10:35p EDT Saturday, October 23, 1999
Dear Friend of GATA and Gold:
Here's another vital post from Friend of Another at the
forum section of www.USAGold.com. Its analysis is as
broad as can be, including an explanation of Kuwait's
announcement of gold lending. Of course I'm glad that
FOA mentions GATA here, but we're the least of it.
Read this carefully. I have a feeling that FOA gets as
close as anyone gets to what is going on behind the
scenes around the world.
Please post this as seems useful.
CHRIS POWELL, Secretary
Gold Anti-Trust Action Committee Inc.
* * *
Post by Friend of Another
at www.USAGold.com
Saturday, October 23, 1999
I also read the article in Barron's offering Mr.
Gartman's views. Thanks to poster "No. 6" for
placing some of it here (also welcome to you, Sir). It
is indeed a benefit for all of us to find the gold
story becoming more mainstream.
Slowly the effects of the European central banks' deal
are sinking in. Still, I think most established
analysts are going to be very surprised at how this
plays out.
As gold begins its rise, the numbers will verify to
many traders that another bull market is intact. Each
in his own way will attempt to gain from the price run.
That is, until the price starts to run out of sight!
You see, the gold market began to change back in the
late 1980s and early '90s, and that evolution has
shaken everyone that followed it.
Too date anyone who has invested in gold using the
traditional vehicles has been dead wrong. If I had to
guess, it would not surprise me to find that 95 percent
of these players have lost their shirts on a "net basis
over 10 years." Even the shorts lost money, as none of
them forsaw gold ever falling so far, some often
switching sides to catch the turnaround that never
came.
Truly, investing in gold "as an industry" or "as a long
leverage play" was not the game to be in recently, nor
will it be for the future. For gold has entered a new
era that will find it being held as "private money" in
the form of "real wealth." This is something our
"extended generation family" has never seen or
understood. More on this in a minute.
Onward....
A very large group of world investors has been buying
physical gold for many years. These people have been
dead right in their reasons to buy gold. Another has
said that "events will prove the wisdom of their ways."
I agree with this even more so as real actions slowly
prove their assessment.
On the other hand a very broad spectrum of gold bulls
can be seen on the side of the GATA group. They
believed in gold as an inflation hedge and a good
supply/demand investment situation. I'm sure most of
them own bullion to some extent, but am guessing that
most of their working money has been involved on the
industry side (gold shares). Truly this segment of the
community has found their investments on the wrong side
of a political currency transition that was destined to
change the gold markets for the rest of our lives.
Most everyone who analyzed gold from a "dollar
devaluation" standpoint was sure that gold (and the
producing industry they brought into) would soar from
such an event. Few could accept that for the dollar to
fall from world reserve status would also require the
destruction of the "dollar paper gold market." Nor
could they imagine how the years preceding this would
see the world flooded with "dollar paper gold
contracts." Yet, as this progressed over many years we
saw how the political manipulation that GATA rightly
exposes was being used in a way that will eventually
destroy the confidence in the dollar. For truly, in
today's world, if one loses the ability to contract for
gold in U.S. currency, then the reasons for holding
dollars at all begins to fade.
>From a country that runs a never-ending trade deficit,
foreign dollars and the interest they earn become a
purposeless hold. If dollars can never flow on a "net"
basis INTO the United States in a trade SURPLUS, the
result must be a bubble of dollars with no home or
value.
Political currency war as seen in simple sequence:
Build a bubble within the dollar gold market by selling
paper gold far and wide. By selling paper derivatives
of gold we free up official and private physical stocks
of bullion to quench the coin, bar, and fabrication
deficit. Because the world gold market is priced in
modern terms by "derivative contract," flood the paper
market and drive the price lower. In a never-ending
circle, the market expands in ownership as the price
falls.
"Coat-tail" this process on the IMF/dollar need to
lower gold to support its currency with a perception of
low inflation, and the political will to proceed is
reinforced.
For those major bullion buyers of the world (oil) who
would object to this, build a new currency upon the
standard of a future "Free World" gold price that can
become a trade settlement reserve item.
Once the timeline of the dollar is near the end of its
mathematical ability to expand world trade, destroy
this new fractional reserve gold market by adopting
self-liquidating rules into the official sector lending
game. With this turn, oil and gold prices begin a
dollar rise from which there is no return.
Eventually, the world gold markets, as built-in dollar
reserve contract terms, can no longer function. As
events slowly sink in, all foreign-held dollars (mostly
held in U.S. treasury form) are liquidated from dollar
terms by buying physical gold and Euros. For without
contract gold, in functioning form, physical gold must
eventually be bid at any price.
In real-time production, we see this beginning in the
U.S. Fed's buying U.S. treasuries almost every day in
an attempt to stop the rise in rates -- a rise that
comes without inflation. This is truly a rise that
comes from reserve currency competition.
Onward:
Today gold investors face a dilemma in concept. None of
them have ever seen a gold market that finds its total
demand coming from buying physical gold as a "wealth
money" asset -- buying that arrives in official as well
as private sources. In the limited experience of the
gold bugs with "free-market gold" dating from 1975,
physical gold buying was never the full driver of
price. The price always rose from, at best, a 50/50 mix
of paper leverage buying and physical buying.
Nor can they envision gold rising so much, so fast,
even before dollar price inflation takes hold. Our
"real life" education about gold prices ($100 to $800)
was explained entirely as "dollar price inflation"
dynamics. Never was it approached as gold becoming a
parallel private reserve asset, just like stocks,
bonds, and currencies.
Add to this the real prospects of the gold price-making
markets falling into complete turmoil and dysfunction.
Every Western investor knows how to convert and spend
his stock and bond portfolio. Yet the concept of
actually selling some personal gold to a private
dealer, without an official quoted market, is seen as
an "end-time event."
Thoughts....
During the next five years physical gold is going to
outlast and outperform not only the current world
derivative gold market but also outlive a large portion
of stockholder equity in most gold mines. During the
death throes of the gold marketplace, the dollar price
could be all over the map. Simply put, most short-term
traders and investors in long-term paper gold (gold
stocks included) will be eaten alive as we witness a
transition unlike anything ever seen.
How can one be ready for this? Some people are 80
percent gold bullion, 20 percent in the few largest
unhedged mines (there are only three or four) and hold
plenty of cash that is expected to devalue greatly.
Their mindset is ready for gold to be priced somewhere
between 0 and infinity. In other words, in their eyes
gold will outlive it all.
Some writers do a wonderful job of proposing that gold
is dead and holds little more use than a tradable
commodity. The most eloquent poster, Mr. Yellin of
Troy, has produced many fine articles that expound the
current feelings of Western life as expressed in its
need and view of gold. Still, all these concepts were
built using the American experience of the last hundred
years or so. I submit that this has been little more
than an experiment in progress that only now comes to
completion. In the end, the laws of nature always
control our destiny and the outcome is distilled into
this common reality:
"The only real earthly wealth is one we touched in
person, as all honor is fleeting."
Further:
Is this how it works?
When a major Middle East oil producer lends its last 79
tonnes of gold into the marketplace, one should know
that he will get that gold back. After all, these
people are not like you or me or the average globe-
trotting hedge fund. They are the oil producers for the
next hundred years.
As I offered before, that gold was loaned for a HUGE
concession that will never be made public. For the
marketplace to approach THEM is indicative of the
massive strains in the lending arena -- for these
people will not lend cheap.
Understand the dynamics that are now in effect.
Somewhere gold lenders and gold contract derivative
holders are exercising the very limits of their fine
print to get their gold back in allocated form. Since
the brokers between these deals have lost the ability
to control their counterparties, their firms must use
their own capital to buy physical gold and thereby blow
up the price, or else "borrow" it to cover their old
lenders. It's no contest and is done outside the retail
lending market so as to not gun the rental rates.
In the past the news of 79 tonnes being lent into the
market was an announcement of fresh supply to lower the
gold price. But today these announcements are for the
purpose of replacing defaulted loans.
It's important to understand that on an ongoing basis,
these new loans do change everything, as the broker now
must eventually cover this new loan from its own book.
The fear is that gold lenders that cannot regain their
bullion will start buying on the physical marketplace
as they call their lawyers to discuss just
compensation. This is the only kind of fear that will
compel some expensive deal making with people who
usually don't lend.
Also:
Every central bank in the world is looking at its
reserve dollar holdings and watching this latest gold
spike. I can tell you that they are analyzing this new
risk because the potential exists to cut them out of
the gold market at what was perceived to be low prices.
As the Euro gains use, dollar reserves will become a
huge dead liability, especially if the Bank for
International Settlements is stopping inter-bank gold
sales.
For China the risk is clear. I expect China to become
more active in buying defaulted gold commitments that
can function except for the lost margin, even if the
price paid is much higher than market.
The recent deal making by a large Arabian investor will
lead the way.
In some ways this action is a precursor of a two-tiered
market for gold, with future-delivered "higher-priced
street gold" taking the form of defaulted new mine
production. We shall see.
Thanks for reading and discussing.
FOA
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