Gold bugs masquerading as pinstripe bankers
By: Tim Wood
"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."
Posted: 2002/06/21 Fri 12:00 | © Miningweb 1997-2002
PRINCETON, New Jersey -- The money management arm of one of Canada's most prestigious banks, RBC Global Investment Management, has issued a no-holds barred punt for gold. It is thought that top-rated professional gold investor, John Embry, authored the report.
RBC is the first mainstream international investment house to sign on to the gold conspiracy, at least publicly, casting the current "suppression of the gold price" as a covert version of the nonsense of the late 1960s and early 1970s when central bankers colluded to hold gold at $35 an ounce.
The RBC writer doesn't pull any punches: "[Gold] will more than rally; it will explode spectacularly to the upside", thanks to an accumulated short position in physical gold, overlaid by a mountain of derivatives.
Conspiracy
The report faithfully reproduces much of the evidence compiled by Reg Howe, the Boston counselor who almost single-handedly tried to sue the treasury-finance complex in Federal Court and Gold Anti-Trust Action Committee supporters like James Turk of GoldMoney. The key strands of the conspiracy case are tied together in a succinct, useful way for the first time so they are worth reproducing in their entirety:
a. Aggressive gold lending, which from an economic perspective is indefensible, has filled the supply/demand gap.
b. NY Federal Reserve 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.
The report goes on to trash gold bears betting on a continued flood of central bank gold. "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."
Which brings to mind an extract from Galbraith's bestseller, Money (to be enjoyed rather than believed), about debasement. The Bank of England (them again) hauled out some plundered Spanish currency and overstamped the head of the Spanish monarch with that of King George III; inspiring a poet to pen: "The Bank, to make their Spanish dollars pass, stamped the head of a fool on the neck of an ass."
By RBC's reckoning, there is going to be a heck of a lot of overstamping in future.
The report takes a potshot at competitor Deutsche Bank as a culprit in the suppression mechanism: "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 [Bundesbank boss] is readying the German public for this with his statements."
Gold equities overvalued?
There were comforting words for gold equity buyers nervous about valuation levels. South Africa's most reliable gold equities forecaster in recent years, Nick Goodwin, is sticking to his guns that the sector is in the middle of a whipsaw with a savage retracement from current valuations.
Referencing the Nixon-Carter gold boom of the late 1970s, the author write: "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.
"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 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."
Economics
Much of the report's argument on fundamentals is by now familiar to those who have been following the gold story:
1. Unsustainable Supply/Demand Imbalance
Falling mine production (there is about a 5-year lag between production and prices) with demand being met solely through central bank sales that would dry up at higher prices.
2. Unsustainable Short Position
"A rising gold price stands as a direct repudiation of allegedly responsible central bank monetary policy" and may be the real motivation for aggressive gold reserve destocking through outright sales or physical loans. "The size of the short position (gold owed to central banks by lenders), officially acknowledged to be more than 5,000 tonnes by 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. Unsustainably Low Inflation
"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." Gold is the early warning device for dollar inflation (since that currency is numeraire) and rises and falls accordingly.
"Year-to-date, the liquidity injection is more than $1 trillion and MZM (broad money supply) 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"… absent the correct fundamentals. The key danger is the U.S. current account deficit which exceeds $400 billion annually and is only sustained by its recycling into dollar 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."
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."
"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 has 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." (Miningweb emphasis – this is the anticipated momentum factor that is currently underpinning gold and silver equity valuations.)
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