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To: yard_man who wrote (257110)	8/21/2003 7:57:40 PM
From: Secret_Agent_Man	Read Replies (2) \| Respond to of 436258

At its April 2001 low, gold was selling at 260 an ounce. Today gold is selling at 365 an ounce. That's a gain of 40% since April 2001. We doubt this is what the Fed had in mind, but we have long suspected that this rally would engender a process of making virtue of necessity – in effect, celebrating the rise of gold from $260 to $350 as “vindication” of the Fed’s ability to mitigate prevailing deflationary psychology, whilst confirming that any further rise would be indicative of unwelcome inflationary pressures – again, part of the joint appeal to the competing constituencies of the bond and stock markets. The latest sign of this new spin was evident during a recent exchange on CNBC between guest host Steve Forbes and President of the Dallas Fed, Robert McTeer: [Forbes]: Bob this is Steve Forbes, guest co-host this morning. McTeer: Good morning. [Forbes]: Good morning, how are you? There has been a little bit of concern surprisingly given the deflation concerns in the past few years that maybe the Fed is over shooting the mark. What should the typical investor look to see that the Fed is supplying enough liquidity to meet the needs of the market without deflating on inflating? What is a good simple gauge? McTeer: Steve, I can't resist the temptation to tell the audience what I heard you say recently in Austin where you told the audience that a simple way to measure how the Fed is doing is to look at the price of gold if it is over $400 an ounce we are too easy and under 300 we are too tight. I was in the audience and used my blackberry to e-mail my assistant and ask her what the price of gold was and it was $349, just one dollar off the midpoint. I think it’s up to $364 yesterday so a little on the easy side. I think if you look at interest rates - [Forbes]: You are a man after my own heart. Good. We have had the “Greenspan put” for the stock market and the “Bernanke put” in the bond market. Does this exchange mark the formulation of a “McTeer put” in the gold market? The simple gauge for the Fed’s future actions: the price of gold. Too high a price: $365. The right price: $350. Also implicit is that the prevailing level of the late 1990s, a sub-$300 price, is too low, although this appears to be a less fundamental concern for the Fed at this stage, given what we understand about the destabilizing consequences of a runaway gold price. Thus, we enter into yet another stage in the futile expectations management game that the Federal Reserve has continued to play over the past several years. We expect that the McTeer put will ultimately go the way of the Greenspan and Bernanke puts, respectively, but not without a fight. Until recently, the apparent willingness of the part of the Fed to contemplate extreme monetization to the point of currency debasement has clearly discomfited holders of treasury bonds and foreign holders of all U.S. dollar assets. Both of these classes of market participants are very long these assets and very vulnerable. Their discomfort could place pressures on US equities and corporate bonds that would more than offset any buying support to these markets that might emanate for those other market participants who found encouragement in these same remarks. Gold has been strong as the bond market has crashed. Recently, it has even been strong whilst the dollar has recovered marginally. What message is this conveying? The U.S. has a massive net external debt and an unsustainable current account deficit. Why has the dollar not crashed? The usual answer is that the world’s other major currencies – the euro and yen- have their own very serious drawbacks. Many have remarked that, if all of the world’s currencies are unattractive, gold might regain some luster as a reserve currency and a store of value. It helps that nominal interest rates everywhere are negligible. It also helps that, in a world of ubiquitous excessive debt, gold is the one asset that is no one’s liability. Prior to all of the discussions of unconventional measures, the price of gold was quite stable. It would clearly complicate the Fed’s efforts to pacify the bond market if market participants began to buy gold because they feared a future deliberate dollar debasement by the Fed. Consequently, we fully expect the management of the gold price to become an even more integral component in the Fed’s expectations management game, as it seeks to extricate itself from the consequences of a credit bubble of its own making. To quote Richard Russell again: “The rise in long-term interest rates is a serious threat to the Fed's intentions and, of course, to the US economy. I'll remind you that there's a total of around $38 trillion in debt built into the US economy, and all this debt has to be financed. Much of this debt was taken on during a time of declining interest rates along with the soothing syrup of inflation. But what if the background turns hostile? What if the background becomes one of rising interest rates and deflation? That, of course, would be Alan Greenspan's worst nightmare. It would also be a nightmare for Wall Street, for US business and for US consumers (all of whom are loaded with debt).”-Aug. 14, 2003 prudentbear.com