20 REASONS WHY GOLD WILL RISE
Jim Willie, May 13, 2002
1. real rate of interest has been near zero since Oct2001
- real rate of interest defined to be 3-month TBill yield minus CPI rate
- bond disincentive, no real return on investment
- credit market is 5x larger than stock market
- strong historical precedent for rise in gold
2. trade debt is approaching 5% of US GDP
- symptom of overvalued dollar, lost export competition
- strong historical precedent for decline in US dollar
3. money supply increased 30% since Jan 2001, 85% rise since 1991
- monetary inflation plants seeds of eventual price inflation
4. rising world tension, desire for safer safe haven, Islamic countermeasures
- threats of terrorism (conventional, biological, chemical, nuclear)
- Middle East escalation, probably retaliation to US attacks on Al Qaeda
- potential financial warfare directed at US dollar
- redirected flow of petrodollars to Europe, new Arab minting of new coins
5. unwinding miner hedges, end of gold leasing, reducing supply
- 1000 ton annual supply/demand shortfall
- eventual central bank discontinued selling
- lost control by Gold Cartel (central banks, bullion banks, hedged miners)
- end of gold leasing program, with inelastic demand, inelastic supply
- unwinding of largest naked short position in history (3 years supply)
- end of trashing of South African Rand (world’s leading gold supplier)
6. dismantled mining supply apparatus, from systemic price below production
- approximately 2 years to turn the switch and produce gold in a shutdown mine
- decade of neglect, lowest CPI-adjusted prices for commodities since 1929
7. no more Japanese savings guarantees, private investor showing new awareness
- Japanese private citizen savings total $12 trillion, prolific savers
- reports pose that Japanese could eventually own 70% of world gold
- worldwide trend of private investors now also in USA, Germany, Arab world
8. new federal deficits from inefficient wartime and security spending
- increased supply of bonds leads to reluctance to hold additional amounts
- increased supply of bonds adds to the already exacerbated money supply increase
- corporate debt collapse leads to pressure on federal and household debts
9. trade tariff resumption discourages global trading village concept
- tension leads to reduced trade, cutbacks in dollar exchange, distrust in USA
- protection trends worsen economic slowdowns worldwide
- walking down the same protectionist path as 1930
10. accelerating worldwide currency turbulence
- Japan, South Africa, Argentina, Brazil, Mexico, Taiwan, PacRim, Turkey
- unbacked currencies acting as hot money, creating frequent airpockets
11. world perception of American institutionalized dishonesty
- scandals, accounting fraud, broker conflict of interest, exaggerated earnings
- consequent resentment of American hegemony, lost trust
12. end old economic cycle of prosperity, begin new cycle to correct excess
- famous Russian economist identified 60-70 year cycles of boom and bust
- Kondratieff summer in 1999, followed by Kondratieff winter in early 2000’s
- evidence is stock market broken bubbles, massive debt collapse, world recession
- recession is atypical: excess goods & capacity, debt collapse, price deflation
13. extreme rise in foreign holdings of US assets
- 45% of US TBonds, 25% of US Corp Bonds, 12% of US Stocks
- lost control of our own economy (interest rate, value of dollar)
- diversification away from American financial instruments
- faulty US TBond deposit base supporting entire foreign economies
14. correction of US dollar usage as both store of value, banking reserve asset
- the dollar is backed by debt, thus represents a denominated debt instrument
- dollar collateral (gold) is in process of depletion, perhaps 50% depleted
- foreign banks use the dollar as basis for fractional banking reserves
- full circle coming toward currency backed by hard asset of gold
15. rising costs from entire energy complex
- political, legal, environmental obstacles to increased supply
- public utilities and regulated industries are horribly mismanaged
- gold is highly correlated with crude oil
16. European currencies offer more attractive alternative
- low US TBond yield is undermining the US dollar
- Euro has better competitive position (trade surplus, 15x gold backing)
- Euro also benefiting from diversification by other nations (e.g. China, Arabs)
17. divergence of deflationary credit-based economy, inflationary cash-based economy
- debt collapse has led to widespread deflationary economic conditions
- public mismanaged energy industry has shortages, poor infrastructure, rising prices
- monetary expansion keeps the yield curve steep, forecasting future price inflation
- refusal of long bond yield to come down despite current deflation
18. Bank for International Settlements has targeted the US dollar for a corrective decline
- Swiss desire to install Euro as new gold-backed currency
- reversal of yen carry trade, reversal of gold carry trade
- previous target was the Soviet Union
19. Sept 11th marks the turning point for US Dollar
- 1989 presaged a rise in the dollar to stretched highs with fall of Berlin Wall
- 2001 presaged a correction after blowoff top following World Trade Center attack
20. high gold price leads to higher demand, lower supply
- demand drops during price declines, becomes nonexistent at lowest prices
- as price rises, a worldwide fever develops and gains momentum, lifting demand
- supply was enormous at gold’s lowest prices with Central Bank and miner selling
- as price rises, hedge sale cashflow declines, money goes to cover forward contracts
- ironically, gold mining firms then become buyers on the world markets !!! |
