A Bullish Meditation on Gold

September 29, 1999

As the world's central bankers make ready to shove gold off the cliff, their odds of getting away with murder have never appeared more remote.

It is Moriarity versus Holmes, with the sovereign governments homicidally bent on silencing the one immutable witness to their epic corruption of the global money system.

Gold is in the throes of an 18-year bear market, a fact which has no doubt emboldened the international banking community in their long quest to substitute a manifestly limitless supply of fiat money for a relatively modest quantity of the real thing.

The bankers have quietly disdained bullion in recent years, relegating discussion of a gold standard to think tanks with no official standing, and regularly selling large quantities of the metal from their inventories. Most recently, Great Britain, in announcing plans to sell hundreds of tonnes of gold over a period of several years, telegraphed its intentions so brazenly as to suggest, however implausibly, that the Bank of England wished to steamroller buyers into paying the lowest possible price. That spin control seems not to have occurred to the Exchequer is a measure of the government's arrogance as they prepared to sell from the public store a boxcar full of bullion with nary a twinge of conscience. British authorities said the sale was intended to bring reserves into line with those of other European countries, but it in fact will lower them well beneath the levels that prevail on the Continent.

If a high-powered publicity firm had mounted a global smear campaign against gold it could not have produced a more relentless barrage of unfriendly news than that which has issued almost monthly from the fiscal ministries of the West. The historical selling binge began early in the decade with a presumptively desperate attempt by the Russian government to hold bankruptcy at bay after the USSR's disintegration. But other manifestly less desperate countries followed suit with large quantities for sale, including the Netherlands, Australia and, most egregiously, Switzerland.

Since gold is no longer news, most of the sales were reported on the inside pages of the newspapers. It was only after the IMF suggested earlier this year that gold be auctioned off to raise funds for the relief of Third World debtors that bullion made headlines. A few Republican Congressman came out staunchly against such sales, although it was the idea of giveaways to the Third World's creditors that they were protesting, not the further depletion of a profoundly valuable public resource. For those few gold bugs who remain, it can hardly be comforting to know that gold's yellow glint has caught the eye of the politician, whose very survival and success come from giving away that which supposedly costs us nothing.

Bullion's few remaining champions have mounted a counterattack, but it has so far proved ineffectual. One U.S.-based group calling itself the Gold Antitrust Action Group (GATA) has gone to court to prove collusion between government and speculators to suppress gold's price for the benefit of financial institutions that have borrowed huge amounts of bullion for hedging operations.

Ultimately gold's reputation will be resurrected not by the legal system, but by the light it shines on the murky crevices of a global monetary policy gone criminally awry. The indictment will brook no rebuttal, since it will by then rest on the foul rubble of the West's economic collapse.

For make no mistake, this is the only conceivable end for a vast credit edifice that is supported more by hubris and economic whim than by any form of tangible collateral. With an estimated $100 trillion worth of derivative debt instruments in circulation, it is by now quite clear that there are no practical limits on the supply of credit dollars. The amazing accretion of zeros is everywhere: in the annual bonuses of investment bankers, in the paychecks of basketball stars, in the divorce settlements of Beverly Hills, in the banks of Redmond, Washington. No nation in history has been so successful as America in expanding the supply of dollars beyond the number saved or earned. This fact alone ensures that gold will one day rise from its depressing trough.

My perspective on gold is that of a deflationist. The financial implosion that began in Japan a decade ago and spread to Asia will need to run its course in the U.S., Europe and Latin America before it subsides. This implies that the credit bubble spawned by a booming U.S. securities markets will eventually collapse under its own weight, wiping out all those fanciful zeroes that now populate our money system. Logically this would seem to have bearish implications for gold, since it will precipitously reduce the supply of dollars searching for safety. But it is not just dollars that will be seeking refuge, but all the paper currencies of the world. They, too, have been hollowed out by the gnomes of banking, and they too shall suffer the harsh judgment of a de facto gold standard. For what other standard exists? While some might argue in the wake of a monetary collapse that there is too much bullion in the vaults of those countries we fear, just let them try to apportion the world's true store of tangible wealth among the countries sitting on all of the oil.

Even if the choice of a money standard does not default to gold, it could be imposed on us by an economically ascendant Asia. For why would they choose to accept the by-then repudiated paper IOUs of the West in exchange for hard goods? And without gold or silver backing, that is all that a dollar or a D-Mark is: an IOU.

There are no reliable estimates for the amount of gold held in China, but it is certain to be a significant amount relative to the total global supply. As much could be reasonably inferred without statistical evidence, given the traditional respect, if not reverence, that gold still commands among the Chinese people. Even as gold was sinking in New York and London markets several years ago, buyers were lined up six deep and around the block in Shanghai to purchase gold coins from the government at a price 40% above spot.

Gold currently trades around $260 an ounce, but it could fall to as low as $100 in the estimate of one well-known Elliott Wave theoretician, Robert Prechter. In the context of a global credit collapse and the repudiation of paper money, however, it is easy to imagine gold's price tripling or quadrupling in a matter of months. That could make the worst-case risk bearable for those who choose to hold gold at current levels, or who average down if prices should continue to fall.

It is most unlikely in any event that gold's current saga shall ended unhappily for those who have continued to declaim its virtues, not the least of which is an matchless record for calling the misdeeds of profligate government to account.

Moriarity did indeed send Sherlock Holmes hurtling over the cliff, as you may recall. But it was not long thereafter that the public's clamor for their wise and virtuous hero raised him from the dead.

10 karat gold is 41.7% pure gold.