Gold Market Update

November 1, 2001

Words pale, if not fail, in the aftermath of the September 11th tragedy and continuing terrorism. These are not occasions to be used to promote self interests. The battles transpiring conform to the Constitutional provision that empowers Congress to punish "offenses against the law of nations". Much as the Barbary Coast pirates were quelled, the terrorists will be extirpated. Before acting the terrorists should have consulted the Book of Job, which warns: "If I be wicked, woe unto me". This mission of itself is not likely to weaken materially the productive capacity of the United States. Neither is it likely to undermine severely the country's economic or monetary well being. Long term and widespread misguided private and public financial practices may suffice.

In evaluating the state of the economy William Esray, C.E.O of Sprint summed up the conclusions to be inferred from recent corporate quarterly reports when he said: "A lot of people I talk to see September 11 as a significant economic event, but the fact is the economy was really in a slide before that and this accentuated it".

Through all this the gold price last week filled the gap stemming from September 11th and gold's open interest on the COMEX has now declined to pre-attacks low levels. Much of the speculative interest is out of the market.

The exiting from the gold market by Credit Suisse, a pioneer in the field, and once proud refiner of its own miniature gold bars, may be a seminal event, not because of its symbolism, but because the consequent narrowing of the market may impinge on the remaining participants ability to execute low cost large gold transactions, thereby discouraging further gold leasing by both hedgers and speculators.

November 5th is now the date to determine whether Reginald Howe's law suit against The Bank for International Settlements will go forward. The charge is that the governments and central banks have conspired with bullion banks to suppress the gold price for their own purposes. A Howe victory, presumably, would have a swift and positive effect on the gold price. A B.I.S. win, if convincingly proved, would probably mean that the future gold price will be determined by marginal private monetary demand, as historically it has.

Speaking of collusion, on October 16th, Standard and Poor's lowered the ratings of General Motors and Ford and their credit companies to BBB+. Moody's followed by maintaining Ford's A2 rating even though General Motors bonds yield slightly less than Ford's. Then Ford nearly tripled the size of its new bond offerings, mostly to the account of Ford Credit, to $9.4 billion. Ford Credit is a major financial institution and the problems there are clearly undesirable in the midst of deteriorating credit conditions. Problem large syndicated loans have exploded 93% this year to $193 billion, and are now 5.7% of the total, up from less than 3% at the end of 1999.

Federal Reserve Credit expansion continues apace despite some extraction after the post September 11th emergency injections. During the last six months the Fed's monetary base has risen at a 13.4% annual rate, leading to an 11% annual growth rate for M3, during a period of virtually no economic expansion and declining capital expenditures.

When Chairman Greenspan and others mention consumer confidence they may subliminally mean investor confidence needed to channel savings into productive capital investment to create jobs rather than a bidding war for stocks. So far, not so good.

The Wall Street Journal recently proclaimed "The Death of Keynesism". The next day the New York Times concurred when it suggested that the redevelopment of the Lincoln Center should be shelved until the economy is "back in a more ebullient mood". What ever happened to compensatory spending?

The problem with burying Keynes just now is that compensatory spending has been the greatest moral hazard the world has known. Why worry about an imprudent balance sheet if the government can reverse any incipient recession? Congress is still tinkering. So, soon we may know.

Last week two respected economists summed it up best. One said: "Monetary policy doesn't have the potency it did prior to the bubble in business investment". The other: "With zero real short term interest rates, 10 and 30 year bond yields remaining steeply higher than over night rates and a ballooning money supply along with the huge increase in government purchases, the risk of inflation pressures over the long term have clearly risen.

If either or both of these gentlemen are correct, the gold pit may soon be rumbling.

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