Taylor On Gold
"The euphoric episode is protected and sustained by the will of those who
are involved, in order to justify the circumstances that are making them
rich. And it is equally protected by the will to ignore, exorcize or
condemn those who express doubt."
Bob Hoye published that quote in his latest issue of Pivotal Events.
(www.institutionaladvisors.com). I think it is a very timely quote, because
in my view, we are approaching the crossroads at which time our
manipulative fiat monetary system is nearing a breakdown point. Every
imaginable effort will be employed by America's version of Pravda-namely,
CNBC, to convince you everything is alright. But the surefire sign that
things are not alright can be seen by a gold price that is getting away
from the manipulators.
Long-time subscribers will recall that a couple of years back I talked
almost every week about gold market manipulation. I stopped talking about
it because it had become so clear to me that it was going on, that there
really wasn't anything more to talk about. Besides, my good friends Bill
Murphy and Chris Powell at www.gata.org and www.lemetropolecafe.com do an
excellent job of beating the drums of this awful social injustice-the
injustice of rigging the gold markets so that the establishment can
"protect the euphoric episode," which is represented by the ongoing
overly-inflated equity prices, housing prices, and debt valuations.
But gold's rising price is telling a story. It is telling us that the big
lie-that paper is better money than gold-cannot be perpetuated by our
government and Wall Street forever, because the abuses of our fiat money
system are now leading to a breakdown in the world monetary system. Like
Pinocchio's nose, this big monetary lie just keeps getting bigger and
bigger and bigger with each successive lie. Every time Ben Bernanke fires
up his money printing helicopter and creates more debt money, we come all
the closer to a monetary meltdown, because the lie he tells-namely, that
printing more money will result in prosperity-is leading America into such
indebtedness that the end is all the more obvious.
Just as the Soviet Communists were, in the end, unable to keep economic
reality from their population by defying the natural workings of markets,
so too is it becoming increasingly apparent that our monetary
dictatorship-the Federal Reserve-is also unable to keep the truth of our
self-destructing monetary system away from central banks and investors
around the world. And by the way, we Americans may be willing to buy into
the big monetary lie, but that isn't necessarily true of others, such as
the Argentines who have been hosed down so badly by U.S.- and
U.K.-dominated global banking institutions that they are literally giving
our ruling elite the middle finger by buying gold. Recall a year or so ago
when the Argentines refused to apply all the dollars they had to repay
loans from the IMF? They took a small portion of those dollar reserves and
announced to the world they were buying gold.
One of the most unique analysts I have met is Bob Hoye. You will recall we
interviewed Bob in these pages several months ago, and I have since had
quite a number of conversations with him. I love people like Bob who think
independently and do not simply regurgitate pap they have heard time and
time again like so many monkeys making funny noises in search of their next
banana. We hear these well-dressed empty suits repeat on CNBC, like
absolute morons, new words given to them by a highly esteemed trendsetter
like Alan Greenspan. It is amazing, for example, how suddenly the word
"conundrum" has crept into the uttering of these well-programmed
mouthpieces of the establishment after Alan Greenspan used that word to
describe what for him was the unexplainable. How could long rates go down
while the Fed was raising short rates?
The sudden use of the world "conundrum" suggested it was as if these folks
could never have come up with that word themselves to describe what to
them, in their very curiosity and experience, was the unexplainable. And by
golly, if Greenspan, that god among mere mortals, doesn't have the answer
to this "conundrum," who in the world could? But Greenspan wrongly
suggested it (the conundrum) has never happened before. Bob Hoye pointed
out it in fact has. For example, it happened in England (which then owned
the senior currency) when long rates fell from 3.40% in 1870 to 4.20% in
1873, the year when a major financial mania blowout occurred. That, by the
way, marked the beginning of the second Kondratieff winter in the history
of the United States, according to Ian Gordon's work.
As Bob Hoye observes, the "conundrum" happens because people foolishly
continue partying like the orchestra playing on the deck of the Titanic as
the ship was sinking. At some point, partying becomes so ridiculous that
not even the senior central bank can continue sponsoring the party. As Bob
stated in his latest missive, "At any speculative extreme, this natural
rationing of credit (by risk) has eventually overwhelmed the senior central
banks' ambition to keep the party going."
What are the signs that the Fed in this case may not be willing to keep the
party going? Bob points out that the two signs that are most important to
watch with respect to the party ending are: (1) widening of credit spreads
between risky and the safest credit, and (2) a change in the yield curve
from an inverted or at least flat shape to a steeper shape. Wider spreads
indicate the issuers of credit are getting worried about not getting paid
back, thanks to rising defaults. A steeper yield curve indicates a rush
away from illiquid assets to more liquid assts. In other words, a trip down
John Exter's inverted pyramid from highly illiquid assets like real estate,
especially second homes and investment property, toward cash and gold, with
gold being the most liquid and dependable asset in time of stress.
It is at this point in time that the margin clerks become boss. Assets, any
kind of assets, are forced to be liquidated so that debt can be repaid,
thus setting off a chain reaction like so many dominoes that affect the
momentum of each other down the line.
Are we at that point or close to that point now? I think we might very well
be. There have been growing signs that foreign creditors are getting their
fill of dollars and that tiny bits of their dollars are being exchanged for
gold. I believe Greenspan's choice to continue raising interest rates
post-Katrina when Wall Street's highly conditioned Pavlonian dogs began
salivating in response to what "should have been" a pause, suggests the
pressure is now on our policy makers to shift toward manipulating markets
to change our behavior from consumption to saving. I think that may be
especially true now that gold is apparently getting away from the
commercials and thus from the policy makers. The last thing the
establishment can afford is for gold to rise, because that will ultimately
mean they lose their privilege of robbing society for their own political
and material gain.
But now the Fed will be faced with a different conundrum. If they raise
rates and tighten money policy (the Fed has raised short-term rates but it
has retained a very accommodative monetary policy, still), they will throw
the U.S. and perhaps the global economy into a recession and quite possibly
the K-winter. The enormous amount of indebtedness in this country, which is
losing income to service debt, thanks to our loss of international
competitiveness, sets the stage for a major economic depression. Greenspan
seems to be between a rock and a hard place. Although this Great Houdini of
the central banking world has worked his way out of trouble by printing
money in the past, one wonders how many more times he can go back to the
well to create even more debt (the raw material from which money is
created) to "cure" our problems. Yet, if he continues to print money, as he
has done with every other crisis since he took over at the Fed in 1987,
that $3 billion per day that we need so folks can keep buying SUVs and more
expensive houses may reverse direction in a very quick moment, not unlike
what happened in the 1970s when flight of capital from the U.S caused
Volcker to implement draconian monetary and interest rate policy then.
At that time, very high interest rates killed gold as people sold tangibles
and invested in U.S. government debt that was paying double-digit interest
rates. This time, that kind of move would, in my view, given our enormous
indebtedness and place in the Kondratieff cycle, most certainly lead us
into a depression. As it was, the tight monetary policy of 1980 pushed us
into the steepest recession since the 1930s depression. Now we have much
more debt and much lower earnings to service the debt than we had in the
early 1980s.
What is likely to happen this time is that commodity prices will be smashed
(perhaps even oil and gas) by drastically reduced macroeconomic demand,
while gold rises dramatically in real purchasing power terms as people
scramble to sell illiquid and non essential assets to raise cash in order
to stay solvent. At the same time, banking institutions will become
increasingly suspect, such that whatever currency folks hold will be in the
form of cash (Fed notes) under the mattress, thus further reducing the
ability of banks to lend, even if they find credit-worthy borrowers willing
to borrow.
At first, the margin clerks may hit senior mining stocks and possibly
junior stocks too, although at this juncture the juniors have not taken off
much. But as gold in real terms rises, the scramble will be on to find real
money-gold-because the paper variety of money, now being mistrusted, will
not be accepted as a medium of exchange by the population who will have
gotten badly burned by debtors. The scramble for real money-gold-should set
off a furious quest for gold exploration that will make all other manias
for gold discovery, like the one I lived through in the 1970s, look like
child's play. In other words, I believe our day has come, or nearly so.
So, thanks to Bob Hoye, we know that what we really need to keep our eyes
on is the credit markets. From there we will see signs of deterioration
that will be super good for gold but rather ominous for nearly everything
else.
October 1, 2005
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com
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