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Gold/Mining/Energy : Gold Price Monitor -- Ignore unavailable to you. Want to Upgrade?

To: Alex who wrote (2811)	11/5/1997 5:01:00 AM
From: PaulM	Read Replies (4) \| Respond to of 116816

Upon reflection of the events of the last few weeks: the proposed Swiss sale is an act of desperation. Here's the way I see it. For decades, (foreign) central banks have been using the dollar as reserve currency, abandoning gold. But the stability of the dollar in large part depends upon the U.S. handling of the fed debt. If the printing press is resorted to, these foreign central banks as well as the countries they live in, will have a huge egg on their face. For years, and especially, since 1993, foreign Central Banks (especially Bank of Japan) have helped maintain the dollar by buying huge amounts U.S. debt (treasuries). This money flow allows the day-to-day operations of the U.S. govt to continue, pospones the day of reckoning and even allows interest rates to remain low (less foreign investment would require a more attractive return and higher rates to get the money flowing back in). But now enter 1997. The SE Asian currency crisis and Japanese illiquidity and banking problems means that the spigot is in danger of being turned off. A Japanese credit conraction is inevitable and that means fewer loans to everyone, inlcluding the U.S. This, and not the effect on earnings of U.S. multi-nationals, is what would devastate the American economy. What to do? First, provide some temporary bandaid money, initially in the form of 23 billion in taxpayer dollars to Indnoenesia. This and similar aid will hopefully calms things down, give the U.S. the appearance that it is "managing" the situation and perhaps ensure the Asian spigot isn't turned off a little while longer. The consequent resurgence in Asian purchase of U.S. debt is interpreted in the media as a "flight to quality." Second, use the politcal and diplomatic influence of the U.S. to influence other foreign central banks. But who? The German mark is already uncharacteristically devalued relative to the dollar, making exports to the U.S. easier for the Germans (and others) while ensuring the flow fo capital into dollar denominated securities(U.S. debt, treasuries). The answer is the Swiss. Let's face it. The Swiss don't have nearly the resources that Germany or Japan does, but we've gone once to often to the til with these. Furthermore, the Swiss can sell some gold over the next few years, even if gold is at mutli-year lows. With the money, they also have the opportunity to "qaulity" U.S. debt. This will cover perhaps a few months of U.S. spending, but every bit helps. The evenst which are causing gold to decline in price in fact presage the largest gold bull run yet seen. Notice that the Fed has never hinted at selling it OWN gold. When that happens, the the game will truly be up (as what gold there is all that's really backing a dollar which in turn is backing all foreign currencies).