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

To: Investor-ex! who wrote (25186)	1/1/1999 1:30:00 AM
From: Hawkmoon	Read Replies (2) \| Respond to of 116790

HAPPY NEW YEAR EVERYONE!!!! Investor, I can't say that I disagree, in principle, with anything you've said (but then again, I have about 5 Irish coffees in my system so I'm pretty agreeable right now... :0) Anyway, I believe this article may have been posted before, but I think it bears repeating: ************************************** fiendbear.com THE GOLD MINERS DILEMMA December 15th, 1998 by Professor von Braun The Rocket School of Economics All gold that is in existence today (the estimates vary but appear to be between 100,000 to 120,000 tonnes) owes its existence to a group of people we refer to as “miners”. Over many thousands of years these people have, as a result of skill, hard physical labor and ingenuity, mined all the gold that now exists. During the 1800's several countries saw their population increase dramatically as a result of gold discoveries. The Californian gold rush, the gold discoveries of Australia, New Zealand and South Africa, even the “rush” to Alaska all saw the creation of wealth take place that allowed each particular area to form a stable population base and develop an infrastructure that contributed to today's society. The discovery of gold was like an invitation to help oneself to the vaults of the Bank of England. Free money, there for the taking was the catch phrase. It was almost as if the bank got there first and then offered free cash to those who arrived. And in most cases the Central Banks of the day ended up owning the gold having swapped it for paper currencies. The miners where quick to cash in the results of their labors and today much of the results of these labors are kept in bank vaults. In some cases fortunes were made and the “new” wealth was put to work creating industries, building cities, and assisting in developing infrastructure that exists to this day. Money in the form of newly mined gold was in the hands of people who new what to do with it. But eventually the supply of the newly mined gold slowed and the creation of wealth became the province of bankers, of those who could create credit to develop industrial bases and assist the local populace to expand their infrastructure. Goldmining continued but on a much reduced scale. Miners continued to seek for new discoveries and when the opportunity arose, produced gold and exchanged it for paper currencies. The importance of the existence of goldmining continues to this day. Some of the countries that were settled as a result of gold discoveries still maintain separate mining boards on their stock exchanges and a daily gold quote is easy to obtain. Gold itself is still seen as being “money” and is redeemable for cash in most countries. So what has changed ? In this civilized technological age we live in what has come about that has resulted in the near non-existence of the traditional suppliers of “new” gold (and the creators of “new” wealth). A large portion of all gold mined still sits in the vaults of various central banks. Estimates of this amount run as high as 30%, which would put reserves at between 30,000 and 36,000 tonnes. About 15 years production from mining companies at today's annual output. Gold is still regarded as wealth and as a backup for printed currency. The concept of gold being of value has not gone away. So what has changed ? Many are the commentators that refer to the fundamentals of supply and demand for gold and quote figures that always suggest that the price of gold should be higher but they fail to see that historically its the Central Banks that create and control the supply/demand issue and as a result, set the price. The United States was very willing many years ago to assist in the creation of wealth by converting mined gold into paper currency and as a result created the largest reserve owned by any one country. Many years later they did the reverse and started to swap gold for their own paper currency (not really a good deal) until they went off the gold standard. But today gold is still readily convertible into paper currencies. So what's changed? What are the gold “bugs” (that strange breed of converts sometimes referred to as relics from the past) complaining about ? Gold can still be mined, purchased, sold, delivered, “discovered” and nothing has really changed. Central banks still own gold and gold can still be converted into paper currency with as much ease as there was one hundred and fifty years ago. Historically the gold price has increased only when the Central Banks have wanted it to. And this usually has come about as the result of a paper currency going into the loss of confidence zone. When CB's have no choice but to try and restore confidence in the coin of the realm they revert to gold to do it. All this does is remove the doubt that has crept in about the soundness of the particular currency. And countries that have large gold reserves usually have currencies that are deemed to be sound as opposed to “shaky”. The Swiss Franc comes to mind as an example of soundness. The Indonesian rupiah is an example of a paper currency that is nearly devoid of confidence and has nothing to back it up. And the Indonesian CB has no gold. Gold has been referred to as “that barbaric relic” which suggests that we don't need it anymore, but I have yet to see it being given away for free. So what is the problem ? People have forgotten that Central banks have a tendency to issue too much paper and to create excess liquidity which eventually causes a collapse in perception of confidence in the paper money. These collapses are now believed to be non existent and the power of the CB's has gone unchallenged for many years. Paper currencies are universally accepted as being the medium of exchange and doubts about their actual value are few and far between. No CB is seriously called to task about their policies and the general public willingly accepts the words of the respective spokespersons as being complete and final. And as long as economies continue to steam ahead (even though limping is common) who cares ? This “who cares” attitude is the same attitude that keeps the gold price where its at and enables the CB's to do what they do with no accountability. However once a CB panics the local populace panics as well. And the more traditional CB's fall back position has always been gold (which is why they still own it). Reconfirmation (or revaluation) of the “reserves” restores confidence in the currency. And gold is always trusted from the “is it real” point of view. An ounce of gold is an ounce of gold. Gold and trust go together. But when trust is not required and the willing embrace of paper takes it's place then it is not surprising that the “price” of gold weakens. The growth of derivatives markets over the last twenty years has given the CB's access to a market that allows them to make a return on their reserves by actively trading on their gold reserves and making a return on capital. It seems that they have forgotten as to why they hold reserves and to whom they are responsible to. But when you are part of a select goup that collectively owns a large portion of known gold reserves it is not hard to dictate (with or without the knowledge of the other participants) which way the market price should go. And when you are not held accountable by any independent body as to your activities, indeed when the confidence in paper currencies is such that you don't need to justify your activities, then it's time to be careful. Recent calls for transparency in the gold market are interesting because obviously somebody did not wake up in the morning and come up with this idea. Perhaps a knowledge of behind the scenes activities could be the cause. The recently announced withdrawals from the trading of gold derivatives by several previously large players has not set off any alarm bells either. Are these withdrawals connected to the recent announcement of new trading rules on the LBMA which are designed to limit the use of derivative contracts ? What do these traders know that the gullible public does not ? Even more recent announcements by some large mining companies that they are offsetting their derivative positions because of potential counter party (bullion bank ?) risk seems to have also gone unnoticed. Previous comments from a senior official at the Bank of France who said “ they stand prepared to deal with any potential disruption in the gold market” also slipped quietly by. What “potential disruption” one could ask ? Comments by Alan Greenspan that CB's stood ready to mobilize their gold reserves also went largely unnoticed. Why would they need to do that ? Other than try to maintain the myth (re: the value of paper) for a longer period. What has changed is the fact that the activity of goldmining has become the victim of complacency. Gold and goldmining has always been an alternative for the average citizens protection against errant bankers activities and today this is (apparently) deemed not to be necessary. That, coupled with a lack of transparency in the gold market itself as well as no disclosure from Central Banks re their activities in the gold market has helped. But the goldminers dilemma is more the result of apathy, of a misplaced faith by the general investing public in the power of CB's to print their way out of any situation and eventually bring about the destruction of wealth denominated in paper currencies. Only the realization that assets denominated in paper currencies eventually lose their value will shift the focus back to the only fallback position that exists. Those with well positioned gold holdings will do very nicely when this event occurs. And occur it will. But at what cost and to whom ? --------------------------------------------------------------------------------