INSTITUTIONAL ADVISORS
June 22, 2004
A Gold Bull Market Regardless
Bob Hoye
Bob Hoye is a market historian and senior strategist at Institutional Advisors, a provider of research to financial institutions, mining, and petroleum companies internationally.
This writer enjoyed meeting Bill Murphy over lunch last Saturday. Bill heads up GATA, which has been the focus of a movement to bring transparency to gold dealings by the anti-gold cabal.
Lately the Blanchard case against J.P. Morgan and Barrick seems to be making headway. Despite stalling tactics, the judge is resolute that requirements of full discovery be met.
This will be very interesting as this case will be a proxy against central bank manipulations as well.
Since the 1980s, our view has been that gold's bear market would run until the bubble ended and that the officialdom's bear raid would only seem to be successful. At various times, we described this as likely the only negative metal cartel in history and concluded that the real test of their abilities would come with the natural rise in gold that has been one of the distinguishing features of the post-bubble condition.
More specifically, once the bubble had blown out in the first part of 2000, it became automatic that gold's real price would begin a secular recovery in November of that fateful year. Relative to commodities, the low was in October.
Even if the Blanchard case is settled out of court, it would signify a success for free markets over intervention. Although involving two corporations, it would indirectly censure central banks and their agenda of currency depreciation without the impartial and continuous adjudication that would be provided by a free market for gold.
From time to time, concerning increases in CPI inflation have been explained as being due to rising prices for crude oil, thereby making OPEC the scapegoat. The reasoning that inflation is caused by rising prices rather than by excessive creation of credit/currency really requires a Ph.D. in Tautology.
Nevertheless, the cartel only seemed to be successful during gold's natural decline with the bubble. The real test has always been its putative ability to drive the price down during the post-bubble contraction when gold's real price has been expected to recover.
Clearly, the cartel has not been successful, as gold has recorded a modest recovery over the past 4 years. This we have described as Year 4 in a 20-Year recovery.
It is appropriate to review the success of those who have been seduced by policymakers' touts. In the 1940s, the intentions were to "peg" interest rates at the existing 2 ½ %. They soared to 15% in 1981. Going full circle, the tout in June, 2003 was that the federales were going to "peg" long rates down to 2 ½ %. One of the worst bond crashes in 300 years followed.
As a phase natural to the credit-risk side of a great financial bubble, spreads were narrowing in 1996-1997. Equally naturally, policymakers got aboard the bandwagon and, in so many words, set out to "peg" all rates in Europe to the same level. The common currency and central bank would provide the financial discipline such that Italian bonds would trade at the same yield as those for England.
It was celebrated as "convergence" and the huge leveraged fund, LTCM, played it to the hilt. So did the senior central banks who directly provided LTCM with the leverage and, even more benighted, the Bank of Italy even took an equity position.
In 1998, LTCM became one of the most dramatic failures in history.
On grand policy schemes, the instruction has been consistent. Both the "pegging" and the "convergence" schemes became financial disasters.
The attempt to collapse gold prices failed with the bubble in late 2000. Through the persuasion of natural market forces, this evolved into an attempt to hold the price from rising, which hasn't been particularly successful. Like the other two grand schemes, this is likely to end with considerable financial dislocation. Gold's next extended recovery will trigger this off and it seems that the key players have been too big or too stupid to cover.
A judgement in favour of the Blanchard case or even an out of court settlement would be extremely embarrassing to the establishment - perhaps the equivalent of President Reagan's "Tear down this wall!".
Gold Shares: Once again, gold shares anticipated a recovery in the bullion price and their course now could be more important than that for gold itself.
Led by deranged silverbugs, the action became extremely excited in early April and, in unusually quick reversal, reached extreme gloom in only a few weeks. As this was bottoming, we noted that it had some similarities to the 1987 stock market crash.
That was a technical liquidity crisis within the fundamentals of a strong economy and earnings.
In gold's case, the strong fundamentals have been the treasury curve steepening and credit spreads widening, so typical of the post-bubble condition.
Although these have been benign lately, gold shares are within a favourable pattern and could be anticipating a return of the financial concerns that will again move gold's real and nominal price up.
BOB HOYE, INSTITUTIONAL ADVISORS
WEBSITE www.institutionaladvisors.com
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