The following is important reading, from a Wall Street economist I know>
Get a beer, a cigar or whatever and take the time to read through it,,
it may help explain the current move of the gold sector..and as I have said before,
many of the gold stocks are closing in on their yearly highs, in what has been a terrible time
for them....
The Coming US Dollar Crisis affecting Gold
One of the most fascinating empires in ancient history is Phoenicia. Lying
directly north of Israel in what is known today as Lebanon, Phoenicia was the
name the ancient Greeks applied to the central eastern Mediterranean coast.
The actual word "Phoenicia" is very appropriate as it was derived from the
classic Greek word for purple phoinikies, which described a famous purple dye
extracted from a rare snail that the Phoenicians industriously peddled
throughout the ancient world.
A relatively loose confederation of independent city-states, Phoenicia grew
into one of the most intriguing trading empires in the ancient world. The
Phoenicians had the great fortune of being geographically situated on the
very nexus of many of the most important land and sea trade routes of the
ancient world linking Europe, Asia, and Africa. In addition to their purple
dye that was highly sought after by royalty all over the ancient world, the
Phoenicians exported the lumber from the magnificent cedar trees of ancient
Lebanon, pine, textile goods, glass, wine, metalworks, and fish.
The Phoenicians grew into one of the most celebrated sea-faring civilizations
of all time. They are believed to have been the first group of navigators to
use the North Star to maintain their course over the formless seas.
Phoenician sailors were the first to circumnavigate the large continent of
Africa, and Phoenicians founded trading colonies all over the ancient
Mediterranean, including the famous city-state of Carthage on the Tunisian
African coast and Tarshish in what is modern Spain.
In order to maintain records of their trading and commerce, the Phoenicians
developed a comprehensive alphabet that was later appropriated and modified
by the Greeks and passed down through the Romans. It was one of the key
ancestors of our current English alphabet today.
In many ways, the mercantile civilization of the Phoenicians that ruled the
Mediterranean for over a millennium is among the most fascinating cultures of
the ancient world.
One of the most important cities in Phoenicia was Tyre ("Rock" in
Phoenician). An island one-half mile off the coast of Lebanon in the
Mediterranean, Tyre was considered militarily impregnable. It had massive
walls of stone that were two miles in circumference and over 150 feet high on
the city's shoreward side. The powerful Assyrians tried to conquer Tyre in
both 701 BC and again 30 years later in 671 BC. Their first siege lasted over
four years, their second nine years, and both ended in failure. Tyre stood
strong.
The empire that conquered Assyria, the Babylonians, tried to subdue Tyre
again in 585 BC, spending thirteen years and vast resources trying to crack
the sea fortress. The Babylonians under Nebuchadnezzar also failed to take
the city and eventually packed up their war materiel and moved on, leaving
the stubborn Tyrians. The proud residents of Tyre continued to consider
themselves unconquerable, as they had unrestricted access to the sea, fresh
water wells on the island, and an effective half-mile moat between them and
land-based armies of marauding kings.
A couple centuries later, Tyre still thrived and business was good on the
trade routes of the eastern Mediterranean. Meanwhile, north of modern Greece
in Macedonia, a boy named Alexander was born to King Philip of Macedon and
Princess Olympias of Epirus in 356 BC. Alexander had an amazing upbringing
including studying under the personal tutelage of the legendary thinker
Aristotle, meeting with foreign heads of state in his father's court, and
even commanding and leading a cavalry force into battle for his father's army
at 18 years old.
After his father King Philip was slain by an assassin's sword, Alexander
became king of Macedonia at 20 years old, and his life's story is among the
most captivating and exciting in world history.
Lusting after conquest and adventure like his hero Achilles of Homer's famous
Iliad, which he had memorized, young Alexander began his successful bid for
world domination at the tender age of 22. Alexander would later be known as
"The Great", and became one of the most extraordinary generals of all time
who forever changed world history. Eleven action-packed years later, sitting
in Babylon on the Euphrates River after having conquered everything from
Macedonia to India, Alexander the Great is said to have sat on his bed and
wept, as his heart was broken because there were no worlds left to conquer.
He became seriously ill with malaria shortly later and one of the greatest
generals in world history died at the age of 33, on June 13, 323 BC.
Of Alexander's entire brilliant military career, his devastating siege of
Tyre stands out as one of his greatest tactical achievements. More than any
other event in his early campaigns, it won him a formidable reputation among
his potential foes.
In early 332 BC Alexander's army approached Tyre and he asked the city elders
to allow him to sacrifice at their temple, an act that would have proclaimed
him ruler over their city. The proud Phoenicians laughed at his request and
butchered his messenger. After all, no army in history had ever been able to
mortally threaten their city and way of life, so why bow to this young
upstart Macedonian? No doubt fully aware of the prior unsuccessful
decade-long sieges of Tyre, Alexander set out to conquer the island fortress.
Alexander had his soldiers and combat engineers gather vast quantities of
stones from quarries in the Tyrian hills and throw them into the
Mediterranean Sea opposite from Tyre. Gradually the stones accumulated into
the beginnings of a causeway, a land bridge or "mole" between the Phoenician
coast and the island fortress. Alexander's plan was to build an artificial
peninsula out to the island and subdue the hostile city.
The Tyrians could see Alexander's siege works inexorably approaching and they
weren't happy. Through heavy naval bombardment, special operations types of
saboteur tactics, and barrages of lethal arrows from the high city walls, the
Tyrian forces did everything they could to harass the construction campaign
and stop the relentless advancement of the mole. Yet, young Alexander, at 24
years old, immediately developed effective countermeasures and neutralized
Tyrian opposition as it arose. The accounts of the skirmishes during the
building of the siege causeway to Tyre are extremely fascinating, and shed
further light on Alexander's legendary genius.
Amazingly, after seven short months, Alexander's men completed the mole,
breached the walls, and stormed the once impregnable city of Tyre. What the
mighty Assyrians and Babylonians failed to achieve in a decade, Alexander
accomplished in less than a year. On July 29, 332 BC, the Macedonian invaders
entered and destroyed the once proud and invincible Phoenician city.
Alexander ordered 2,000 Tyrians slaughtered after his victory, bringing the
total Phoenician death toll to 8,000. He took 30,000 more Tyrians prisoner
and sold them into slavery. Throughout his whole incredible siege, Alexander
lost only 400 men.
Alexander the Great's causeway still exists today and the island that was
once proud Tyre is now a peninsula in the Mediterranean off modern Lebanon.
Throughout all aspects of human history, great pivotal events like
Alexander's siege of Tyre have caught most people unaware. We all tend to
become seduced and hypnotized by the status quo. We inherently extrapolate
the present into the future, relying on linear assumptions in a non-linear
world. Because something looks stable today, we usually tend to naturally
assume that it will remain the same tomorrow.
This instinctive human tendency led the proud residents of Tyre to believe
that their city was absolutely secure and totally impregnable. After all, if
two great ancient empires could not conquer and subdue it through repeated
heavy sieges, what did they have to fear from some unknown Macedonian
general? Yet, this assumption that the past would extend into the future and
that they were invincible quite literally proved lethal for the Tyrians.
While the consequences of making false linear assumptions are not life or
death issues in the financial world as they were for Tyrians who brazenly
rode out the siege instead of fleeing in fast triremes, they are certainly
still perilous for scarce and finite investor capital.
Today in the United States and around the world, investors seem to have taken
on a Tyrian mentality regarding the mighty US dollar.
The dollar is so incredibly strong, and has been for years, even through the
NASDAQ crash and subsequent early deflation of the huge speculative equity
bubble, that it is hard to imagine the situation changing. Americans, and
even many international investors, have become incredibly complacent. As the
dollar has weathered so many spectacular storms in recent years, from the
endless parade of serious structural economic problems in the United States
to near-meltdowns like the Long-Term Capital Management fiasco of 1998, many
assume the dollar will stay strong indefinitely. "Tyre is invincible!", they
shout, "Long live the impregnable US dollar!"
The most important currency in the world today, the dollar, is the world's
reserve currency! The strength of the dollar is absolutely mind-boggling as
the world's premier currency.
Ominously, the growth trajectory of the US dollar very closely approximates
the early ascending stage of a parabolic growth curve. Trends like this is
typically seen exclusively in market bubbles, as parabolic growth is
inherently unsustainable. The potential ramifications of a major dollar
bubble are vastly more serious than any equity bubble.
Why did the dollar launch on this stratospheric trajectory? Why will the
dollar have to fall? And when will the dollar capitulate and head south?
The first factor, foreign capital inflows, is the most significant single
cause for the dollar's amazing rally. The second factor, a stealthy concerted
Western effort to cap the price of gold, while much more difficult to
discern, built on the success of the early foreign capital inflows to attach
a rocket booster to the already strengthening dollar.
Warping back to the middle 1990s, there was an enormous disconnect that
became manifest in the very fabric of the American financial markets.
Virtually any important US market one can study, including the US dollar, the
Dow Jones Industrial Average, the S&P 500, the NASDAQ, the broad US M3 money
supply, etc, seemed to all of a sudden decisively break from old trend
channels and launch north around 1995. Looking at all these graphs at the
same time, it becomes very evident that the US financial markets, dollar, and
money supply suddenly broke free from long-term trends and leapt all at the
same time.
What happened in 1995? A significant part of the reason for the odd
disconnect in the dollar and US equity markets in the mid-1990s centers
around the strong dollar policy of the Clinton Administration.
The mid-1990s were right before the time Alan Greenspan made his famous
"irrational exuberance" comment to the US Congress in 1996. The DJIA had just
broken through 4,000 in February 1995, and many traditional value-oriented
investors looking at cash flows and earnings were in awe of the stock
market's gravity-defying progress. By fundamental measures, the Dow was
approaching valuation extremes similar to the late 1960s or even the 1920s,
and prudent thinking investors were very concerned.
Meanwhile, various currency crises were erupting around the world in assorted
"emerging markets". Every year or two like clockwork, some far off country
would seem to implode as economic problems caused a run on its currency and
elite hot money capital deserted it at the speed of light. The 1990s was a
decade of continuing financial crises echoing around the globe, putting
substantial stress on the world financial system.
In early 1995, Bill Clinton recruited Robert Rubin from Goldman Sachs to
become his new Treasury Secretary. Rubin was well known and respected on Wall
Street, and he had a passion for the financial markets and a legendary
crusader-like zeal to keep the US dollar strong. Rubin knew the strong dollar
was necessary to entice fresh foreign capital into the US financial markets.
First, foreign capital inflows bolster US equity market prices, initiating a
virtuous circle that entices still more money into the market. The more
foreign capital floods into stocks and bids up prices, the more additional
capital is attracted to the same markets. Also, as long as foreign capital
was rapidly flowing into the States, the chances of the US being seriously
damaged by the swarms of regional financial crises of the mid-1990s remained
very low. Wall Street, of course, thrives and makes boatloads of profits as
the markets rise. |
