I'm sure you have seen this:
RBC Global Investment Management Inc., a
division of Royal Bank of Canada, whose gold
mutual fund is among the best performing in
the world, has issued a report to private clients
that fully endorses GATA's analysis of the
gold market and the world economy.
Don't worry -- GATA hasn't gone establishment.
To the contrary, the establishment in the gold
world is coming around to our central premise:
that central banks and particularly the U.S.
Treasury Department have been colluding
surreptitiously and desperately to suppress the
gold price and manipulate the gold market.
The RBC Global Investment Management report
seems to have been written by someone who has
been following GATA's work closely, taking notes,
and checking out our assertions. It's more evidence
that, because of your support, we're making a big
difference for the gold cause.
The report was sent to GATA this week by an
intermediary and is appended here.
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
RBC GLOBAL INVESTMENT MANAGEMENT INC.
Report on Gold
Clearly, with gold stocks on a tear as the gold
price moves laboriously forward battling the
fervent attempts to suppress it, one must be
comfortable with the notion that the gold price
is going to overcome the forces that are aligned
against it. What is happening today is no different
than what was happening in the late '60s and the
very early '70s, when the Gold Pool was in
existence and the gold price was contained at
$35 per oz. by a consortium of central banks
that dumped a considerable amount of gold to
keep prices down. Today, instead of the overt
action of yesteryear, it is covert because the
market is allegedly free, and it has entailed a
different mechanism, which has resulted in a
humongous physical short position. In addition,
there has been an enormous amount of
derivatives piled on top, which could make the
ultimate upside explosion all the more spectacular.
So the question obviously is: "Will the gold rally
ever begin?" The following arguments emphatically
suggest that it will more than rally; it will explode to
the upside.
1.Unsustainable Supply/Demand Imbalance
Mine production has flattened out at 2,600 tonnes and
is beginning to fall due to a lack of exploration, falling
grade at many mines due to previous high-grading,
and the closing of older mines as they run out of ore.
It has been estimated by Beacon & Associates in an
exhaustive study that if gold prices were to remain
under $300/oz., production will fall in the neighborhood
of 25% over the next 5 to 7 years. Scrap supply tends
to average about 600 tonnes annually. Demand is
currently estimated to be roughly 4800 tons (primarily
jewelry) without any investment demand from the
Western world. The present deficit has been met by
direct central bank sales (roughly 400 tonnes per
year) and central bank leasing for mining hedges
and financial speculation.
2) Unsustainable Short Position
Central banks have ostensibly lent increasing
amounts of gold to earn interest on their reserves.
However, when one lends at an rate (less than 1%
generally), the question arises as to whether there
may be another motivation. As a rising gold price
stands as a direct repudiation of their alleged
responsible monetary policy, perhaps this is the
real reason they have been so aggressive in this
area. Bullion banks have borrowed gold from the
central banks for their own accounts and those of
various speculators, such as hedge funds and
financial institutions (the carry trade) and for
producers (mine hedging) and have used
derivatives to limit their risks and generate
additional income. The loaned gold has been
sold into the physical market and is now in jewelry,
primarily in the Middle East, India, and other parts
of the Far East. The size of the short position,
officially acknowledged to be more than 5,000
tonness by the bullion bank apologists, is thought
to be well over 10,000 tonnes and may exceed
15,000 tonnes. To put this in context, this constitutes
between one-third and one-half of all central bank
gold, and the vast majority of it is no longer
accessible.
3) Unsustainable Low Inflation
The gold price has a tendency to rise at the first
whiff of accelerating inflation. CPI inflation has been
unrealistically low due to the very strong dollar, which
has underwritten vicious foreign competition and
removed pricing power in many sectors. However,
in the final analysis, inflation is a monetary phenomenon
and the aggressive interest rate cuts and monetary
expansion to avoid recession/deflation is expected to
result in re-inflation. Year-to-date, the liquidity injection is more than $1 trillion and MZM has grown by 16.5% in the past year. To avoid debt default, the Fed must
err on the side of ease, virtually ensuring upside
pressure on the CPI. In addition, the "war on terror"
superimposed on Bush's mammoth tax cuts and a
four-year government real rate of spending increases
that is the greatest since the '60s portends large U.S.
government deficits, yet another recipe for inflation.
4) Unsustainable U.S. Dollar
The U.S. dollar has been levitating for a long time,
but the underlying fundamentals continue to erode.
The U.S. current account deficit exceeds $400 billion
annually, and the continuation of this chronic deficit
turned the U.S. into the world's largest debtor as
most of these deficits are being recycled into U.S.
debt instruments. However, foreign appetite for U.S.
securities appears to be ebbing and the chart on
the U.S. dollar looks very toppy . Gold is already in
a bull market in U.S. dollars, and an established bull
market in every other currency. If the reserve currency,
the U.S. dollar, falters, gold could well be launched
on the upside as people recognize its status as the
only "true currency."
5) Unsustainable Prices for Financial Assets
Western world investment demand will be the true
fundamental that drives gold much higher. Gold tends
to be counter-cyclical and investors buy it when financial
assets begin to lose credibility. Ownership and pricing
(P/E) of financial assets are at historic highs and if
inflation accelerates, the U.S. stock market is extremely
vulnerable. The ratio of the S & P 500 Index to the price
of gold reached an all-time high, by a considerable
margin, in 2000, but this parabola have been broken
and a downward trend is in effect. At the margin, if a
small amount of money is moved from financial assets
into gold, the price effect on gold will be dramatic and
the ratio will continue to move in gold's favor.
6) Increasing Evidence of Unsustainable Gold
Price Manipulation
a. Aggressive gold lending, which from an economic
perspective is indefensible, has filled the
supply/demand gap.
b. NY Fed gold has been mobilized when the gold price
is rising.
c. Timing of Exchange Stabilization Fund gains/losses
corresponds to gold price movements.
d. Audited reports of U.S. gold reserves show unexplained
variances.
e. Minutes of Fed meetings confirm officially denied gold
swaps.
f. Rules on gold swaps revised but subsequently denied.
However, individual central banks have repudiated the
denial.
g. U.S. gold reserves have recently been re-designated
twice, initially to "custodial gold" and latterly to "deep
storage gold."
h. Statistical analysis of unusual gold price movements
since 1994 indicate high probability of price suppression.
The invalidation since 1995 of Gibson's Paradox -- that
gold prices rise when real interest rates fall -- suggests that the real manipulation began then.
i. NY gold price movements versus London trading defy
odds.
j. Timing of huge increases in bullion bank gold derivatives
is consistent with gold price declines.
k. Rapid decline in U.S. Treasury holdings of gold-backed
SDR certificates is not explained.
One or two of these factors could be viewed as random, but
the full body of evidence is overwhelming.
It would appear that gold is beginning to be viewed as
money again. Gold is the only monetary asset that doesn't
represent somebody else's liability, and with U.S. real
short-term interest rates now in negative territory, there is no disadvantage in holding gold. Those with a vested
interest in containing the price of gold -- central banks,
bullion banks, heavily hedged gold companies -- will not
die easily, but the tide is moving strongly against them
and the embedded short positions could catapult the
gold price higher while imperiling the future of those
holding the short positions.
The great rallying cry of the bears is the mobilization of
even more central bank gold to the tide. Recently, Ernst
Welteke of the Bundesbank has spoken publicly of the
Germans selling gold after the initial Washington
Agreement limiting European central bank gold sales to
400 tonnes per year expires in late 2004 with the intention
of redeploying into stocks and bonds. Formerly,
commentary and action of this sort by central banks (the
announcement of Swiss sales, the initiation of English gold
auctions, etc.) devastated the gold market but this elicited
little more than a yawn. An astute gold analyst in South
Africa postulated the reason why, perhaps. There are
strong rumors that Deutschebank has borrowed an
enormous amount of gold (more than $10 billion worth)
from the Bundesbank over the years to facilitate the
carry trade, producer hedging, etc. and it is becoming
apparent that there is no way they will be able to pay it
back. Perhaps, to make good on their gold loans, they
will reimburse the Bundesbank with stocks and bonds
and Mr. Welteke is readying the German public for
with his statements.
In addition, there are enormous dollar reserves building
up in the Far East, particularly in China, and the Far East has acknowledged being significant buyers of gold. So the flow of central bank gold is not only one-way. Even the Russian Central Bank is on the buy side. The shibboleth of central bank sales will undoubtedly be trotted out again, but it is losing its sting, particularly if the possibility that as much as half of all the central bank gold may already be in the market starts to become more widely recognized.
In addition, in the '70s, when gold was rising sharply in
price, central banks, after having been heavy sellers at
$35/oz., sold little or none at higher prices. Central bankers are no different than the momentum players; if the price is rising, they are more likely to be buyers than sellers.
One last observation concerns the gold share price action
prior to the explosion of gold prices in the '70s. Then, as
now, gold stocks rose to prices that made no sense to
observers who had a static view on gold prices, but the
stock buyers knew that sharply higher gold prices were
inevitable. I suspect that is the case today, particularly
when one examines the foregoing evidence.
7) Gold Stocks
Gold stocks are perceived by many to expensive, but, in
fact, they are considerably cheaper than they were in the
late '90s. The central banks' overt attempts to bring the
gold price down (Swiss sales, British auctions, etc.) at
that time removed the premium in gold shares and it is
now gradually being restored as confidence returns to
the sector. In fact, if the gold prices were to rise sharply, I would not be surprised if the price to NAV continued to rise due to a shortage of viable gold stocks. |
