Adam Hamilton. Gold Bull for 2002
(Excerp from his 12/28 commentary)
<Gold, the King of Assets and the ultimate inflation barometer, continued to be
aggressively and actively capped by official central bank selling. In 2001 reams of
additional official evidence were discovered worldwide that strongly incriminate
the US Federal Reserve and the US Treasury in both actively managing global
central bank gold selling and possibly even illegally liquidating official US gold
reserve holdings to cap gold rallies. The fearless freedom fighters at GATA now
have discovered literally ten times the amount of evidence that was available in
2000 supporting this frightening hypothesis. Nevertheless, gold was kept
mysteriously locked in a tight trading-band almost all year and finished up only a
couple percent, another giant victory for the Fed. The moment the gold price
bursts free from its shackles and rises significantly, savvy investors worldwide will
realize something is very wrong with the dollar and the consequences could be
immense.
Trouble is brewing in the gold world, however, and the Fed will have a much
tougher time influencing the gold price in 2002. Profits in the Gold Carry Trade,
which is essentially the spread from borrowing gold at very low interest rates from
central banks, selling the gold in the open market, and then investing those
proceeds in short-term US Treasury debt, have been destroyed by the collapsing
short-term interest rates. Gold carry profits have plummeted by 80% during the
Greenspan Gambit, a catastrophic rout. This is very important for many reasons,
not the least of which is central banks can only find willing borrowers for their gold
when gold lease rates are low and market interest rates are high. This is not the
case anymore. The paltry current sub-1% gold carry profits are not worth the
enormous risk of a supply/demand based gold price explosion.
The gold carry trade is dying before our eyes. Soon central banks will lose the
crucial conduit of gold leasing for dumping the metal onto the world markets and
they will have to resort to outright selling, which is much harder to hide, or quit
dumping gold entirely, which means the gold price will soar. At that point, it is
“check-mate” for the anti-gold forces!
After interest rates, money supply growth, official inflation measures, and crucial
commodities are considered, the Round Two Rate Cut Scorecard puts
Greenspan and the Fed at five and the Free Markets at seven.
Alas, however, unfortunately most of the critical variables we have discussed thus
far are considered little more than obscure economic arcania by most investors
today. For most folks, the Fed rubber meets the real-world road in the enormously
important US stock markets.
On January 3 as the first surprise rate cut was celebrated, EVERYONE on Wall
Street and the vast majority of the investing world assumed that the US equity
markets would finish this year at least 10% to 20% higher since the Fed was
throwing the whining equity speculators such a big bone in rate cuts. Today,
however, almost 12 months after the opening move of the Greenspan Gambit, in
terms of stock prices the rate-cutting spree has been a dismal and catastrophic
failure.
The elite Dow 30 is off 6.5% on the year, the huge S&P 500 has bled 12.9%, and
the hyper-speculative NASDAQ casino has hemorrhaged another excruciating
20.6% of its value! It is literally impossible to overstate what a devastating
psychological blow this is for the perma-bulls!
The whole US financial system and economy are based on pure confidence.
Watching the equity markets plunge for the second year in a row even in the midst
of the most extreme and aggressive Fed easing in history is tremendously
disconcerting and damaging for American investors.
With a system based on little more than faith, there is probably nothing in the world
that could have shaken that very faith more in 2001 than finding out that the Fed
was and is totally impotent in the face of a post-bubble bust. Just as in the US in
the 1930s and Japan in the 1990s, the same easy money and market
manipulation that causes bubbles to swell in the first place is not what will fix them
or allow them to work their way out of the system. Ever more excess credit is NOT
the cure for burst credit bubbles!
Beginning in 2001, and accelerating in subsequent years, the power of the Fed as
a force for inspiring confidence in the faith-based financial system has eroded
and will erode substantially. It is hard to even imagine the catastrophic damage
that Greenspan has wrought by blowing virtually all the Fed’s ammo in a single
year but with little or no tangible success evident in the US equity markets. These
three stock market losses for Greenspan are absolutely ruinous!
Last but not least, and maybe most importantly of all, with Greenspan and the
Market Manipulators way behind the Free Markets by five to ten in the Round Two
Rate Cut Scorecard, the US dollar must be considered.
In classical economic theory, the value of a currency on the world markets is
primarily determined by two things, the interest rate the sovereign
government-debt denominated in that currency pays to foreign investors and the
expectations of future inflation that will erode the wealth of foreign investors. The
whole colossal mess in Argentina right now will make a classic case study for
decades to come about what happens when foreign confidence in a currency and
government’s financial dealings is lost through gross mismanagement.
In 2001, the US dollar had a huge year, roaring up 7.9%. In the face of
plummeting interest rates, unprecedented money supply growth, and negative real
returns for bond investors, this gain flies in the face of all economic and financial
theory. The reasons for the dollar’s current unnatural strength are complex and
legion, and are best left for a future essay dedicated to that subject alone. But,
with a strange fortuitous convergence of rare events including the world recession,
the horrible mismanagement of the Japanese bust (ominously, the Japanese
authorities tried exactly what Greenspan is now trying in the US but failed!), the
birth of the Euro, the capping of the gold price, and the willingness of the US
consumer to plunge further into debt to buy foreign-made goods, the dollar
remains strong even as economic theory says it should be plummeting to earth.
This is an immense victory for Greenspan and the Fed in 2001!
But, like all unnatural market events (witness the collapse of the great NASDAQ
bubble of 2000), the dollar’s unexplainable strength will too soon meet its end. All
kinds of elite global financial organizations are declaring that a 20% to 30% fall in
the US dollar’s price on the world markets is long overdue and imminent. While
Greenspan dodged the dollar bullet in 2001, we don’t think he will be so lucky in
2002. All economic actions have consequences, and the Fed slaughtering the
return on short-term US dollar-denominated Treasury investments as well as
potential enormous inflation looming bode very ill for the fortunes of the dollar in
the coming year.
Net net, as the dust begins to clear near the one-year anniversary of the opening
salvo of the Greenspan Gambit, the Free Market forces are thrashing the Market
Manipulators at the Fed by ten to six. Indefinitely manipulating markets has
always been a losing game in history, and it continues to be an impossible task
today.
Watching the Greenspan Gambit chickens come home to roost in 2002 should be
both fascinating and frightening.>
zealllc.com |
