took over the government, and it has 70% backing, radical socialism began. Free water and electricity and housing was begun to help the poor and massive unemployment. The problem then was to find a way to pay for these subsidies and that, of course, meant higher taxes. That is to be solved by Black Empowerment and 51% ownership of all new ventures on both private and publicly owned land. Then came the royalty tax, which is not levied on profits, but on turnover, which overrides the motive for profit, which is not relevant for mining in a Marxist paradise. The ANC government is truly mindless. ERPM – East Rand Propriety – that went from $1.35 to $56.00 in the 1974 to 1980 period has shut down and its black management and 2300 workers are on the street, and this is only the beginning. Shafts are being closed at many mines because they are not profitable. These gold mining giants are losing money and they cannot stay in business at this rate. Costs keep on rising in mines that are five miles deep. No company of sane mind would do any exploration in South Africa today. You give up 51% of the profits and control to a bunch of local Marxist dingbats. That means no new mines. As we have said over and over again since 1994, do not invest in anything in South Africa. We know we lived there and have followed the destruction of the country closely. Don’t buy South African mining shares, sell them. If you live there escape. This is your last chance. If you stay you will lose your life and the lives of your family. The game is over – retreat.

LATIN AMERICA

            Leaders of the pro-Chavez petroleum workers union SENTRASET has threatened to cut Venezuela’s petroleum supply to the US and start a national strike if there is a new fraud on August 15^th that leads to the “yes” option winning in the presidential recall referendum.

            A campaign by President Hugo Chavez’s government has boosted voter roles by an astounding 1.5 million in recent months, mostly in poor areas likely to favor the president in the recall vote. This is a victory for participatory democracy.

            Venezuela’s President Hugo Chavez Frias says his government will not allow hard line opposition groups to create disturbances before or after the recall referendum against him on August 15^th. He insists that the US Empire is behind the opposition and he has stated that Venezuela will never become a US colony. Mr. Chavez said, “Before the poor didn’t vote, because they didn’t have an ID card. I doubt if there has been an electoral process more transparent than this one and I am the first person interested in seeing full transparency.”

            Brazil’s industrial production grew at the fastest pace in four years. Volkswagen production jumped 13%, the 10^th consecutive month of year-to-year increases. Imports were also the highest in six years, up 26.7%.

            Chile’s economy expanded 5% in June, after lending rates hit a record low, spurring spending as demand for copper climbed.

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