Flash forward to the present.
Despite its most recent and lengthy sucker rally, Wall Street is entrenched in the mother of all bear markets, one that is sure to accelerate as the US dollar re-confirms its own decisively bearish trend. While most economic sectors remain negative for the year, one sector continues to outshine all the rest: precious metals (PM).
Yet despite its superior performance, the precious metals industry faces many of the same problems encountered by the fringe corporations and renegade entrepreneurs of the Eighties.
The Wall Street Establishment does NOT love them.
Today, gold and silver are viewed by the bullion banks and hedge funds as their unanimous enemy. Reason: over the past decade, via the gold carry trade, the bullion banks have utilized derivatives to amass an approximate 10,000 ton physical short position in gold....and several major hedge funds have aggregated an even more alarming short position in silver. Since 10,000 tons represent about four years worth of global gold production, the bullion banks potential dilemma is exacerbated by notable reductions in major Western central bank gold sales and leases as these CB's come to recognize the enormity of the impending gold short problem. Moreover, with interest rates so low and precious metal lease rates so high, the gold and silver carry trades are no longer profitable so virtually every short sale of gold and silver today is done at a hefty loss, especially considering the rate of inflation.
The major gold mining corporations of the world (with the notable exception of Establishment darling, Barrick Gold and virtually the entire Australian gold industry) are the long counter-parties to the gold short bullion banks. Whenever the price of gold begins to spike upward, the various gold short Wall Street financial houses apply enormous pressure upon mining companies to hedge or sell forward vast amounts of their future production in order to contain the metal price increases. After all, in the paper market, pledges of future metal production have the same suppressant effect as current sales -- and the metals prices must be restrained at any cost lest sharply rising prices endanger the major Wall Street players' huge short positions.
What is truly pathetic about the current status quo within the precious metals sector is this: if companies like Cisco or Dell or Gillette or Coca Cola wish to expand their financial activities, you do not see major Wall Street financiers demanding that they short sell their own products. If Microsoft wishes to expand, its investment banking syndicate does not request it bet against the value of its software products. If General Motors wishes to grow its auto production facilities, its capital providers do not compel it to place bets against the price of its vehicles.
Yet in most cases, in order for a PM company to raise vast amounts of capital for acquisitions or mining development, they must accede to the wishes of counter-parties who desire they short sell their own product. That is because the bullion banks and hedge funds best interests can only be served by perpetually descending PM prices.
If any producer raises objections, the standard Wall Street response is, "This is the way things have always been done in the gold and silver industry and that is the way they will stay."
Brain dead words in defense of a market's status quo...do they sound familiar, Mr. Milken?
Surging precious metal prices are simply Wall Street's enemy since they usually occur in synchronicity with falling general equities prices. As such, the PM's are always potential lightning rods for flight capital, much to the consternation of a Wall Street Establishment dedicated to directing flight capital into bonds, NOT precious metals.
The potential threat to the Wall Street Establishment status quo is a significant one. Since the entire capitalization of the XAU (gold/silver index) is only around $50 billion, then it quite evident that a notable influx of capital into the XAU would send the index into full verticality in a manner that would rival the Internet mania of the Nineties. Who would want to buy bonds if gold stocks are appreciating at 500% per annum or better?
Is Michael Milken a potential savior for an entire industry?
The precious metals industry is in desperate need of a radical re-invention by which capital is raised for development and acquisitions. As it stands, the industry's extreme dependence upon the bullion banks likely ensures "unofficial" price caps will remain upon gold. Between the bullions banks' strong connections to Federal and State political contacts...between their ability to influence Big Media's constant spin against precious metals....and between their monopolization of the financial instruments (stocks, bonds, hedges, etc.) by which the mining sector raises capital, the BB's are able to control the mining sector with virtually no true substantive resistance. Only a sudden huge avalanche of foreign purchases of gold (along with the demand for physical delivery) is likely to break the bullion banks' control of the gold market.
One thing is certain: any individual or group who can create a new entirely independent financing entity aimed specifically at the precious metal sector, one that does NOT require de facto short sales of precious metals, will reap tremendous financial rewards. Such a financing entity would become the first choice for gold and silver miners who wish to develop large projects with a counter-party who looks out for miners' interests ahead of its own.
Once the precious metals miners can raise large amounts of capital without having to short sell their product, then a notable negative in the precious metal bull market will be eliminated.
That is where Michael Milken comes in: the man who single-handedly revolutionized the entire bond industry to the benefit of Wall Street's "outcast" corporations and an upstart entrepreneurs is undeniably a man who has the creative smarts to reinvent the financing methodology for the precious metals sector. Although the man is barred from trading and conducting business on Wall Street, to the best of my knowledge, he is not prohibited from "consultation."
Furthermore, with his vast array of financial contacts and his established ability to raise huge amounts of capital, Milken is in a position to strategize a truly innovative approach to raising large development funds for the precious metal producers.
As we move through the first stage of the precious metals bull, there will be great rewards for those who can capitalize on the public's inevitable movement into the sector. Now is the time to devise investment vehicles directly related to precious metals that can be introduced as Initial Public Offerings. Once the gold bull is roaring, the public will be hungry for any type of IPO related to precious metals.
Those investment vehicles that are unique (more than just another mining company) will stand out. A financial entity that is precious metals specific (and PM friendly) should attract much attention and interest from the investing public. Most importantly, in its ability to liberate producers from the tyranny of their short counter-parties, such a new capital source would be a true victory for the mining industry David in its battle against the bullion bank Goliath.
If any reader feels the preceding sentiments are valid...and if such a reader has access to Michael Milken....then I would urge the reader to forward this thesis in order to determine if Milken would be interested in participating in a second financial revolution, one that should be as exciting and heroic as his battle in the bond market.