Gold Market Update

March 21, 2002

During the past week the gold price was virtually unchanged, but since its February 8th high gold has declined $13.40 to $290.10 an ounce. The immediate causes seem to have been the German announcement that it might sell some gold after late 2004, a rally in the U.S stock market and an expectation that, as in past fiscal year end crises, the Japanese authorities would avert a credit meltdown. As for the German threat, much or all of the gold that might be sold is already in the market via lease arrangements.

The advice in our January 21st report to be wary of minor changes in standard economic statistics clearly has gone unheeded. Annualized monthly or quarterly changes in macroeconomic economic factors are themselves microeconomic statistics and may be seriously misleading when it appears that the economy is poised for a double dip recession following a temporary stabilization and rebound. The micro numbers apparently seduced even Alan Greenspan when in just one week he advanced from mildly optimistic to outright bullish.

Similarly, the stock market, a supposed leading indicator which has forecasted ten of the last five recessions, has also forecasted economic recovery midway through major recessions and depressions. One need look only at Dow Jones rallies of 1930, 1931 and early 1932 on its way to an 89% collapse; or if that is too far removed, the rally of l974 when the Dow rose to 900 in March before declining to 577 in December, a 45% drop from the January 1973 high. In both of these examples gold and related investments proved to be the ultimate refuges.

Today the principal macroeconomic indicator is debt, its quality and its impact on economic and business decision making. Total private debt in the U.S. rose 8.7% in 2001, a year in which the economy stagnated. Indeed, for decades such growth has risen three times real economic growth, with the excess alternating between inflation and excess speculation. The ease of financing in speculative times led to inordinate investment, particularly in favored industries, but even old line industries such as automobiles are now hunkering down despite near record sales because of past excesses. Meanwhile the Federal Reserve will be fostering even more borrowing and future inflation if it holds the Federal Funds rate below rising Treasury bill rates.

In this cycle efforts to conceal the magnitude of the debt burden intensified. All sorts of financial engineering and questionable hedging methods were devised, while lavish corporate emoluments mushroomed. All of this finally led to corporate restructuring and cost cutting which, while helpful to a single company, may harm the general economy as lower costs of one company cause lower sales for another leading to a vicious cycle of lower capital investment, lower profits, more unemployment and protectionism, the latter of which is already evident.

No one knows if the debt breaking point has been reached. High consumer borrowing and the housing boom have kept the economy humming. Rumblings are being heard, however, as apartment vacancies are rising, and new home sales, despite favorable weather conditions fell 14.8% in January.

Forecasting remains a hazardous occupation, but financial risks clearly are rising in a highly leveraged world. Evidence includes a doubling of corporate bankruptcies last year and five times as many corporate downgrades as upgrades by Moody's so far this year. The Federal Reserve summed it up best when it reported that from 1998-2001 corporate debt rose $1.2 trillion while equity shrank $678 billion due to buy backs and write-offs. Paul Volker, not a gold man, added recently: "Radical reforms are needed to solve the systemic problems of the global financial system stemming from Enron". This could be interpreted as there is no paper currency in which to hide.

Senator Charles Lindberg, most assuredly a gold man, had this to say after Congress passed the 1913 Federal Reserve Act: "When the President signs this bill, the invisible government by monetary powers will be legalized. The people may not know it immediately but the day of reckoning is only a few years removed". Looking back at the depressions and inflations that have driven all major currencies to a small fraction of their pre 1913 values the father of The Lone Eagle may have been right. The aftermath of today's modest economic recovery and its consequent effect on credit and gold may be just the proof the senator was seeking.

In 1792 the U.S. Congress adopted a bimetallic standard (gold and silver) for the new nation's currency - with gold valued at $19.30 per troy ounce