Taylor On US Markets & GoldBullish Markets:
COMMODITIES - At the end of last week, the CRB broke above its up-trend channel, creating an even more bullish picture than we have seen since the start of this bull market run back in April 2002. Likewise the Rogers Raw Materials Index Fund remains on a tear. It is already up over 7% this year.
BONDS - All durations of U.S. Treasury instruments remains bullish, defying
mainstream experts. We think the continued strength in the Treasury
instruments is evidence of deflationary pressures and that bonds will remain strong until a crash in the dollar results in huge amounts of foreign capital leaving the U.S.
GOLD - See our discussion below.
U.S. DOLLAR and EQUITIES - See our discussion below in the Gold Section.
This past week a new US Treasury Secretary was confirmed and one of the key things he said was that he was in favor of a strong dollar. But that should not be a surprise. Politically, that would be suicide for a country that is not only the lone superpower but which also has succeeded in getting the
world to use the dollar as its reserve currency. Is the Treasury Secretary
sincere about his view that we should maintain a strong dollar policy or was he simply giving the politically correct answer to ensure his confirmation?
We have no way of getting inside the new Treasury Secretary's head, but we
do believe it may be very difficult for him to orchestrate a strong dollar
policy given all the ills of the U.S. economy and global dollar based monetary system as discussed above.
To get a handle on where the dollar is headed with or without a strong
dollar policy, we must first recall how the Clinton Administration implemented their "strong dollar policy. The establishment would have you
believe the dollar was strong because a) it was talked up and b) the U.S.
economy under Clinton was so strong.
Congressman Paul pointed out in the article displayed above that the strength of the U.S. economy has been more of a mirage than reality. And as
my good friend and truth teller David Tice used to say in arguing the bearish case for stocks on CNBC during 1998 and 1999, "print me a trillion dollars and I will throw one heck of a party too!"
We are quite sure thanks to the excellent work of GATA intellectual
heavy-weights like Reginald Howe, James Turk, that the Clinton strong
dollar policy was implemented by the Fed and the Exchange Stabalization
Fund capping the gold price. A major basis for this view was a paper on the
topic of "Gibson's Paradox" co-authored by Professor Lawrence Summers
(www.goldensextant.com.) in which he acknowledged that if real interest
rates were pushed down by a mass creation of printing press money, the only
way you could keep the currency strong was if the price of gold were
"capped." To ensure its political survival and to orchestrate the phony
economic growth of the 1990's, national bailout after national bailout was
orchestrated by this interventionist Democrat administration, starting with
Mexico, then later Russia, Long Term Capital Management, and Asia followed
by Y-2K leading up to January 2000.
Massive amounts of money were created out of thin air by the Fed to ensure
the world economy kept turning in spite of these global problems. There was
never a thought of not intervening. But the $64 trillion dollar question is
"how did the dollar increase in value those years even as its supply skyrocketed? In addition to lies spun by our policy makers (remember
productivity claims, a "new paradigm," etc.?) the major fundamental tool
used by the Clinton Administration Exchange Stabalization Fund and
supported by the Fed was the rigging of the gold price to lower and lower
levels. Summers who worked for Rubin at the start of this process in 1995,
understood gold had to be suppressed. That was the only way the world could
be conned into a strong dollar policy.
In addition to using its influence to get central banks around the world to
do some of the Clinton Administration's heavy lifting by selling their own
gold, Central banks, (most likely including the Fed) made gold available at very low interest rates to their crony capitalist friends at some of the
major bullion banks. We believe it was think it was no accident that during
the Clinton days, Bob Rubin's old firm, Goldman Sachs was the key gold
borrower from the U.S. Treasury via the ESF. Goldman itself did not need to be involved with any conspiracy. All it had to do was take advantage of is
special crony capitalist relationship with the Administration to borrow
gold at around 1%, sell it in the market and use the proceeds to buy other
investments like U.S. Treasuries which were yielding 7% or so at that time.
Not a bad margin wouldn't you say?
In theory at least, Goldman would have to return that gold to the Treasury,
and that could be a loosing proposition in the event the price of gold were
to rise. But being privy to inside information, Goldman and other bullion
banks like Chase, J.P. Morgan, and Citibank did not need to worry because
they were given assurances by policy makers - Greenspan in particular -
that "central banks would continue to lease gold in increasing quantities,
should the price begin to rise." (Greenspan twice in 1998 on Capital Hill).
So the U.S. and many other foreign banks, out of academic ignorance and/or
greed on the part of the banking establishment, dishorded gold. How much
gold has been dishorded in the process of blowing up the greatest financial
bubble in human history remains uncertain, but based on the excellent work
of Frank Veneroso and other GATA heavyweights, it seems likely that ½ or
perhaps more of the gold that is reported to be on national balance sheets
of various countries has been sold or lent or swapped into the markets, so
that it is highly unlikely that it will ever be returned as a foundation for monetary stability to the western banks that lent it out. Indeed the recent revelation by GATA of the Bank of Portugal's financial statements lend a great deal of credence to the notion that a major portion of western
central bank gold is gone. In fact, Portugal's annual report showed that
only about 1/3 of the gold it says its claims to own is its possession!
Given the huge shortfall of supply to meet annual demand, it is highly
unlikely that Portugal will ever have its gold returned.
Recently, US Secretary of the US Treasury, Paul H. O'Neil may well have seen the handwriting on the wall and opted out so that he would not have to face the prospects of a skyrocketing gold price and a plunging dollar. Moreover, Mr. O'Neil understood, but was forced to say otherwise early in his tenure as Treasury Secretary, that the dollar was overvalued! All hell broke loose among the banking establishment when he said the dollar was
overvalued immediately upon taking office. He knew then and knows now that
the dollar is overvalued and that to continue rigging the gold price -even if that were possible - would be a policy detrimental to the U.S. if not the ruling elite corps of bankers who really run America.
The pernicious destructive dynamics of an overvalued dollar will not change
for the new Treasury Secretary. Is the U.S. running out of golden bullets
with which to shoot the gold price down? It may not matter because as Dr.
Stephen Roach of Morgan Stanley has been pointing out for quite some time,
and my good friend Dr. John Whitney for an even longer period of time,
unless the dollar is reversed to a level that reflects actual trade realities, the U.S. economy will continue to perish. It may already be too late for America to reverse its path. A strong dollar has resulted in the rape of American wealth creating industries like mining, agriculture and manufacturing. America's ruling elite - top management of our money center
banks may not care if Americans lose their jobs to the Chinese because of
an unfair currency advantage to the Chinese, but the American people do
care. Soon there will be political hell to be paid unless this situation is
remedied. I think the Bush Administration knows that and so it must be,
behind the scenes orchestrating a weak dollar policy while officially
maintaining a strong dollar policy so as to avoid an outright plunge and panic of the Greenback.
And since the tool used to implement a strong dollar policy was never revealed to the American people - the rigging of the gold price to lower
levels - all the new Treasury secretary will have to do is quietly behind
the scenes, stop suppressing the gold price. The dollar will then naturally
decline as the price of gold rises. I suspect the U.S. has shot most of its
golden bullets. But even if it has not, it may make no difference because
the sins of a gold market rigging are now bearing down on America. We face
the greatest deflationary collapse since the 1930's as a result of the most
excessive debt money binge in our history so that by this time, even the
establishment policy makers know that continuing to rig the gold prices at
lower levels in order to strengthen the dollar represents economic suicide for America.
Of course, I take the position that no matter what policies are implemented, it is too late to escape the excessive creation of money and debt orchestrated during the current 60 to 70 year Kondratieff cycle that
Ian Gordon argues began back in 1949. To defy reality and win votes, the
dollar lie was created by suppressing the price of gold. But now, having
suppressed gold to its absolute limits, the yellow metal is getting ready
to shoot to unfathomable heights like a recoiled spring with enormous pent
up energy. Gold is likely in the very earliest stages of the most remarkable bull market ever even for those of us card carrying members of the Gold Bug Society.
Gold is Very Strong - The Dollar is Very Weak
February 6, 2003
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
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