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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: Bill F. who wrote (62344)	6/16/1999 8:02:00 AM
From: ForYourEyesOnly	Respond to of 132070

The Great Gold Sale Governments throughout the world are doing their utmost to devalue their currencies, both relative to the US Dollar and to the real things that money can buy. During the past few months both the British and Swedish Central Banks suffered momentary bouts of candor and expressed their desire to increase inflation. The British also announced the sale of 60% of their gold reserves, possibly to ensure that the Pound keeps pace with the falling Euro. Perhaps for the same reason the Swiss have removed the official link between the Franc and gold. Meanwhile, the European Central Bank has been conspicuously ambivalent regarding the fall in the Euro's exchange value. Strangely enough, gold continues to lead these currencies in a race towards zero. Commodity prices appear to have bottomed and are tentatively trying to form an up-trend. Oil, the most important of all commodities, has rallied strongly from its late 1998 lows. Silver prices have been trending upwards since 1993, platinum has been trading sideways for the past 6 years, and palladium has been acting like an internet stock for the past 2 years. The CPI has finally begun to reflect the rampant inflation in the US economy (at least based on the April figure) and bond prices have been falling relentlessly since October 1998. The demand for gold coins has been very strong during the past 12 months and the shares of most of the major gold producers are trading significantly above their 1998 lows. Despite all these supposed positives for gold, the fall in the bullion price has actually accelerated. Either all the other indicators are painting a false picture or gold is subject to some temporary aberration ("aberration" is defined in the dictionary as "departure from a normal course" or "deviation from truth or moral rectitude"). An "aberration" is what many gold investors think we have, courtesy of central bank (CB) manipulation. It is certainly widely known that central banks regularly intervene in the currency markets to, in their own words, reduce volatility and increase stability. If this is truly their goal then their total lack of success can easily be seen by viewing a chart showing the US Dollar/Yen exchange rate over the past few years. The fact that they readily intervene in supposedly free currency markets in the name of a 'good cause' suggests that they would perceive no ethical barriers to doing the same in the gold market. After all if anyone appreciates the monetary role of gold, central bankers do. However, is gold really that important in today's 'e-commerce world' that CBs need to devote so much of their time, energy and reserves to maintain its price at bargain basement levels? Some have theorised that governments want a low gold price as a validation of their sound economic management. A rising gold price has historically occurred in parallel with declining confidence in government, so preventing a gold rally can be likened to 'killing the messenger'. However, this argument is flawed. The gold price is low because confidence in government is high, not the other way around. A record low gold price has resulted from a record high level of confidence in central banks in general and Alan Greenspan in particular. For example, between 1975 and 1980, when confidence in government regularly hit new lows, gold enjoyed a phenomenal bull market despite the public auctioning of 1,308 tonnes of gold by the US and the IMF. During this period central banks were powerless to stop the advance in the price of gold because private investors had decided to buy gold en masse. In more recent times, near the peak of a raging bull market in central banking, the threat of auctioning 415 tonnes over several years causes the gold price to plummet. If investment demand for gold was to increase substantially, then the central banks of today would have even less success in limiting a gold bull market than did their 1970s counterparts. This is because the CBs now hold less gold than they ever have, but the amount of fiat currency in the world is far greater than it has ever been. In other words, there is a lot more paper available to chase a very limited supply of gold. The supply is actually even more limited than it may appear at first glance since approximately 10,000 tonnes of future gold production will be needed just to cover the current short position. It is interesting to note that investment demand for gold during the first quarter of 1999 was strong, with US purchases of gold hitting an all time record for any first quarter. If the demand for physical gold continues to increase then substantially higher prices must result in order to bring supply and demand into balance. So, if 'killing the messenger' is not the reason for central bank manipulation of the gold price, what is? One possible answer is that the elimination of gold reserves is simply another string to the depreciation bow. If currency depreciation were the goal then a reduction in the value of all remaining reserves would not be seen as a problem, perhaps shedding some light on the UK's seemingly self-destructive announcement. Another possible answer is that the enormous volume of gold loans and the inter-relationship of these loans with trillions of dollars of derivatives mean that even a modest rise in the gold price would pose a risk to the entire financial system. Let's hope that the first answer is closer to the mark. The main stream press argues that gold is a poor investment because it is being officially de-monetised. As is often the case, they completely miss the point. Gold is a good investment BECAUSE it is being officially de-monetised, and the more it is officially de-monetised the better an investment it will be. If currencies were fully backed by and convertible into gold, then gold investment would provide no real benefit. In this situation the currencies would be, by definition, as good as gold. However, the more gold is de-monetised the more valuable it will eventually become in terms of the currencies to which it no longer provides any value. Milhouse Hong Kong 16 June 1999 The reader is invited to respond to Milhouse's wisdom via email: sas888@netvigator.com -------------------------------------------------------------------------------- Also by Milhouse -------------------------------------------------------------------------------- Back to Gold Digest Copyright c 1997 - 1999 vronsky and westerman