IT CAN HAPPEN
- gold at $3500
Investment Indicators from Peter George
Monday, October 17, 2005
Scripture
'What has been will be again,
What has been done will be done again;
There is nothing new under the sun.'
Ecclesiastes chapter 1, verse 9
SUMMARY
It was the Spanish 'Naturalist' philosopher George Santayana who arguably best expressed the kernel of the above truth when he proclaimed the following:
"Those who fail to learn the lessons of history are doomed to repeat them."
We run the risk of making the same mistakes today as we made in the past. We seldom learn. As an old generation passes away, a new one takes its place. They are as stubborn and foolish as their predecessors and frequently forced to learn the same hard lessons afresh. Yet if we study history, much of our pain could be avoidable.
S.1 COULD HISTORY REPEAT?
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S.2 POTENTIAL FOR ANOTHER BULL MARKET IN GOLD
By end-January 2006, the latest bull market in gold will be 7 years old, measured from August 26, 1999, when the price recorded a 19-year low of $252. The 'bull' will be only 4-and-a-half years-old if one tracks the upturn from February 16, 2001 when the price recorded a near-double bottom at $254. That is certainly a more obvious beginning but arguably not as accurate if we are seeking to define the EXTENT and DURATION of the balance of the move - and that is the intention of this report.
As with both previous commodity super cycles - from 1924 to 1938, and again from 1966 to 1980 - extraneous events intervened to compress the move in gold but one cannot ignore their effect. On this latest occasion, they caused gold to suffer a major set-back which postponed the start of the bull by two years. Once we investigate how it happened, readers may understand why the writer believes the TWO YEARS ought to be included. In effect the cycle is therefore more mature than we think. Because it has been 'compressed' it will 'spring back' with greater force as it approaches maturity. It also helps explain why the gold/oil ratio is so out of kilter - more of that later.
The delay from 1999 to 2001 was the result of a deliberate attempt on the part of the UK Government to suppress the price. Against the better judgment of the Bank of England, the UK Treasury forced the Bank into proceeding with a series of gold auctions totaling 400 tons. The average price realized amounted to $276 an ounce. In retrospect their timing was not particularly clever but then maximizing revenue was never the intention. In relation to current prices - and for the record -the UK's opportunity cost has been $2,3billion (and counting!).
The auctions were originally announced on May 7, 1999 as gold was preparing to break above $300. By August, as sentiment deteriorated, gold bears hammered the price back to $252. On September 26, 1999, in an attempt to soften the blow, European central banks announced their 'Washington Agreement'. It was a plan to limit official gold sales to 400 tons a year over a five-year period. The market completely over-reacted. In days the price recovered from $252, broke through $300 and jumped to $330. $400 was round the corner. British bullion dealers went into a cold sweat. Most of them had been encouraged by their government to go 'short', in expectation of further falls. When the reverse happened they cried for help. GATA believes the US then intervened, borrowing 1700 tons of gold from the Bundesbank before dumping it onto the spot market in Europe. Eddie George - Governor of the Bank of England - later told a friend they faced 'the abyss' if prices rose further.
With all the above interference it is not surprising the price retraced its steps. The auctions continued for three years until March 5, 2002. By February 2001 - and to no-one's surprise - the price was levered back down to a 'double-bottom' at $254.
In view of the above, the writer believes the true beginning of the current 'bull' market was therefore August 1999. There is even a case for going back as early as 1994. That was when central banks collectively began to encourage clients - especially well-connected major mining houses - to 'hedge' production forward. The latter were warned in no uncertain terms that central banks intended bringing the price of gold back down from its 1994 high of $410. They were advised it would be in their interests to take advantage, by selling their own production 'forward'. In the event, the advice was 'self-fulfilling'. The world's top three producers, Newmont, Anglogold and Barrick, each began to sell their gold in advance of being produced.
In the interests of simplicity, the writer intends accounting for these earlier attempts at suppression, and the hedge positions that remain, by lopping 2 years off the end of Lassonde's 14 year super cycle and making it 12. The actions of large hedgers delayed the start of the market at the outset. Now, as they run for cover, their actions will have the opposite effect.
If we take August 1999 as starting point for the current 'bull run', then we have completed the first 6 years of a total 12-year super-cycle. That leaves another 6 years to go - termination date August 2011 and ultimate target $3,500 an ounce. A full justification of this forecast will be provided in the body of this report.
1.1 GOLD BREAKS FREE FROM THE DOLLAR
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1.2 GATA'S NEW-FOUND FRIENDS
Veteran newsletter writer and 'Dow Theory chartist' Richard Russell - long an advocate of gold - has been forced to acknowledge the overwhelming evidence of manipulation without saying how or by whom.
South African mining analyst Tim Wood, a previous scoffer of note, wrote an article on September 2, entitled:
"If oil goes to $100, where does gold go?
He focused on the growing distortion between the prices of oil and gold as evidence that something was amiss. At the very least - without daring to mention the word 'manipulation' - he drew attention to the record fall in the oil/gold ratio from a long-term average of between 15 and 17, to a recent low of 6,7. He ventured to suggest gold 'might be under-priced' but went on to speculate that if oil 'temporarily' spikes to the Goldman Sachs' target of $100, the gold ratio could eventually fall as low as 5 barrels to the ounce. To use a Bill Murphy phrase:
"What is with these guys?"
Not for a moment do they question why the ratio is so out of kilter. Nor do they ask what would happen if - instead of 'spiking' briefly as per Goldman Sachs - oil instead ratchets higher by multiples over the next 6 years, as supply enters long-term decline.
1.3 MANIPULATION SPREADS TO OTHER MARKETS
The extent of manipulation by central banks has lately been shown to include a far wider range of financial markets than ever demonstrated before. It was always suspected but never proven. Now it is seen to encompass not only gold and the currency markets, but bonds, commodities and equities as well. If necessary it can even stretch to property, thanks to the unlimited imagination of one of Greenspan's likely successors, 'Helicopter Ben Bernanke'. (BB is the ex Fed Governor who said that in a deflation the US Central Bank would if necessary drop $100 notes from helicopters to encourage instant spending). He specifically mentioned property prices as a legitimate asset target for a government bent on preventing panic and needing to underpin debt cover for mortgage-backed securities. (More about these later)
In respect of the above revelations, tributes are due to GATA members John Embry and Andrew Hepburn. They are both attached to Canadian Investment House, Sprott Asset Management.
When Embry left the Royal Bank of Canada a year or so back he effectively 'swapped sides', dumping the establishment's 'Gold Cartel' for the 'Rebels of GATA'.
His first offering in this new role was a lengthy and revealing report entitled:
"Not Free - Not Fair: The Long-Term Manipulation of the Gold Price''
It was a detailed exposé of the Administration's widespread and long-continued manipulation of the gold market. Erstwhile colleagues in the Bank studiously ignored it.
His and Andrew Hepburn's latest effort, published towards the end of August, was entitled:
"MOVE OVER ADAM SMITH: The Visible Hand of Uncle Sam"
In a 40-page document they discussed how US shock, following the market crash of '87, led President Reagan to appoint a commission to determine the causes. Called the 'Working Group on Financial Markets', its aim, apart from identifying major issues was:
"enhancing the integrity, efficiency, orderliness, and competitiveness of the nation's financial markets and MAINTAINING INVESTOR CONFIDENCE."
Although the President rejected calls for 'more regulation', the Embry report showed how within a year the 'Working Group's' role had evolved into what later became known as:
"THE PLUNGE PROTECTION TEAM"
Credit for this anti-free-market morphing process probably goes to ex-Fed Governor Robert Heller who, within months of retiring in 1989, presented the financial press with a dramatic proposal for direct market intervention by the Fed when cataclysmic plunges threatened equity markets. He submitted an article to the Wall Street Journal entitled:
"Have Fed Support Stock Market, Too"
In it he spurned the role of automatic 'circuit-breakers' - suspension of trading being one - in place of a novel method of direct intervention by the Fed. Here is what he recommended:
"Instead of buying individual stocks….the Fed could buy broad market composites in the futures market. The increased demand would normalize trading and stabilize prices. Stabilizing the DERIVATIVE markets would tend to stabilize the primary market….Instead of treating the SYMPTOM of the panic - the liquidity of the banks - the Fed would eliminate the CAUSE."
(A crash in prices)
In 1992 outspoken financial journalist John Crudele wrote an article for the Buffalo News entitled:
"Evidence Suggests Government Manipulating Stock Market"
Crudele quoted a top inside source in the Republican Party as stating that the government had already INTERVENED to support the stock market as early as 1987 - even before Heller resigned from the Fed and presented his proposal. Crudele's source revealed that the Fed supported the market again in both 1989 and 1992. In other words, far from being a 'proposal', Heller's article was flying a kite for what was already taking place. Crudele's insider was Norman Bailey, a top economist with the government's National Security Council during the first Reagan Administration. Bailey described how:
"People who know about it think it's a very intelligent way to keep the market from a meltdown."
Bailey explained how the process works. The Fed arranges for banks to give orders to buy 'index futures contracts'. Brokerage firms who receive the orders are encouraged to believe they emanate from 'foreign clients', even 'the central banks of other countries'.
This is like a giant-size version of Robert Kirby's "Pirates of the Caribbean" where Kirby laid out persuasive evidence to support his allegation of official purchases of Treasuries by the Fed, via banks in the Caribbean masquerading as foreign central banks - a device concocted to fill the gap between a growing US trade deficit and shrinking foreign purchases of Treasuries despite rising dollar surpluses. These foreign buyers of Treasuries were needed to mop up the shortfall that had previously been sufficient. Now countries like China have been expressing second thoughts as to where they should invest growing dollar surpluses. So far their withdrawal has been minor and temporary - more a testing of the wind. In the absence of this automatic support for the US bond market, the Fed itself had to fill the gap.
How does all this evidence help us forecast the future direction of the gold market in particular and other markets in general? Or are they permanently fated to lie shackled to the whim of central banks and their political stooges? Analysis shows that the burden of intervention is becoming all-pervasive but at the same time is reaching practical limits. They cannot print physical gold.
One of the biggest problems is the 'insider trading' it encourages by inviting major banks and brokerage firms to 'assist' the Fed and Treasury in stemming the tide of panic 'in the interests of the country'. In the process of 'co-operating' with these secret interventions major private financial institutions are given ringside seats in the business of trading at substantial profit against the trend - knowing they cannot lose.
We quote from Embry's conclusion:
"We have not taken a position on the wisdom of intervention in this paper, largely because exceptional circumstances could argue for it. In many respects, for instance, the apparent rescue after the 1987 crash and the planned intervention in the in the wake of September 11, were (both) very defensible."
OUR COMMENT
For those who believe in the validity of the 54-year Kondratieff economic cycle, 1987 was a critical point. It marked year fifty four from the pit of the thirties depression. If the Dow was going to crash of its own accord, this was going to be the year. It coincided with Greenspan taking over as Chairman of the Federal Reserve, boasting he could defy the historic cycles of boom and bust. He would print his way out of the Kondratieff Winter. The crash in October of the same year - dubbed 'the '87 crash' - gave him his 'baptism of fire' and first opportunity to test his theories. His response was predictable. He opened the floodgates of liquidity, rescued the international markets, but the cost was high. He proceeded to drive the world economy further and further into debt.
Today the world economy - particularly that of the US - stands on the brink, faced with multiple bubbles across a wide spectrum, and the piper is calling for payment. In retrospect it may well have been better had Greenspan not stuck his oar in when he did. Had the free markets been allowed to run their course, the subsequent crash and deflation would have expunged all debt. Thereafter, a fresh foundation could have been laid for healthy growth. In the writer's opinion, and with the benefit of hindsight, intervention has been both counter-productive and unjustified.
Government actions in the wake of September 11 are a separate issue. Here from most accounts was a blatant act of war. The financial elite's top organization, the 'Council on Foreign Relations' had already determined during a 'war games' project in January 2000 - involving a group of 75 financial and political experts and according to project organizer Roger Kubarych - that:
"Future threats to national security will be as much about economics and finance as they are about bombs and missiles."
Embry relates how CFR's President, Leslie Gelb, confirmed this:
"The most dangerous near-term threat to US world leadership and thus to US security, as well, would be a sharp decline in the US securities markets. Such a decline would stun the US economy at a time when the strength of our economy is critical to global prosperity and political stability of most nations, and ultimately to international security itself."
In the aftermath of September 11 it is generally believed that:
"The terrorist attacks threatened to cause a panic in financial markets."
Yet the facts tell a different story. If one studies trading in the Dow in the 4-day period PRIOR to September 11, one will observe that the index was already in a terminal dive. It began well in advance of the attack. The Dow then fell by an average of 200 points a day for each of the 4 days which preceded September 11. In fact the subsequent intervention turned out VERY CONVENIENT. This is in no way to suggest that there was any form of early warning. It does however seem indisputable that financial institutions were delighted to discover a ready-made excuse for intervention. Once again they interfered with a free market process which was already underway without any help from terrorists.
We encourage you to access the full report at Peter George's website with a
view to becoming a SUBSCRIBER. The address is:
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