-Caveat Lector- from: http://www.aci.net/kalliste/ <A HREF="http://www.aci.net/kalliste/">The Home Page of J. Orlin Grabbe</A> ----- Gold Market Gold Production Costs Drop 17 Percent But gold still not underpriced Gold production costs fell 17 per cent last year as gold miners worldwide pushed down costs to cope with the rout in the gold market over the past three years, according to an industry research group. The western world cash operating cost of producing gold fell 17 per cent to an average of US$193 an ounce in 1998, according to a report by the AME Mineral Economics, a Sydney-based commodities research and consulting group. Gold prices, meanwhile, fell from $415 an ounce in early 1996 to the current $285 level. AME's study found that, in real terms, average Australian gold mining cash costs fell to US$204 an ounce, $43 less than average 1997 costs, South Africa's average cash costs fell by $52 an ounce to $254, US gold cash costs fell $40 to $163 and Canadian costs fell $11 to US$200. The primary factor driving US dollar-denominated costs lower in Australia, South Africa and Canada was their weak domestic currencies and the currency weakness also boosted gold prices in local currency terms. While gold prices in US dollar terms fell to 18-year lows of US$272 an ounce late last year, gold in Australian dollar terms actually rallied through A$500 an ounce to its highest level in two years last October. South African and Canadian producers experienced similar local currency-denominated price increases. This was one reason why the slump in US dollar gold prices has not induced a corresponding reduction in supply. AME forecast that western world gold supply will actually increase by 40 tonnes this year, rather than decline in response to the collapse in US dollar gold prices. Lower costs also suggested that, even though gold was trading just above its lowest level for 18 years, it was still not necessarily underpriced, said AME. It estimated the 90 percentile line - the level at which 90 per cent of gold producers break even - had fallen from $344 an ounce in 1997 to $280 last year. This indicated that the current prices below US$300 an ounce gold prices were substantiated by actual mine costs and were not necessarily influenced by concerns of market oversupply from central bank sales and producer forward-selling, said AME. Last Friday, when the Australian dollar gold price rallied sharply through the A$460 level on the back of the weaker Australian dollar, dealers reported substantial Australian gold producer forward-selling. Also "there has been a lot of call option selling by producers", said Simon Klimt, head of commodities for Westpac Bank in Sydney. Meanwhile, the outlook for the gold price, based on forecast production costs, remains dismal. AME forecast the 90 percentile line will fall to $258 an ounce in 2002. With the declining spot price of gold, many producers are now more dependent upon the premium received (the contango) by selling gold forward, said AME. Australian gold producers have embraced the benefits of forward-selling gold. Australia's next three years' gold production has already been sold forward at prices above A$600 an ounce, significantly above current price levels of A$460. The Financial Times, March 2, 1999 Finance in China China's CITIC Lowered to Junk Rating by S&P Operating environment getting worse, says S&P HONG KONG - China's troubled state-owned sector suffered further blows Monday as Standard & Poor's Corp. relegated the credit of the nation's biggest investment company, China International Trust & Investment Corp., to ''junk'' status. Separately, Goldman, Sachs & Co. announced that the debts of Guangdong Enterprises Ltd., a foundering Hong Kong company owned by a Chinese province, exceeded its assets by more than 18.8 billion Hong Kong dollars ($2.43 billion) ''None of this is shocking news, and the downgrades could be expected,'' said Stephen Cheng, director of credit research at Warburg Dillon Read in Hong Kong. ''But this does show the depth of problems facing the state sector in China, and they will likely get worse.'' S&P, the New York-based ratings agency, also assigned a ''junk'' rating - which labels the investments as very risky - to the Bank of Communications and dropped three of the country's biggest banks, Bank of China, China Construction Bank, and Industrial & Commercial Bank of China, to the lowest notch of investment-grade debt. Credit downgrades denote an increased risk that loans will not be repaid and make borrowing more expensive, particularly when ratings drop below investment grade. Analysts said the downgrades could have a negative impact on bonds issued by China and perhaps even Hong Kong. ''The rating revisions reflect Standard & Poor's expectation that the domestic operating environment for Chinese financial institutions will become increasingly difficult as a result of slowed economic growth and corporate restructurings,'' S&P said in a statement. ''Despite repeated interest rate reductions and infrastructure spending by the Chinese government, domestic demand remains weak and deflationary pressures are mounting,'' it said. The agency added that the ratings could be revised further downward if China's economy continued to deteriorate. ''The interesting part of the downgrades is how the agency has already begun looking at each of the banks as entities separate from their sovereign backing,'' Mr. Cheng said. ''This shows how perceptions have changed since the collapse of GITIC,'' he said, referring to the closure of Guangdong International Trust & Investment Corp. in October. GITIC, one of China's largest financial institutions, which was the borrowing arm for the country's richest province, was shut down by the government when it did not have enough money to repay debts to international lenders. The implied loss of government backing on debts owed by state-owned companies has sent lenders and international investors scurrying to slash their China exposure. ''I basically think it is wrong to tar all these entities with the same brush and totally discount government support they could receive,'' Mr. Cheng said. ''But ever since GITIC closed, investors have been rushing out, making the credit crunch even worse.'' Also on Monday, Goldman Sachs sketched out a management restructuring proposal for Guangdong Enterprises Holdings Ltd., a debt-laden Hong Kong company owned by a Chinese province that has foundered in the wake of GITIC's closure, Bloomberg News reported. The company's restructuring is considered a test case for sorting through the rising pile of bad debt among the $4 billion owed by Chinese companies to international lenders. It is overhauling its operations with the help of Goldman Sachs. Restructuring of the company's actual debt, some 31.8 billion Hong Kong dollars owed to such creditors as HSBC Holdings PLC, Standard Chartered PLC and ABN-AMRO NV, will be finalized in April, the U.S. investment bank said. The Hong Kong company's assets are worth 19.4 billion dollars, Goldman added. International Herald Tribune, March 2, 1999 Oil Market France Does Oil Deal with Iran Says US Iran policy can take a hike The re-opening of Iran's oil sector to foreign investment took another big step forward yesterday when Tehran signed a deal with Elf Aquitaine of France and Eni of Italy to refurbish the Doroud offshore field near Kharg Island in the Gulf. The agreement is also another blow to unilateral US attempts to restrict large-scale foreign investment in Iran's strategic petroleum industry. Elf and Eni will spend $540m (£337m) in capital expenditure over the next few years to boost Doroud's output by 90,000 b/d, to a production rate of 220,000 b/d by 2003. It will do so by drilling new wells and installing water and gas injection to improve reservoir recovery. The refurbishment will also boost Doroud's recoverable reserves from 600m barrels to 1.5bn barrels. Under the "buyback" arrangement, the capital provided by the two companies will be repaid through the sale of a portion of the increased crude output, plus a rate of return thought to be in excess of 15 per cent. The total value of the 10-year deal is estimated at $998m (£624m), including financial charges and remuneration to Elf and Eni. Negotiations over the redevelopment of Doroud have been going on since 1995. In recent months the talks faltered over Iran's insistence on production rate guarantees. Elf and Eni have now guaranteed "a certain production capacity" when the redevelopment work is completed, with a review of the guaranteed rate one year later. The Doroud agreement comes as Iranian government officials are in the midst of assessing dozens of proposals from foreign oil companies keen to take part in more than 40 oil and gas projects. The Middle East Economic Survey, a newsletter, said yesterday that more than 30 foreign companies from 18 countries in Europe, Asia, Latin America and the US, had submitted proposals, although the US ones - said to have come mainly from Arco of Los Angeles - depend on unilateral sanctions being lifted by Washington. Although Elf has "exchanged views" with US government officials about its involvement in Iran, the company said Washington had no right to restrict the commercial activities of a European company. Individual European governments and the European Union have advised European oil companies operating in Iran to ignore Washington's Iran/Libya Sanctions Act. Ilsa is intended to deter foreign energy investments in those countries by threatening to punish their US operations. The threat of US retaliation receded after the US issued a waiver to Total, the French oil company which is developing the Sirri and South Pars fields, in a move which many European companies interpreted as giving them a green light to invest in Iran's energy sector. But BP Amoco and Royal Dutch/Shell, Europe's biggest oil groups with extensive interests in the US, have so far been reluctant to make a definitive move in Iran, even though they are talking to officials there about a number of projects. According to Elf's 1997 annual report, the French group had just under FFr23bn (£2.41bn) of identifiable assets in North America at December 31, 1997, equivalent to nearly 10 per cent of the total. Also in 1997, the US accounted for about 5 per cent of the company's natural gas production. US exploration and production activities are conducted offshore in the Gulf of Mexico, where the group has decided to increase its presence, particularly in the deep offshore sector. North America accounted for 19 per cent of the group's FFr58bn in chemicals sales. The Financial Times, March 2, 1999 Economic Slump in Japan Government Vouchers Good for Sex in Japan How to Stimulate Consumption GOVERNMENT shopping vouchers aimed at sparking a consumer boom in Japan may be spent on the pleasures of the flesh as establishments in some red-light districts are preparing to accept them instead of cash. Sex shops, strip joints and massage parlours around Tokyo have registered with the authorities so customers can pay with the coupons. As part of its economic revitalisation plan, the government is giving coupons worth about £100 to families with children under 15 and to the elderly who are bedridden or on low incomes. The conditions beg the question who will be spending their coupons in the red light districts. But some areas of Tokyo are making sure that the coupons are only spent in more conventional ways. Taitou ward has banned the use of coupons in its historic red-light district, Yoshiwara, once a haunt of geishas. "The coupons are supposed to lighten the economic burden for residents," an official said. "Sex shops and the sex industry are not suitable places to use them." The vouchers are being distributed over the next few months and the scheme will cost the government £4 billion. Many economists doubt the measure will cause a consumer boom but it could help create a feel-good factor as people spend their windfalls on some special extras. The London Telegraph, March 2, 1999 ----- Aloha, He'Ping, Om, Shalom, Salaam. Em Hotep, Peace Be, Omnia Bona Bonis, All My Relations. Adieu, Adios, Aloha. Amen. Roads End Kris DECLARATION & DISCLAIMER ========== CTRL is a discussion and informational exchange list. Proselyzting propagandic screeds are not allowed. Substance—not soapboxing! 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