Gold -- the eternal short? Message Board

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Strategies & Market Trends : Gold -- the eternal short?

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To: Keith Zhang who wrote (44)	4/30/1997 9:51:00 PM
From: rch	of 114

I preferr not be called a gold bug because up until two years ago I was decidedly short on gold. However things have changed but that is not reflected in the gold price. we have a unique situation today which has led to this stock market rally which seems never-ending. I would decribe this period as a period of inflation, but not in goods and services but in financial assets. Naturally when investors are getting wealthy nobody sees this as a problem but it is a vicious cycle which will eventually have to unwind after this extreme bubble has been broken. Reagonomics, shifted wealth into strong hands (ie wealthy people) These people and institutions don't spend their money on cars, diapers, washing machines etc. they re-invest in more financial assets. This of course drives the price of those assets up. This was sufficient momentum to drive up stocks during the 80's and would have likely ended there were it not for the fact that there were some new forces at work. 1. Japan: having gone through their own inflation of financial assets they began to have problems as well. Real estate collapsed and then stocks and finally large insurance companies, banks and major manufacturers ran into trouble. This problem was made worse by the fact that the banks in japan were being made to comply with IMF rules for capitalisation. Where before they counted the stock and investment portfolios as capital assets for reserve purposes, they no longer could do so and banks which appeared solvent were not because reserves must be comprised of cash assets and not ones that can increase or decrease in value (such as stocks). For all intents and purposes Japan Inc is insolvent and it only remains for someone to say the Emperor has no clothes and the whole deck of cards will fall. Japan in a desperate attempt to save themselves have been trying to reliquify the banks and insurance companies. Their strategy is this. Keep the yen low by reducing interest rates to zilch. Lend that money to the Japanese institutions who in turn sell the yen (keeping its price low) and buy dollars. They then took those dollars and invested them in Treasury Bills which earn a high rate of interest. That profit is returned to Japan to help strengthen balance sheets. While in the past, before Reagan, it was illegal for foreigners to hold US Government debt, it was changed after Reagan got in. The result has been that this year the Japanese and Europeans have completely financed the US Government deficit. That is why there is enough liquidity to keep stocks bonds etc soaring long after they should have corrected. Imagine what would happen if the Japanese Yen were to start going up in value. All those selling yen and investing in treasury bills would start losing money because of currency losses. They would start liquidating US holdings and converting them from Dollars to Yen. Dollar drops even more and Yen goes up even more therebye accellerating the process and leading to an all out collapse of the debt and stock market. Because foreigners are now refusing to finance the US debt, domestics interest rates will skyrocket in order to try to finance the debt. Rising interest rates will pull money out of the stock market which will start to drop precipitously. What will happen to gold then? On forward selling: just a quick comment, like any step in one direction it will retrace in the other direction. Forward sellers faced with rising gold prices will stop forward selling. this will more pressure on the price to rise and should it go up enough they may hedge by buying and as a result put more upward pressure on gold.

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