Taylor On Gold
Gold Screams "Manipulation" and "Trouble" at Greenspan & Cronies
Gold is telling a story in spite of all efforts by the establishment to
muzzle it. If you think gold has not been manipulated, I would strongly
suggest you examine the mountains of evidence of central bank manipulation
compiled by Bill Murphy and Chris Powell and their friends at
www.lemetropolecafe.com.
Why does it matter if gold is manipulated? It matters because by capping
the gold price for many years, policy makers have deprived the markets of
warning signs that a free trading gold price would have otherwise provided.
Absent a rising gold price, Republican supply side advocates-folks like
Larry Kudlow for example-have concluded that everything is fine in America.
A rising gold price, if left to rise, would have suggested problems were
brewing during the Clinton Administration and earlier. And with warning
signs abounding, it would have been impossible for Alan Greenspan to create
the series of financial bubbles that he created through his lavishly easy
money policy over the past 18 years.
By capping the gold price, the Clinton Administration and the Fed enjoyed a
bubble in the stock market. And when the equity bubble was deflated by
driving gold lower via dishoarding practices, the Fed and other central
banks in the hip pocket of the U.S. continued to deceive Americans and the
international markets into believing all is well with our increasingly
global economy, even as chronic imbalances like the trade deficit and U.S.
dollar borrowings have suggested that isn't true. The low gold price helped
pave the way for lower interest rates that stimulated a stock bubble, a
housing bubble, an energy bubble, and many other bubbles. All of these
economic distortions would not have been possible if the Fed and other
central banks had not "managed" or "capped" the gold price over the last
decade or two.
But rest assured, over the long run there is no free lunch. As we say
almost every week, debt is the raw material from which fiat money is
created in a fiat paper monetary system such as we have had since 1971. And
as we also frequently note, and show on the chart on your left, debt is
growing exponentially, while income, which unlike debt money that can be
created at will by policy makers, is governed by natural economic
constraints and continues to grow in a linear pattern.
Now, on top of the ill advised and immoral war in Iraq, which is costing
huge amounts of money, and thousands of U.S. troops in hundreds of foreign
lands sent there to impose the will of the U.S. on other nations, we have
the biggest and costliest disaster in American history. The price tag is
now set at $200 billion just to repair and rebuild this huge area in
America's south. That doesn't even count the billions of cost to the
economy resulting from a damaged infrastructure. The world is beginning to
become anxious as it asks, "How is America going to pay for this on top of
all its other socialistic/fascistic endeavors? Do they expect us to send
them, the richest country in the world, $2 billion per day so they can keep
buying all manner of junk from China that they don't need, so they can keep
driving their SUVs and buying bigger and more lavish houses?"
I believe that anxiety is spilling over now into the currency and gold
markets, which is why this past week we have seen gold breaking through the
all important $456 resistance level against the dollar to $459, in spite of
ongoing attempts by the Fed and other "hip pocket" central banks to cap the
gold price. Breaking through this resistance level, even as the dollar was
rising last week is a very, very bullish sign, and looking at the charts, it seems as though the next serious resistance level for gold is $500. I
believe that number could be challenged yet this year. Of course longer
term-perhaps over the next 5 to 10 years, we should see gold rise in
percentage terms akin to those when the yellow metal rose from $35 to $850 in the 1960s and '70s. Thus, gold's price will be quoted in four digits not three.
Perhaps the most important measure of gold's strength is its rise against
foreign currencies. My friend James Turk pointed out to me this week that a
key resistance level for gold in terms of euros was $365/oz. This week gold
broke through that resistance level like a hot knife through butter, rising
to $375. This is evidence I believe, that no matter how hard the Fed tries
to suppress the gold price, the wasteful, immoral money management of Uncle
Sam as made possible by the Greenspan Fed is beginning to cause the world
to lose faith in the paper system dollar based system. Where have people
gone for centuries when they lose faith in paper money and the institutions
that create them? They go to gold and sometimes silver.
Another significant measure of the recent strength for gold is one that I
look at thanks to the advice of Bob Hoye, and one we use in our
Inflation/Deflation indicator, is the "real" or inflation adjusted price
for gold. Because Bob understandably does not trust government inflation
numbers, he measures gold against the CRB. We actually prefer using the
Rogers Raw Materials Index because we think that is the best measure of the
actual cost of keeping alive, given its more appropriate weighting of
various commodities. What we saw this past week was that gold rose 3.08%
above the Rogers Raw Materials Index. (It may actually be higher when we
get Friday's numbers on Monday.) So gold is rising against most all
currencies, against the dollar-which is also showing strength vis-à-vis
other currencies-and it is also strong against commodities, too.
So the world wants to know: How is America going to pay for the $200
billion Katrina price tag on top of all the other things going on? And how
can the U.S. spread itself so thin, telling other countries how to run their affairs, and then not have troops in place to properly take care of its own disaster? I think the world is starting to say in not so subtle terms that they are getting tired of sending us Americans $2 billion every day so we can keep buying junk from China, gas-guzzling SUVs, and oversized houses.
If we don't suddenly raise interest rates to reward foreigners who have
been doing our saving for us, do we begin raising taxes at a time when
consumers are finally showing signs of petering out? By the looks of the
Wal-Mart chart above, the consumer may finally be about to bite the dust
with interest rates rising, gas prices high, variable rate mortgages soon
to increase, home refinancing on the wane and with a new and onerous
bankruptcy law kicking over indulgent consumers in the posterior end. Home
building charts are also indicating that trouble in the housing sector may
not be far away.
What happens if the Fed keeps raising interest rates now just so that
foreigners don't decide to start selling dollars-never mind stop sending us
$2 billion per day? As I have been saying over the last couple of weeks, I
think that may be exactly what is now beginning to happen. As in the late
1970s, the rest of the world, being our creditors, may be saying to us,
"It's time to pay the piper. Ante up, Mr. Greenspan! Make our holdings of
dollars worth something. You won't let us buy your oil companies, so what
good are your dollars? You'd better raise rates or we are going to run out
of your currency. And if we do that, the dollar crashes; and you, America,
are going to have to relinquish your place as the world's lone superpower."
Gold up, Dollar down? Beware! Gold up and Dollar up May Be the Trend
The assumption by most people in the financial industry is that a higher
gold price depends on a lower dollar, and they think that gold is rising because of inflationary pressures. Actually, gold does well during inflationary and deflationary environments, while non-monetary commodities
perform very poorly in a deflationary environment.
As I said before, the ruling Anglo-American elite would rather see America
enter another Great Depression than to relinquish its place as a world power. And so, I believe the die may be cast for the beginning of the Kondratieff winter. Time will tell, but I think Bob Hoye's comments this week relating to the dollar are well worth noting. Bob makes a point that is overlooked by almost everyone with the exception of Richard Russell from time to time-that the dollar could be the strongest currency against most if not all other currencies, even as the price of gold rises vis-à-vis all currencies. Do you wonder how that could be?
As Bob frequently points out, the senior currency through history has been
the strongest during a deflationary collapse because it is the one with the
most debt. Debt represents a short position against a currency. When you
borrow to buy a car or a house, you are, whether your realize it or not,
taking out a short position against the dollar. What happens when the
economy implodes or contracts and you either lose your job or fear you will
as a result? What you will do is start to sell everything you don't need,
for dollars. What happens what that takes place, en masse? You start to see
the dollar rise, vis-à-vis all manner of items being dumped on the market.
That is what will happen in America when Ian Gordon's Kondratieff winter
bites hard. It is inconceivable to all but the oldest Americans because the
rest of us have not witnessed that happening in America in any major way
since the 1930s. But I believe it will happen again, which is why I think
gold and paper currency-preferably under the mattress and not in shaky
banking institutions guaranteed by a government that is itself increasingly
shaky and in fact already bankrupt-are where you are going to want to have
a major part of your money when this crisis hits.
In any event, regarding the dollar short thesis and why the dollar could
actually get stronger much to the surprise of most investors, here is what
Bob Hoye had to say in this week's Pivotal Events:
"As we like to contemplate, the very worst thing that could happen to
policymakers would be a firming dollar.
"This is based upon the doctrinaire practice of depreciation, which has
been the universal remedy for any official concern. So if depreciation is
good, appreciation is bad-particularly if the world is massively short
dollars and long highly inflated asset prices.
"The problem, as any speculator knows, is that the debt stays when prices
suddenly fail. Typically, this then urgently compels offside players to sell assets to cover debt that suddenly makes cash (dollars) more important
than formerly hot stories.
"On the dollar relative to currencies, our view is that the majority of the
global debt issued (there has been a debt bubble) has been underwritten in
New York and payable in dollars.
"This has also been the condition when sterling was the senior currency and
London was the financial center. Following previous great asset inflations, the problem became servicing debt into a firming senior currency.
"After all, the majority of global debt during those melancholy contractions was obliged to be serviced in sterling. Selling other currencies or raw materials to meet those obligations tends to make the 'owned' currency relentlessly strong.
"In the 1550s, Thomas Gresham discussed this acute problem as financial
agent and advisor to the government of Elizabeth I.
"In yet another century, actually the 20th, Ludwig von Mises wrote a
concise essay on the post-boom credit contraction-The Dearth of Credit.
"A low of around 85 for the dollar index has been possible in September.
After that, the uptrend that started last December can resume." (Please
refer to www.institutionaladvisors.com for information on Bob's service.)
RobTv Host Assumes Rising Gold Means Inflation and Dollar Demise
On Friday evening I traveled into Times Square where I appeared on a ROBTV program, Business News, at 7:00 p.m. ET. The host of the program assumed I would agree that gold was rising because of inflation and as a result the
dollar would have to crash. I passed on, as best I could with such limited
time, Bob's dollar short thesis, which I believe is valid, based on intuitive reasoning and most importantly on history.
But the idea that the dollar could actually get stronger when people think
policy makers can print unlimited quantities of this increasingly worthless
paper is counterintuitive and thus hard for most people to fathom. The
reason they don't understand is because they fail to realize that "debt is
the raw material from which fiat money is created and as such, printing
more of this debt money results in a larger and larger dollar short position. And so when the margin clerk calls for repayment of debt, everyone is forced to stampede out of the narrow exits at the same time to sell what ever they can to raise cash."
So as you can see, despite my flirtation with inflation hedges and despite
the fact that those investments have been very kind to our Model Portfolio
this year, I remain a deflationist and worry about when we might want to
exit from those investments. Ultimately, deflation will win. And I wonder
also, based on Bob Hoye's work as well as more signs in my own
Inflation/Deflation indicator (which was down again this week), whether we
may be nearing a tipping point from inflation to deflation. Indeed, Bob
noted that a steepening of the yield curve this past week could be hinting
that a start of a cyclical bear market in base metals could be underway.
September 19, 2005
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com
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