(GATA) Gold market vulnerable to speculative attack, causing the sky to fall.
Subj: Financial Times - The long view - The battle over bullion
Conspiracy theorists have a field day as gold edges higher,
again writes Barry Riley
Date: 2/12/00 3:07:43 PM EST
From: LePatron@LeMetropoleCafe.com
Le Metropole members,
Finnancial Times - London - February 12
The long view - The battle over bullion
Conspiracy theorists have a field day as gold edges higher again,
writes Barry Riley.
All the attempts over the years to downgrade gold to the status of a routine
commodity such as, say, zinc or aluminium have failed. This week, the gold
price has again looked quite frisky at above $300 an ounce. The sector was
also enlivened by Barrick's refusal to abandon its hedging programme and
by the sad plight of Ashanti Goldfields, which is teetering on the edge
of collapse after losing a court action in Ghana.
Gold naturally attracts controversy. There is a kind of religious zeal
about the gold bugs; they see the yellow metal as nature's own store
of value which is far superior to the corrupt paper money churned out
on high-speed printing presses controlled by the politicians.
The weakness of the gold price, which tumbled from $400 in 1996 to $250
last summer, has encouraged elaborate conspiracy theories. Now, though,
the gold bugs are getting excited. The bullion price, they claim, could
be on the edge of a break-out; many years of oppression by the central banks
and their collaborators might be about to end.
Gold, say the conspiracy theorists, could be about to reclaim its leading
position among precious metals. There is, after all, plenty of action in
platinum and palladium, which have both risen in price by about two-thirds
since last summer.
Should we care about gold? It has moved from the core of the global monetary
system to the fringe. All the same, leading central banks continue to hoard
20,000 tonnes of it in their vaults, worth around $200bn.
You might think that they would welcome a higher price as a reward for their
investment. But that is the same as saying they would welcome a lower price
for their own currencies. That might undermine public confidence when times
are tricky. They are forced to grapple with an awful contradiction.
The gold bugs of GATA (it stands for Gold Anti-Trust Action) have an
entertaining web site gata.org where the conspiracy theory
is debated endlessly. GATA blames the US government: it has more or less
accepted the Federal Reserve's pleas of innocence but thinks the Treasury
has been operating heavily through the Exchange Stabilisation Fund,
aided by big bullion traders such as Goldman Sachs.
Top mining companies have tagged along for several years by selling large
quantities of gold forward. The price went down and down. Last summer,
the affair began to turn into a re-run of the old post-second world war
battle over gold between the US and the UK on the one hand, and the
continental Europeans on the other.
In May, the UK Treasury announced - unexpectedly - a high profile bullion
sale programme of 435 tonnes (in approximately 25-tonne instalments) that
looked more calculated to drive the price down further than to realise
good value for the British taxpayer, especially as the proceeds were to be
largely switched into shrinking euro. By late September, the continentals
retaliated and announced curbs on bullion sales. The price spiked up,
to the great embarrassment of many of the gold producers.
When mining companies behave more like hedge funds than metal producers,
they actually can be bankrupted by a rising price. But, allegedly,
the US Treasury then intervened on a bigger scale to limit the damage.
The bullion price hovered around $280 an ounce for several months but
recently has pushed higher again.
The reasons, as always, are obscure. But some of the mines are changing
or abandoning their hedging strategies and one or two might even collapse,
while bullion banks are running some very dangerous positions.
The market could be vulnerable to a speculative attack.
Certainly, some strange things have been going on in the gold market.
What GATA does not really explain, however, is why the US Treasury
would go to such lengths to distort the bullion price. A strong gold price
might be an embarrassment; but, in this world of rampant technological change
and overwhelming American economic power, would it matter very much?
True, gold inspires a kind of religious faith. It provides an alternative
to fiat money and, at times of instability, it might prove a disruptive
force. That is what happened in the 1970s. But surely the US Treasury
is not that scared about the dollar - though it is true that, as the
annual current account deficit moves from $300bn towards $400bn,
the potential risks of a loss of confidence are becoming more daunting.
Gold is also an alternative to conventional financial assets such as bonds
and stocks. Historically, the bullion price has wilted when the stock market
has been strong. Then, when the stock market has crashed, gold has prospered,
as in the early 1930s and late 1970s.
Time has passed, however. A few people might be frightened out of stocks
by a strong gold price which, they think, signals a coming crash, but
not many. The howls of outrage from the gold bugs are not very convincing.
Most governments believe it is their right (and duty) to intervene secretly
in foreign exchange markets, and gold is just a kind of foreign currency.
Speculators in currency have to learn to outwit the central bankers,
and they cannot expect much sympathy when they keep crying "Foul!"
The gold manipulation might well have started as a minor smoothing operation
that got out of control. For central banks to lend out their gold reserves
has seemed a promising way to earn modest revenues from an otherwise
unrewarding asset. But the speculative institutions that borrowed it
realised that, if they could drive down the bullion price,
they could make useful profits from short sales.
The miners, meanwhile, decided they could protect their profits by selling
forward for future delivery at roughly today's price - although now they
are starting to realise that a long-term downtrend in the price cannot
possibly be in their interests, quite apart from the dangers of an
incompetently-run hedge book vulnerable to enormous margin calls if
the gold price takes an unscheduled upturn.
That the US Treasury apparently has helped to mess up the gold market
is perhaps not very surprising when it has plunged even its own domestic
bond market into near-chaos. Last week, Larry Summers, the Treasury Secretary,
effectively lowered long-term bond yields at the same time that the Fed was
raising short-term rates. He did this by announcing he would focus buy-back
activities on the 30-year bond.
This week, he tried to repair the damage by saying that intervention in bonds
would be all along the yield curve rather than just at the long-dated end.
But bond experts were not amused.
Thursday's Treasury bond auction was a disaster.
Fixed-interest bonds and gold bullion represent two very different asset
classes. One depends on faith in the long-term probity of politicians,
the second offers a crude defence against their wars, taxes and inflations.
Both markets have become huge speculative casinos, and neither seems to be
under very good control.
[End.]
All the best, Bill Murphy
Chairman, Gold Anti Trust Action (GATA) gata.org
Le Patron, Le Metropole Cafe lemetropolecafe.com
The above mention of GATA is as follows.
Bill Murphy, Chairman, Gold Anti Trust Action (GATA) gata.org
Also, GATA related articles can be obtained at the pay for view site.
Bill Murphy, Le Patron, Le Metropole Cafe lemetropolecafe.com |
