first majestic silver

Gold Will Rise - and Stay There

June 3, 2003

The current bull market in gold is different from any other in the past.

Yes, I know you've heard that before. I know that the stock-freaks in the nineties said the exact same thing when the Dow-wow and the Nazdog were all the rage, and talk of the "new economy" swelled the airwaves - and the brokerage houses' bank accounts.

The battle cry of "this time it's different" has always been a sure-fire sign of a coming crash - except for now, because ...

... this time it's different.

This time, gold will rise, and not come back down. Certainly, like in all great rises, it will "overshoot" somewhat and then settle back, but the levels at which it will settle back are going to be so high that nobody will care.

It is not necessary to make any predictions as to "how high." Suffice it to say that it will be higher than any sane person would publicly admit to believing today.

There is no way to rationally pick a number and then proceed to "prove" with technical analysis that the price of gold will reach that level, but there is a way to prove the validity of the current trend, and its inevitable consequences.

How can anyone make such a silly prediction? How can anyone make such audacious claims and hope to be taken seriously?


The main reason is that it is no longer in the interest of the most gold-heavy central banks in the world - the central Europeans CBs - to support a low dollar-gold price.

Read that again:

It is no longer in the interest of the most gold-heavy central banks in the world - the central European CBs - to support a low dollar-gold price.

Nor, as time goes on, will it be in the interest of most of the rest of the world's central banks to support the dollar vs gold, because now there is a new factor in the money equation, a factor that has not existed since the world decided to continue to put its faith in the dollar despite Dickie Nixon's default on the US' gold obligations in 1971.

And that new factor is the existence of an alternative. An alternative to the dollar, that is.

The euro is that alternative.

Now, that the euro (a) exists, and (b) has already achieved a tremendous amount of penetration of the international currency markets and even central bank reserves to some extent, and (c) has not lost decisively in value but has gained back all "losses" to date, the stage is set for a slow, gradual, but complete takeover by the euro of the dollar's role as the international reserve currency.

This process will not be allowed to take place too suddenly, because a complete and rapid "crash" of the US economy would still hurt too many countries that are dependent on the US market for their exports. Their export routes will have to be shifted first.

Rather, the US economy will be allowed to slowly suffocate under its own dollar-weight, letting it go into a gradual recession, with gradual deflationary pressures exerting themselves at first a la Japan (now happening), which the Fed is presently proceeding to "fight" with mammoth inflation, and that will eventually help bring about hyper-inflation.

There is already talk of alternatives to ordinary monetary policy, like a "tax" on holding money for too long without spending it, dubbed a "carry-tax," intended to combat this "deflation."

That goes to show how little of actual free-enterprise capitalism and constitutional protections for the enjoyment of private property are left in the good old US. Now they're going to tell you that you must spend "your" money - or else they'll take some of it away from you.. All in the name of the emergency du jour, as usual.

As the US economy is seen faltering all of its own, the nations of the world are going to be faced with a choice: (1) continue to hold fizzling US dollars to support their own currency's reserves and suffer a severe contraction in reserve values, thereby limiting their own ability to inflate their native fiat currency as needed, or (2) shift away from the dollar and into the sizzling hot euro - which does not suffer from such huge trade and current account deficits and from such decades-old over-issuance and over-saturation.

What does all of this have to do with gold?

In previous essays, the US dollar's golden shackles have been exposed from the other end: the strangling effect the quasi-official intra-governmental US gold price has on gold, i.e.., the need for the US to keep the price of gold under control in order to prevent too many dollar holders to sell dollars and buy gold during inflationary times.

Now we look at the same set of shackles from the other ankle - the gold ankle. For those shackles also limit the ability of the dollar to survive this crisis. It's just like a cop shackling a prisoner to himself to prevent him from getting away. The problem is that the cop can't get very far, either.

Same thing here. As the dollar faction must "control" the price of gold to prevent currency flight, and thereby exerts a restraining effect on it, the "quasi-official gold-price ankle" exerts a restraining effect on the "dollar-ankle" in that it does not allow the FOREX value of the dollar to rise as the price of gold rises.

Why? Because this quasi-official price law ties the way the US values its own gold reserves to the ridiculous, formerly official, price of $42.222 per ounce. As a direct result, a rise in the price of gold makes gold more attractive relative to the dollar, instead of allowing the dollar's "attractiveness" to rise along with the price of gold.

Now, please ask yourself under what conditions the euro-faction (and the rest of the world's central banks outside the dollar-faction) would have any remaining interest in keeping the price of gold artificially low?

As the euro continues to penetrate the world central banking systems, and as the price of gold rises for lack of coordinated international support for low gold prices (demonstrated for the first time by the Washington Agreement), and as the dollar falls in value while international investors and central banks "get the heck out of Dodge", dumping dollar-denominated assets for gold and euro assets, any conceivable reasons for (a) holding dollars, and (b) continued artificially low gold prices simply disappear.

For, the only past reason for non-American central banks to support a low dollar-gold price in the first place was their need to preserve the dollar's ability to perform its function as the world's reserve currency, warts and all - until just recently.

The euro's creation, and successful launch and dispersion, have changed all of that.

The US, through its perverted 'neo-con' and 'communo-liberal' leadership, can conceivably lean on other countries militarily in order to dissuade them from joining the euro club of nations (a la Iraq), but that strategy has its limits.

Will the US attack or at least threaten Iran? Possibly. (Iran has already threatened to replace its dollar reserves with euro). Any other terrorist-supporting OPEC nations are also fair game - but that's where the buck stops. Is the US going to attack Europe? Highly unlikely. Is it going to attack Russia or China? Don't think so.

But that means the euro will surely survive.

So, what's left as support for the dollar? John Snow's pronouncements that the US still has a "strong dollar policy" while he says that a low dollar doesn't alarm him and would be good for exports, anyway? Sure. Or maybe it's Al Greenspan's plan to inflate the hell out of the dollar at any sign of deflation? Of course, Monsieur!

Anyway, with all of that said, the central point of this essay remains to show that - once the US is progressively marginalized and eventually neutralized in the world scene as an economic and monetary super-power - there is no reason at all under the successor euro-reserve system to "manage" the price of gold (except upwards, maybe), at least not until very late in the game when the euro begins to show the same signs of wear and tear that are now marring the dollar's future.

For, one must remember that the euro still is just a purely fiat paper currency, and so is theoretically subject to the same kind of "moneypulation" as the dollar was. The only two differences are that the euro's time-line, compared to the dollar's, is far, far longer when measured from today, and that its value is actually boosted by a rising gold price.

The only reasons why physical gold is not now priced at its true "best-use function value" are the US dollar and the world-wide US dollar reserve-system as they are currently constituted. Once either of these two breaks down, all reasons for "managing" or controlling the price of gold simply vanish.

On top of that: who do you think now owns much of the physical, non-central bank held gold that is available? It is those who "architected" this new euro system, as well as all those financial heavyweights and heavy-hitters who understood, from observing what was going on, that gold will be free to rise one day soon. Nobody would be surprised if it turns out they have been buying gold like mad, largely in secret, ever since.

In the meantime, the dollar-faction's temporarily successful efforts to keep the gold price under wraps were very much in the interest of these heavy-hitters. The US' ultimately doomed efforts allowed them sufficient time to acquire a physical asset that would certainly explode in value in the future - at fire-sale prices!

Do you think these people will agree to devalue their considerable physical holdings to support the paper-euro at the expense of the real gold they own? The euro may lose in value during any future crisis - but the gold they own will not, and they know that.

Every country but the US has no reason left to push gold down. They know that "high gold" will help support their new reserve currency -and thereby the value of their own currency. And they also know that high gold will eventually kick the US economy's rear end. And US policy makers are either blind to this, or are fully aware of it but are running out of options, or the only options left are too painful for them.

Either way, those are the reasons why gold will climb, and climb, and climb - and stay there for good.

Because this time, it's really different!


June 3, 2003

Copyright, Alex Wallenwein, 2003

Alex Wallenwein

Editor, Publisher


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