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NOAH'S ARK OF GOLD
BUILT FOR A 'PERFECT STORM'
Last time the mockers drowned
Investment Indicators from Peter George
Friday, July 15 th, 2005
Scripture
"By faith Noah, when warned about things not yet seen,
in holy fear, built an ark to save his family."
Hebrews chapter 11, verse 7
SUMMARY
The last article to strike the writer's eye before punching keys on this report was one by a certain Mark Pierce III entitled:
"GOLD KOOKS versus MAINSTREAM SPECULATORS".
It was probably churned out 'tongue in cheek', but nonetheless cut to the quick. It was a painful reminder to those over 60, whose views on gold have remained unchanged since the 1980 intra-day high of $875, that the 25-year wait has been long and unprofitable. Those who jumped ship at the top - like our legendary friend Jim Sinclair claims to have done - are few and far between. Those who died with the ball - the vast majority - rue the day they failed to sell. Many have since kept replaying the same tune to a diminishing audience. Twenty five years down the line it is hard to convince one's children that the arguments carry weight. Our urgings fall on deaf hears and their response is representative of a younger generation that has never experienced a world-wide economic implosion. We call for a return to honest money based on a gold standard. We berate them: 'Stick to financial discipline - both for yourself and your country. Do your best to stay out of debt and live within your means.' They rightly bounce back:
"Dad, you've been telling us about gold ever since we can remember and even today the price is less than HALF what is was when you were buying it 25-years ago….. You tell me not to borrow, but everything I've bought has gone up…. The house I bought five years ago has trebled…It's just as well I didn't listen to you."
As the speculators of today waft gleefully in a sea of multiple financial bubbles - property, bonds, stocks, debt, credit and currencies - who are we to warn them of the dangers when we've waited so long and been so wrong? Based on last night's gold close of $424, our children are right. Gold is HALF its intra-day high of 25-years ago and in REAL terms we'd have to get back to $1600 just to stand still. Are we even entitled to be heard? Who cares what the price 'ought to be'? It isn't! Should one then concede defeat, in the growing belief that governments can indefinitely postpone an evil day through powerful interventions? If not, how long should one wait? The economist Lord Keynes gave discouraging advice:
"Markets can remain irrational longer than one can remain solvent."
Others put it differently but describe the same problem:
"The Dow has discounted ten, out of the last three recessions."
Scripture is different - certainly for believers. When God makes a promise, it happens. The famous British evangelist, Smith Wigglesworth, put it this way:
"God said it. I believe it. That settles it."
Even here there is a problem. It is one of timing. Fortunately we are warned to be patient. Read what it says in 2 Peter chapter 3, verses 8 and 9:
"But do not forget this one thing, dear friends: With the Lord a day is like a thousand years, and a thousand years are like a day. The Lord is not slow in keeping his promise, as some understand slowness. He is patient with you, not wanting anyone to perish, but everyone to come to repentance."
The verse chosen from the Book of Hebrews at the outset of this report referred to an advance warning given to Noah in the Book of Genesis. God said he was going to 'bring floodwaters on the earth to destroy all life'. He advised Noah to 'build himself an ark'. His warning had a sequel in the Book of Matthew chapter 24, verses 36 to 39, and its message is as valid today as it was then.
"No one knows about that day or hour…only the Father. As it was in the days of Noah, so it will be at the coming of the Son of Man. For in the days before the flood, people were eating and drinking, marrying and giving in marriage, up to the day Noah entered the ark; and they knew NOTHING about what would happen until the flood came and took them all away….Therefore KEEP WATCH because you do not know…"
For purposes of this report, the writer believes on this occasion the storm and flood referred to, will be FINANCIAL rather than PHYSICAL. From the time Noah received his warning and simultaneous instruction as to what measures to take to protect his family, it took 100 years. Scoffers had a right time - until the day the rains began to fall. Then it was too late.
It reminds one of the tragedy which befell the driver of a ten ton truck. He was bent on crossing a river which flowed through a chasm. The nearest bridge spanning the two sides was a rickety wooden relic used by the odd horse and cart. A sign was posted at the entrance:
'Maximum load: one ton.'
Pressed for time and unwilling to travel an extra thirty miles to the nearest main road, the driver decided to ignore the sign and take a chance. Fortuitously he made it. For the rest of the month, morning and evening, he continued to use the same short cut. In the process he learned to ignore the sign - forgetting it was there. On the last day of the month, half way across, the bridge collapsed, the truck fell into the chasm, the driver drowned. When she heard of the accident, his wife was furious:
"How could he have ignored the warning? He was so stupid!"
It is not just truck drivers in a hurry who knowingly take dangerous short-cuts. We all do it - even central bankers and politicians. Unfortunately the 'chasms' and 'storms' await us all.
S.1 JAM TODAY BUT NEVER JAM TOMORROW
What has all the above to do with the world of markets and economics? In a jointly authored book, published late last year, James Turk and John Rubino make a forecast of their own. The book is entitled:
"The Coming Collapse of the Dollar - and how to profit from it"
The authors describe the reckless manner in which their own government - the United States - is driving relentlessly into a 'perfect financial storm'. They are driven by the same mounting pressures on government, which led to the rise of welfare states in the late 1800's; first in Germany, then in New Zealand, Austria-Hungary, Norway, Sweden, Italy, the UK and Russia.
"The gold standard countries had arrived at the inevitable crossroad. In one direction lay CONTINUED DISCIPLINE, with the promise of further growth that would, over time, pull millions of people into the middle class - but at the COST of growing UNREST and risk to the careers of the people in charge. The other course was that of the SHORT-TERM FIX, expanding the role of government to BUY support in the HERE and NOW, at some undefined future cost to growth and STABILITY. Politicians being what they are, governments began to choose EXPEDIENCY over SOUND MONEY."
Times haven't changed. Turk and Rubino describe how the result of American profligacy will be national bankruptcy by way of a dollar collapse, coupled with a huge short squeeze in gold, causing a massive rise in price.
Their most interesting concept is their 'Fear Index'. Used to predict the price of gold, it is found by multiplying the number of ounces in the US gold stock (theoretically 261 million) by the current gold price in dollars. ($424)
They then divide the top figure by the latest M3 Money Supply. (Thanks to The Privateer the latest is $9.70 trillion). When James Turk and his friend wrote their book a year ago the result was 1,23%, using different figures. Based on their indicator, gold had already given a clear buy signal. The latest figures above are based on a marginally higher gold price - $424 instead of James' figure of $415. They also allow for a significant boost in the money supply (From $8,85 trillion in 2004 to an upated $9,70 trillion). The fact that the money supply has been able to increase so sharply without affecting the price of gold, brings the Fear Index down to 1,14%. The 'buy' signal is still intact, but only just.
In 1980 the Fear Index peaked at 9,4%. If history repeats, then as faith in the dollar crumbles, the gold price could rise by a factor of (9,4% divided by 1,14%), which equals 8,33 times. So $424 today could rise 8,33 fold, to $3,500. The time span at this stage is indeterminate. However, if past history is a guide, the bull market in gold and commodities will probably reach maturity by 2010.
The price of $3,500 is subject to two conditions:
- That the 261m ounces actually EXIST and have not already been lent out or sold. In this respect one needs to discuss the matter of 'German Gold'.
- That between 2005 and 2010 the money supply stands still. Last year it rose at an annual rate of close to 10%. As pressure on the FIAT system grows, the rate of increase is likely to accelerate sharply.
Taking the above into account, it is not surprising that Doug Casey's estimate of where gold ought to be is closer to $5,000. He says raising it there could possibly avoid a dollar collapse. Failing that the dollar itself will have to crash.
The writer's estimate of where gold is going is based on the relative prices of Oil and Gold over a 50 year period. Taking 1980 as a simple example, Oil peaked at $40, Gold at $875. Today Oil is $60. Gold ought already to be $1300. Matt Simmons believes Oil is heading for $200 over the next five years. That's a five-fold increase from 1980. Based on only a four-fold rise, Gold is heading for $3,500. Turk is in the same ballpark but via a slightly different method - using his 'Fear Index'.
S.2 GREENSPAN'S DILEMMA
On June 9, 2005 Greg Ip wrote an article on similar lines to the message in Turk's book, but for the Wall Street Journal. It was entitled:
"Greenspan's Legacy at Stake"
Ip described how 'asset bubbles' present central bankers with choices. They can either prick them early, or wait for them to burst before picking up the pieces. He failed to discuss the importance of determining the reason for their occurrence in the first place. The writer will return to that aspect later. The choices Ip describes are collectively merely questions of timing.
Ip relates how, in an attempt to learn from history, Greenspan studied the actions of the Fed in 1929 and the Bank of Japan in 1989. Both chose to prick their respective asset bubbles early, by raising interest rates. The result for the Fed was the depression of the nineteen thirties. For the Bank of Japan it was a market crash, similar in nature, but followed by fourteen years of deflation and a stagnation which continues to this day.
In the aftermath of the crash of 2001, Greenspan maintains he deliberately chose the strategy of waiting for the bubble to burst. Then, he aggressively cut rates seven times, all the way down to 1%. By January 2004, deeming the recovery sufficiently entrenched, he declared victory:
"Our strategy of addressing the bubble's consequences - rather than the bubble itself - has been successful."
Time will tell whether his glee was premature. Having studied the housing and mortgage markets all his life, Greenspan secretly knew that, between HIS rate cuts and BUSH'S tax cuts, their joint policies would rapidly replace a stock market bubble with a housing bubble, rock bottom savings rates, and 'out-of-control' deficits on budget and trade account - and that is what has happened.
When questioned, Greenspan admitted that his actions had fuelled a substantial rise in household and foreign debt as consumers 'extracted equity' from their homes to support a burst of spending - way beyond each consumer's means. To his credit, he maintained that with the passage of time, the imbalances would dissipate. Instead they have grown.
In February 2003, Fed Governor Kohn - one of the bank's principal monetary policy strategists - admitted falling rates had had an 'outsize impact' on 'car sales, home construction, and housing prices' but he claimed it had 'kept more people employed and reduced the risk of deflation'. In April 2005, Kohn finally accepted that the rate of increase in house prices 'raised questions'. Even Greenspan commented there were 'signs of a bubble' in the housing market - that it was becoming 'frothy'. It's too late. The damage is done.
S.3 WHERE DID GREENSPAN GO WRONG?
In the writer's view, the time for Greenspan to have acted to prevent a crash was back in 1996 when he first saw fit to cast a pall on US equity markets, describing them as inflamed with 'irrational exuberance'. The powers that be silenced him and he backed off. They were all making too much money. The Dow was then a mere 6,000. It finally peaked - five years later - at 11,700. That was definitely 'irrational' but by then the Chairman was no longer prepared to comment. Nor was he willing to act. In retrospect he should never have allowed the 'exuberance' to develop. He saw it coming, lost his independence, failed to act. If one searches for reasons, it was undoubtedly the Fed's own policies of ramping up the money supply, which indirectly promoted the 'exuberance' which took hold.
In 1998, two years after issuing his warning, the Fed Chairman had to contend with both a Russian Debt Crisis and the collapse of Long Term Capital Management. His response - as always - was to boost liquidity. In 1993 the Fed raised the M3 money supply by $80billion. In 1998 the increase ballooned to $600billion. By end 1999 the Dow had risen from 6,500 to 11,000 - all in three years and on the back of money supply.
Looking back there can be few congratulations for either the 'Fed' or its Governors. They failed the people and the country. Time will show this. There is one exception - a man who deserves credit for having taken the bull by the horns and done what needed doing. It was the current Chairman's predecessor, Paul Volker. By way of comparison, Greenspan's continuing actions stand in stark contrast. The sad thing is that his training and early belief in the discipline of the gold standard gave him an opportunity to play a uniquely different role. Instead he changed sides, fluffed it, and bent to the will of the bankers.
Volker had a different background. It was 'conventionally elitist' yet, when the occasion arose, Volker broke the mould. It happened back in the late seventies, when he forcefully raised interest rates. At the time his medicine was extremely painful but was specifically designed to break the stronghold of 'inflationary expectations' then gripping world financial markets. Before his measures began to bite, gold had pushed well over $800. Long term government rates later nudged 16%. Carter was ousted. Reagan became President. Rockefeller's instructions to the Fed and new Administration were unequivocal. Stop printing. Return to borrowing. Aim to balance the budget or we will completely lose control. It worked for a while.
Now the wheel has gone full circle but there's no firm hand on the tiller. Even if there was, action has been left too late. Instead, the US faces a debt bubble of vast proportions. It affects consumers in their personal capacities, their credit cards and house mortgages. It has caused the nation's budget deficit to balloon to 6% of Gross Domestic Product, and the country's deficit on current account to spike even higher. Every working day of the week, the US has to borrow almost $3billion from foreigners.
If there was a problem in early 2001 - the risk of collapsing share prices causing a major recession - the risk has now doubled. When the housing bubble bursts, its impact will be considerably more far reaching than the share crash of 2001. That is because the benefits of the housing boom have been far more widely spread.
David Vaughan quotes Businessweek:
"Economists at the IMF - which to its credit has been warning about our housing bubble for some time - have estimated that its collapse could have as much as TWICE the negative impact on the US economy as did the market crash in 2000-2002."
The Administration knows this. Ex Bush man Lindsey says the Fed should stop worrying about inflation and focus instead on protecting the housing market. He thinks the Fed should raise its short term rates to 3,5% - one more increase - then stop:
"You don't want to collapse asset prices. You want to give people time to adjust in a gradual way."
For the UK housing market it may already be too late. In May, Bank of America said:
"British house prices had raced ahead of even US property in recent years, leaving little doubt the country was in the grip of a speculative bubble…Skyrocketing house prices enabled consumers to draw down staggering levels of mortgage equity for spending …but the multiplying effect of the boom is running out…We cannot rule out a nightmare scenario in which a decline in consumption caused by a sudden correction in house prices leads to an explosive rise in the FISCAL DEFICIT that would have to be addressed by a tighter fiscal policy."
In other words, the UK economy is already running a budget deficit, even before the cycle turns down. When it does, and they have to raise rates, the housing market will implode. To start with they will probably cut rates, but, unless there is a substantial cut in Government spending at the same time, they are heading for a crisis. This is exactly what Lindsay fears will sooner or later afflict the US if the housing market is allowed to die. In due course it has to. Nothing grows to the sky.
S.4 VOLKER KNOWS GREENSPAN IS 'PLAYING WITH FIRE'
In February 2005, retired Fed Chairman Volker made a speech at Stanford University. He was commenting on the exploding imbalances impacting the economy in greater and greater measure:
"If I were a biologist I'd call this a perfect example of symbiosis…Contented American consumers matched against delighted foreign producers. Happy borrowers matched against willing lenders. The difficulty is, the seemingly comfortable pattern CAN'T GO ON indefinitely…"
Volker expects a crisis:
"At some point, investor confidence could fade, with damaging volatility in both exchange markets and interest rates."
S.5 IN DENIAL OF CRISIS
The writer was fortunate to come across an excellent and comprehensive two-part article by David Jensen of Vancouver, entitled:
"IN DENIAL OF CRISIS".
He describes how the stock market bubble and subsequent correction of 2000:
"reveals a distorted economy saturated with unsustainable and increasing levels of debt just to continue the economy. The post-bubble response of the US Federal Reserve in lowering interest rates to 1% now leads to rampant and DESTABILIZING financial bubbles in the economy including the North America-wide real estate bubble. "
Jensen then referred to a second address by Paul Volker - on April 10, 2005:
"Under the placid surface of the economy, there are disturbing trends: huge imbalances, disequilibria, risks - call them what you will. Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot."
Clearly this particular Ex-Chairman can read the writing on the wall and is not afraid to speak it out.
S.6 ERRANT CENTRAL BANKS FORCED TO COVER TRACKS
When central banks knowingly choose 'JAM TODAY' in lieu of 'JAM TOMORROW' they are forced to cover their tracks. They either intervene or sabotage the warning signs. Interventions are frequently of a political nature as well. It was the late President Roosevelt who coined a phrase of which we need to take careful note:
"Nothing happens by accident in politics."
Having dumped the discipline of the gold standard many moons ago - if one is strictly honest the problem began as far back as 1913 with the establishment of the Federal Reserve - central banks have nonetheless been unable to do away with gold's nasty pointing finger.
Here's what happens. When central bank actions overstep the bounds of financial prudence, the gold price invariably rears its ugly head and fires a warning shot. It does this by going up. In doing so it often triggers secondary effects which sabotage central bank objectives. Here are some of them.
- Currencies weaken, when required to stay strong.
- Long bond rates go up, when banks want them down.
- Markets crash when elections are round the corner.
- Rising commodity prices cause problems:
- They fuel inflation.
- They worsen a nation's balance of payments.
- They enable emerging nations to exercise 'undue' international influence.
In the absence of a rigorous gold standard, the COUNTER-VAILING actions banks use to suppress some of the above, can only come via surreptitious market INTERVENTIONS.
THEREFORE, when markets behave in ways that are strange, there's often a good reason. Sometimes Keynes is right. The market is simply 'IRRATIONAL'. At other times, events are responding to an underlying cause of which market observers are totally ignorant. The act of attempting to IDENTIFY the agent of change ought not automatically to relegate one into the category of being an 'obsessive conspiracy theorist'. There are times when one has to ask questions.
That central banks and power elites would wish to distort markets is nothing new or strange. Even where it is clearly taking place, there are people who would rather not know for fear of getting hurt or spoiling 'friendships'. The writer does not fall into that category. He is a firm believer in the biblical truth that:
"What is done in the dark will come out into the light."
This article therefore focuses a spotlight on one or two markets where strange things are happening to delay inevitable market adjustments. We have termed them 'market shenanigans'. They include major currency shifts, irrational government bond behaviour, high income stocks which fly in the face of clear and present dangers, property markets which defy gravity, and finally the most 'controlled' substance of all, the gold market.
CONCLUSION TO THIS ARTICLE
This article concludes with a speculative analysis as to potential G8 plans for GOLD in the next few months.
The GOLD CARTEL is under severe pressure. In one form or another, IMF Gold is the last available source of fresh physical 'supply'. Readers will be shown how the central bank GOLD CARTEL has used a myriad of measures to shore up their FIAT currencies and suppress the price of gold. But it's not enough. They urgently need fresh stocks of the metal.
Traveling in Noah's Ark of Gold is the safest way for investors to ride out the 'perfect storm'. Over the long term the price of gold will soar.
In the short term, there is still a risk of the odd 'hiccup'. The price could go either way. A break above $443 spot could spark a run to $500 - then higher. On the other hand, if the GOLD CARTEL pulls out the stops, a last sell-off - back to $385 - is not impossible. If it happens, let it serve as a superb opportunity to buy. Refrain from panic. Victory is close. Let the situation develop.
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