The feverish buying that has hit our normally sedate and orderly trading desks in the aftermath of the terrorist attacks in the US, are an indication of far deeper structural problems in the global economy and financial markets. These conditions clearly existed before the events of September 11th.
A CHANGING ENVIRONMENT
The world today is a very different place than what it was just over three weeks ago. As tragedy unfolded on the streets of New York, the world shifted on its axis. We have all heard talk of the new sense of nationalism and united resolve; patriotic sentiment is running high, not just in the United States, but across the west generally.
However, the greatest change has come, not in increased airport security or the newly declared war on terrorism, but on the financial and economic front. When considering this rapid transformation, several changes immediately spring to mind;
1) Money Supply
Fiat money (national currency created out of thin air) is being flooded into the global system. The US has announced hundreds of billions of dollars in new spending programs and economic stimulus packages. The much-flaunted government surpluses of two years ago have disappeared, while it seems the era of large government deficit spending is back.
The Fed has moved twice in two weeks to cut interest rates, each time by 50 basis points. Nine rate cuts this year now brings the Fed Funds rate to 2.5%.
Japanese Yen are being created at massive rates to prevent that currency climbing to against the US dollar, therefore attempting to prevent any further deterioration in Japanese exports from impacting their already deflationary economy.
Like water into a bucket, all this "new money" cannot slush into the global economy without eventually giving way to runaway inflation.
2) Bond Market
Bond markets are complex and highly sensitive to many different factors. Bonds have been considered a safe haven for capital when the stock market is under selling pressure. On the other hand, bond markets react poorly to future inflationary fears, such as the massive money pumping we have looked at above.
3) Stock Markets
The stock market has continued its slide, now confirming a bear market in the Dow. The 3rd Quarter finished with the Dow and S&P both down 15% while the NASDAQ was down by 30%. The SEC announced the relaxing of rules governing the trading of stocks. The NASDAQ announced a change in its rules, saying that it will now allow companies to remain listed if their share price falls below $1.00. Stock market losses are now worse than we have seen in several decades. However, as the economy has deteriorated, company's earnings have fallen faster than their stock price, leading to P/E's that are now at record highs. This points to much lower stock prices from here, if P/E's are eventually to return to the historic norm.
4) Unemployment and the Consumer
The average consumer is the backbone and lifeblood of our modern "spend-and-consume-today-and-pay-for-it-tomorrow" economy. Without consumer spending, the economy grinds to a halt. The consumer is more in debt today than at any time in all history. It becomes harder to spend when you don't have a job. As the economy is slowing, companies are laying off staff.
Unemployment claims reported last week reached the highest levels in nine years. While more workers are out of a job each day, their stock portfolios are being hit like they never considered possible.
Credit card delinquency is up over 10% from this time last year. Eventually the consumer realizes that he can't borrow and spend forever, regardless of how low interest rates go. What happens when the savior of the economy, the consumer, simply stops spending? Consumer confidence is now reported at hitting five-year lows.
AN UNCERTAIN WAR
It has been pointed out many times in recent weeks that the economy reacts well to war. Certainly over the last 50 years this has been true. The war economy of the late 30's and early 40's eventually dragged the world out of the Great Depression. Every war the US has been involved in the last 50 years has led to higher stock prices.
Many political and military analysts have pointed out that this is not like any other war we have waged in the past. While I don't claim to be a political commentator, it is plainly obvious that there is a far greater degree of uncertainty with this war and its objectives than any other conflict to which America or its Allies have been engaged in the past.
The enemy is intangible; difficult to identify and locate. It can be nowhere and yet everywhere. It has nothing to lose with few fixed cities or fortifications, and then there are the greater religious and cultural considerations.
From a global economic perspective, the delicate and complex balance that is Middle East politics is at the epicenter of this war. We have repeatedly said that our daily dependence on uninterrupted supplies of crude oil from the Middle East is possibly our single greatest economic vulnerability.
To understand what these changes will mean to us in the future, we need to take a step back. Whether it is the destroying of national currencies by inflating them into oblivion, the return of government deficit spending in the form of government stimulus packages, unemployment, consumer confidence, hemorrhaging of stock portfolios, or the new war on terrorism, all of this spells uncertainty, and markets do not like uncertainty.
NOTES FROM THE BULLION TRADING DESK
Gold and Silver are many things including a barometer of the economic well being of any economy. Throughout the high-tech boom of the 1990's, it appeared as though the precious metals had had their day. Since the 1930's and 40's we have been told that gold was the "Barbarous Metal". In more recent times we have been repeatedly instructed that gold no longer is an accurate gauge to the economy. It no-longer reacts to inflation, recession or stock market volatility. All that changed in recent weeks. The pile of notes collected from my trading desk in the last three weeks tells the stories of the response of clients to the uncertainty and instability that lies ahead.
Eventually, once peoples minds started to recover from initial shock of the devastation so close to home, client's minds inevitably turned to the markets and their own personal and financial security. Deep inside people's minds and hearts is the instinctive understanding that gold and silver are the ultimate safe haven asset in troubled times. It is this instinctive response that drives the precious metals to extreme levels of turn-over whenever shock waves resound throughout the political or economic environment.
GOLD - A METAL OF EMOTION
Gold is an emotional metal. It sparks a deep emotion response within people. Privately I have used what I call the "emotion index" to measure the buying strength in the market. The resolve by many clients in recent weeks to secure precious metals, at any price, has this "emotion index" surpassing the highest levels I have witnessed in several years.
GOLD - A SCARCE METAL
Every bullion dealer and trader I have spoken with around the world have confirmed the same story of extremely heavy buying in the precious metals. Last week Reuters reported bullion coin sales had increased 10-fold since the attacks. Everywhere, stories of long delays in delivery and large premiums are common.
For a long time we have spoken about the limited size of the physical markets. We have said they are very finite markets, it will not take very many people entering the market at one time to clear out available reserves, precipitating a world-wide short squeeze, in-turn pushing prices to extreme levels very quickly.
GOLD - A RIGGED MARKET
In the last few years, large amounts of evidence has come to light exposing the manipulation and capping of the price of gold, particularly by western governments and central banks. While western nations have being holding down the price of gold, through selling and leasing, eastern and Arab nations have been snapping it up at incredibly cheap prices.
It is an irony to me that, while we declare war on terrorism, we sell our future financial security at vastly undervalued prices. In a recent article, Bill Murphy from the Gold Anti-Trust Action Committee put it this way "What is the point of winning the war on terrorists only to be defeated by them in years to come when they, and their recruited colleagues, buy up the physical gold market and bankrupt America?"
Earlier this year, well before the recent acts of terrorism, I interviewed Adam Hamilton. In the course of our conversation, we discussed this shift of gold from the vaults of the west to the east. At the time I said "I've always thought and said that it's ultimately shows a shift of nation's power. Not only in the short term but in the longer term, the more gold a nation amasses, or a block of nations amass, to themselves, ultimately the greater power they will have, that is at least what we have seen through history."
Mr. Hamilton responded; "Yes, the kind of popularized definition of the golden rule is "he has the gold makes the rules" is so true for people and nations, and as you point out, civilizations who have had a good strong gold based currency have lasted as long as the currency is not debased. But as soon as the gold moves to somewhere else, that civilization falters, which is what is happening in the west. We have heavily, heavily indebted fiat currency, debt-based welfare states. United States, most of Europe and Australia, are getting to the point where they cannot support themselves any more. They debase the currency so much they just have done away with all financial prudence, and the new rulers of the world, from a gold perspective, from a true financial perspective, are going to be those Asian (and Middle East) countries which are amassing these hoards of gold." LINK TO FULL INTERVIEW
A FINANCIAL PROTECTION RACKET
Fellow Australian, Bill Buckler writes an in-depth fortnightly newsletter and runs his excellent website www.the-privateer.com. Last week in his weekly gold commentary he wrote a piece called "A Financial Protection Racket" which, in my opinion, summarizes so well the situation we in the west find ourselves today;
"Of all the decisions which have come out of the U.S. government since the September 11 atrocity, the most transparently ridiculous one has been an FAA (Federal Aviation Authority) decision NOT to allow commercial airline pilots to arm themselves. Pilots will NOT be allowed to defend either themselves, their passengers, or their aircraft. Federally-employed "Sky Marshals" will have that job.
Consider this carefully. No private citizen or private company (airline passenger, airline pilot or airline owner) is permitted to protect either life or property. Only GOVERNMENT is allowed to do that.
Now, if you move this "principle" over to the financial realm, you will readily understand the reason why all governments want to control Gold.
There may have been some excuse for people who did not recognize the fact that they had been stripped of their ability to protect their financial future before September 11. There is no excuse for not recognizing it now. What are the "investment classes" which almost any investment advisor in any nation will recommend to you? Stocks, debt paper of all descriptions, real estate. For the more adventurous, there are financial derivatives of all descriptions and levels of complexity. And what is it that everyone is supposed to flee into to "protect" their wealth in times of trouble? Government debt paper.
What is the single financial action which has been most actively discouraged by governments all over the world in the past decade? SAVING - of any description. What was the only thing being relied on to "save" the world economy before September 11 - SPENDING BORROWED MONEY.
Now, what is the SINGLE most important difference between a financial system which rewards thrift and the creation of REAL wealth and one which "rewards" profligacy and the juggling of paper claims to the real wealth of others? The first uses GOLD as money. The second BARS Gold from any financial function whatsoever.
It is astonishing that anyone who has paid any attention to the financial and market mania of the past decade would harbor any shadow of a doubt that Gold and Gold prices denominated in the various fiat currencies of the world is being manipulated. Physical Gold demand has outstripped newly-mined Gold supply since the late 1980s. The history of rules and regulations designed to hamper or make impossible the private ownership of Gold in the U.S. goes back to the 1930s.
We have lost track of the number of times we have seen statements to this effect in the media: "Gold has once again confirmed its loss of stature as a financial medium by failing to rise in price despite the current crisis." This has been an almost constant refrain ever since the $US Gold price "topped out" in early 1980.
By now it should have dawned on most people that the people in charge of the modern ("gold free") financial system have a vested interest in keeping Gold down and that they have evolved ever more "sophisticated" means to do just that.
Fundamentally, if you want to protect yourself from ANY depth of crisis or collapse in the present system of fiat currencies and debt based claims to your wealth, there is only one way to do it. OWN PHYSICAL GOLD.
This is the modern financial "protection racket". Governments are making it as hard as they possibly can for anyone to protect THEMSELVES against a collapse of the financial system which governments control. The racket is clear. "We will protect you" - says the government - "but we will only do it if you stay INSIDE OUR SYSTEM".
To coin a variation on an old theme: "I'm from the government. I'm here to protect you.". If you, dear reader, are content to rely on that promise, then you won't see any need to own Gold. If you are NOT content to rely on it, and you have not yet acquired any physical Gold, you had better hurry up.
Don't bet your financial future on it. Make SURE you have some Gold. Anyone who has bought Gold in ANY currency over the past six months is already WAY ahead of the game. But Gold is still cheap in U.S. Dollars. At any price OVER $US 300, it is highly likely to get more expensive very quickly." THE PRIVATEER used with permission.
10 October 2001
Philip Judge is a director of the Gold Heritage Certificate www.goldheritagecertificate.com, an offshore Bullion Banking and Certificate Company, and editor of www.millennium-money.com. He was producer and director of the 2-hour feature documentary "Millennium Money" which won a 1st place Gold Award at the 1998 US International Film Festival. Philip can be reached at email@example.com
Mr. Bill Murphy www.lemetropolecafe.com
Mr. Adam Hamilton www.zealllc.com
Mr. William Buckler www.the-privateer.com