Gold in 2000

January 1, 2001

We noted that the O'Higgins process calls for you to determine whether to be on the long end of the yield curve if the price of gold declined during the most recent year compared to the prior year. Amazingly, until the year just ended, this means of selecting short or long-term bonds worked in 29 out of 30 years or 97% of the time! I dare you to find one economist who has even come close to that record in forecasting the direction of interest rates.

During 2000, we selected the short end of the yield curve because gold finished $1.55 higher at the end of 1999 than at the end of 1998, thanks to the Washington accord that caught the short selling gold market manipulators off guard. Unfortunately, we should have been on the long end of the yield curve during 2000. If gold had traded at a lower price at the end of 1999 than at 1998, we would have selected the zero coupon bond maturing in February 2020. Had we done so, the O'Higgins model would have left us with a gain of 32.88% during 2000 rather than the 6.35% gain generated from the one year zero coupon bill. Still, this method is statistically hard to argue with given a success rate 93.5% (29 out of 31 years or 93.5%)

The logic behind this method of predicting which direction interest rates are headed makes some sense because if the price of gold is heading upward, it might be indicating a rising rate of inflation, in which case interest rates are going to rise. Of course, in that environment you want to be in short term bonds because it will decline less in value than a long term bond under a rising interest rate environment. Alternatively, if the gold price is declining, you might expect inflation rates to decline in which event interest rates would decline an you would earn a bigger profit from the appreciation of your bond, with longer term bonds appreciating more than shorter term bonds.

BUT...CAN A RIGGED GOLD MARKET SERVE AS A PREDICTOR?

I have recently read over Reggie Howe's law suite in which he is charging the Federal Reserve, the U.S. Treasury and several large gold bullion banks with rigging the gold markets in order to orchestrate lower gold prices. I have had little doubt for quite some time now that these allegations are true. After having read Reggie's law suite, I have ZERO doubt that the Clinton Administration, in conjunction with Alan Greenspan as well as the British have manipulated the gold markets to lower and lower price levels. (Be sure to read this very understandable law suite which you can download at either www.GATA.org. or www.goldensextant.com.) It provides a very thorough and systematic argument in support of gold manipulation charges.

GOLD MANIULATION WAS JUST ANOTHER CLINTONIAN SPIN - BUT A MUCH MORE SIGNIFICANT ONE THAN SPINNING ABOUT HIS SEX EXPLOITS.

It seems clear now that manipulating the gold price to lower levels has been part of an overall "spin" on the part of the Clinton Administration aimed at their strong dollar policy. Since paper money has no INTRINSIC value, but is in fact derived solely by confidence in it, the same folks who seem to have been playing games with productivity and inflation statistics, were making sure the one "currency" in the world, namely gold, which actually does contain an intrinsic value, would not be allowed to be perceived as superior to the dollar by the global markets. The means by which this has been accomplished has been discussed frequently in my newsletter and hotline and the case for believing this is so is very well summarized in attorney Howe's suit.

Could it be that the gold price along with other statistical machinations has the markets fooled with respect to inflation? Perhaps that could be true at least for a limited period of time. The Howe legal motion charges that the defendants have been rigging the gold price since 1994. During that time the annual change in the gold price, as outlined in the O'Higgins process, has predicted the correct direction of interest rates in seven out of eight years or 88% of the time even during the years gold has been manipulated by the Clinton regime.

The notion that a declining gold price provides proof that inflation is a non-issue has been sated so often that most investors who think about that topic automatically believe it is true. We still hear that theme played at least once each week from stock market cheerleader Lawrence Kudlow touts this line every Friday evening on CNBC. Certainly if gold were heading consistently higher rather than consistently lower, it would cause unease in the financial markets because by its very nature a rising gold price indicates a loss of confidence in paper money. There is little doubt that a declining gold price, orchestrated or not has helped keep the party going by avoiding a loss of confidence in the dollar as a result of a rising gold price.

The problem is, the thermometer has been taken away from the doctor so that it is not possible to judge the fever of our "economic patient." In my 1999 interview with Jeffrey Christian, which was published in the February and March 2000 issues, he offered the suggestion that policy makers would not fix the price of gold in part because doing so would deprive policy makers of an important tool in judging the health of the economy. But now we know, thanks to the work of James Turk and other GATA supporters, beyond any reasonable doubt that Treasury Secretary Bob Rubin, whom Jeffrey worked with at Goldman Sachs and his successor, Mr. Summers, has used the Exchange Stabilization Fund to do exactly that.

Jeffrey can be excused for disbelieving his former boss would rig the gold markets for a couple of good reasons. First, the only two people who are allowed to know what goes on at the Exchange Stabilization Fund are the President of the United States and the Secretary of the Treasury. Bob Rubin, just like Lawrence Summers, are not permitted to discuss gold or any other activities of the Exchange Stabilization Fund so they would not have shared that with anyone including their nearest underlings at the U.S. Treasury. So much for our democratic process! Secondly, it is not easy for underlings to question their bosses, especially when they are held in such high esteem as Mr. Rubin is and has been in the past. Remember how ALL of President Clinton's cabinet, wife and virtually every other prominent Democrat who knew him refused to believe he was lying to the American people and how they were used to perpetuate Clinton's lie to the nation and the world?

But alas, Jeffrey is right in his supposition that a rigged gold market would lead to flawed economic policies. And now that we know that Rubin, Summers, Greenspan, major bullion banks and no doubt the English government conspired to drive gold to a false price, I believe it is safe to assume that the economic policies of the Clinton Administration as well as the monetary policies of the Greenspan Fed have been badly flawed as a result of this "golden deception" and that we may now be about to pay a terrible price for these deeds.

Overconfidence, and plenty of liquidity made it possible for the Internet bubble and overall irrational exuberance to exist. At to a great extent, it still exist evidenced by a still highly overvalued stock market. Overconfidence combined with easy credit set the table of an over leveraged economy that may indeed lead us into the Kondratieff Winter of the 60+ year cycle.

If so, interest rates would be expected to fall substantially during 2001 in which event, owning long-term government bonds could lead to a windfall profit in 2001. Thus, it may in fact be possible that even a rigged gold price accurately provides a great interest rate prediction tool. Statistically, the numbers suggest that is true.

On the other hand, if 2001 turns out to be a year in which inflation becomes a major problem, the rigged gold price will in fact have helped mask a growing problem. While there is no doubt that Greenspan can be expected to increase the money supply very substantially in the near term in an attempt to avoid the Kondratieff Winter (which he reportedly said he looked forward to doing if he ever became Fed Chairman), there is no guarantee that doing so can avert plunging prices and a depression. If you doubt that, just look at Japan which has been experiencing their Kondratieff Winter for the better part of the last decade.

The first use of gold as money occurred around 700 B.C., when Lydian merchants (western Turkey) produced the first coins

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