Taylor on the Markets & Gold

March 5, 2002

Gold Price Suppression & Irrational Exuberance Run Amok

The problem as Stephen Roach, Chief Economist at Morgan Stanley pointed out is that the Federal Reserve did not have the courage to prick the economic bubble in the U.S. back in September 1996. As a result, equity prices rose to levels of the absurd as has total debt in relation to GDP. Back in 1996, the only Fed Governor who did have the courage to speak out was Larry Lindsay who said, "I think it is far better that we do so while the bubble still resembles surface froth and before the bubble carries the economy to stratospheric heights." But the Fed minutes, which are now public, clearly showed Greenspan was too much a coward to do what was right at that time. It is interesting to note that back in 1996, in that same Fed governor's meeting, Larry Lindsay, compared the irrational exuberance of the 1990's with the 1920's in the U.S. and the 1980's in Japan.

Indeed Mr. Greenspan who intellectually believes in the virtues of free markets, did his level best to hinder the invisible hand of those markets that efficiently allocates scarce resources and checks major imbalances. How did Mr. Greenspan muck up the U.S. and global economy to the point where we are now poised for the first global depression since the 1930's? We certainly can't blame it all on Mr. Greenspan, because the fundamental problem, which is the existence of the Federal Reserve, goes back to 1913. But one of the key ways he helped inflate the bubble was by willingly going along with the Clinton plan to rig the gold markets, presumably at the recommendation of Lawrence Summers and Bob Rubin, beginning in 1994.

There can be no doubt that the most significant cornerstone to the strong dollar policy of the Clinton administration was the manipulation of the gold price via sweetheart gold loans to crony capitalist friends of our government. For Rubin it was a natural to lend cheap money in the way of gold loans to his buddies at Goldman Sachs. And lend he did so that during the Clinton years, Goldman Sachs was the leading institution that carried out the gold price suppression. In other words, it was an instrument of the politicians used to obscure the reality of markets required for the levels of irrational exuberance in the dollar and financial markets that we still are experiencing now.

Lest Goldman Sachs and other gold bullion banks named as defendants in Reginald Howe's law suite become worried about repaying borrowed gold in the midst of a rising gold price, Mr. Greenspan came to their rescue in 1998. In the midst of all sorts of worrisome global financial problems (Long Term Capital Management, Asia, Russia etc.), Mr. Greenspan assured the bullion banker accomplices to the gold market rigging on two fronts. First, THEY DID NOT NEED TO WORRY ABOUT LOSING MONEY IN A RISING GOLD PRICE, because central banks would continue to lend more and more gold out into the markets should the price begin to rise. Secondly, despite an already irrationally low gold price, these same banks could CONTINUE TO RIG THE GOLD MARKET FOR THEIR OWN PROFIT WITHOUT WORRY OF LOSING MONEY IN COVERING THEIR SHORTS!

What a racket on all fronts for the purveyors of legalized theft! Not only could these crony capitalist bankers reap windfall profits by rigging the market, but the Clinton Administration could take credit for a perfect market. Quite correctly, they could take credit for it, because their rigging practices contributed to this TEMPORARY condition of seemingly market perfection. And Republican supply side proponents like Steve Forbes, Jack Kemp and Larry Kudlow could join forces with the Keynesian Democrats in praising President Clinton's handling of the economy! And with bonds being purchased with the proceeds of gold sales, that also helped push long term interest rates lower which in turn convinced everyone that all was well in America.

Clinton's Boys Knew Bailouts Required Gold to be Rigged

Thanks to prior research at Harvard by Larry Summers, the Clinton boys knew that if their practice of bailing out the world were to succeed, starting with Mexico in 1994, they would have to suppress the gold price. Otherwise, as Summers pointed out in his research in 1988, if the U.S were to print money for bailouts, and the gold price rose, the dollar would decline and interest rates would rise. Forward progress in this policy would be at best akin to running on a treadmill. Greenspan of course was an accomplice to the illegal act of rigging the gold price. This of course is one of the major issues facing Judge Lindsay in Reggie How's court case at a Federal Court in Boston. Whether or not it is constitutional for the Exchange Stabilization Fund and the Fed to rig the gold price, when gold is no longer money, is a very significant constitutional issue. If the government has the right to rig gold, a mere commodity, then presumably it can manipulate any market of its choosing!

A Few Brave Establishment Folks are now Making Sense

Morgan Stanley has had more than their share of some very bright independent thinking market professionals. Stephen Roach, the chief economist at Morgan Stanley is one such admirable character. He courageously told a CNBC early morning audience last week that he does not believe the U.S. will enjoy a lasting recovery because of huge underlying problems of profitability and an over-extension of consumer debt.

And Financial Times writer, Martin Wolf picked up on the theme of our policy makers seeking to deter the markets from self adjusting which, he opined, is leading to an "unsustainable black hole." He noted that the huge and growing current accounts deficit cannot grow indefinitely without undermining the dollar's astonishing strength.

Indeed there are several structural problems in the U.S. economy which are drawing increasing attention from the mainstream press, which, as Ian Gordon suggests, are inevitably leading us into a depression akin to or worse than that of the 1930's. In summary, the big problems that I see are the following:

  • An overvalued dollar that is causing all sorts of global economic dislocations and leading to a depression in American manufacturing, mining and agriculture.
  • Huge current account imbalances with the U.S. continuing to live beyond its means by importing far more than it exports.
  • Debt from all sectors of the U.S. economy. This will continue to eat away at effective demand from all sectors of the economy as principal and interest payments continue to grow exponentially.
  • A housing market bubble that continues to pump up housing values far in excess true economic value.
  • Global gluts and pressure on profit margins resulting from increased global competition, especially from the Chinese.
  • A lack of economic incentives for capital expenditures and to hire new people, given declining profit margins.

We have seen quite a lot of air let out of the NASDAQ balloon, but the equity, housing and dollar balloon remains extremely overextended. Which of these will be the first to decline is anyone's guess. But any one of them could finally lead the nation to understand we are in for some very tough times.

Richard Russell Sums up the Dow for the week ending 3/1/02

So, was this weeks rise in stock valuations a sign that we are ready now to pursue 36,000 on the Dow on the way to 100,000 as at least one author opined near the top of the market mania in 2000? Here is Richard Russell's conclusion as published in "Richard's Remarks" on March 1, 2002 (www.dowtheoryletters.com):

"CONCLUSION -- It's blow baby, blow. Looks like the pros want to bring back the bubble. Can you blame them? Hey, Wall Street isn't a charity affair, it's a business -- and the business is distributing securities to the public. That's right, Wall Street's business isn't collecting stocks and bonds, it's getting rid of them.

"Seriously, this did look like a blow-off, but we'll only know that in retrospect. I keep thinking of 1966 to 1974, those mini-bull and mini-bear markets. Is this a mini-bull? To early to tell, but remember -- the market can do anything.

"The Bible tells us that "The wind bloweth where it listeth," meaning that the wind goes where it wants. Wall Street has always believed the Bible in that the market also goes where it wants.

"In view of today's move, do you think Greenspan will come out with another "irrational exuberance" speech? If he does, you can bet that pigs will have wings, and chickens will speak Swahili."

GOLD IS BEHAVING VERY WELL INDEED!

Tuesday, March 5th will be the last sale from the Bank of England. We shall see how many bullets the international bank manipulators have left in their attempt to keep their legalized counterfeiting operation alive. Gold is a huge threat to that most unfortunate operation. Mr. Greenspan said that central banks have learned how to work with fiat currency more effectively. What he did not expound on was the role the suppression of gold has played in the newly found skill sets of central bankers.

For a host of reasons I do not have time to get into, Bill Murphy, who is himself a skilled and experienced commodity trader, is absolutely convinced the authorities have nearly spent their last bullets. Certainly one thing we have noticed in recent weeks is that the gold price does not automatically finish lower in New York than where it opened as was true over 94% of the time for a number of years in a row!

And frankly the action on Friday was very bullish as was news that Deutsche Bank was a big buyer of gold on Monday. It looks as if the remarks by the German Central banker last week in which he knocked $5 off the gold price by suggesting the Bundesbank might be a big seller of gold in the future, was designed to help his fellow countrymen at Deutsche Bank (known for their short positions in gold) cover their short positions. What a racket. Another example of how Enron has simply taken a chapter from policymakers!

We have known for quite some time that gold is undervalued from a fundamental basis and that 1,500 tonnes per year or so of shortfall from the mines is being made up with central bank selling. This cannot go on forever. And as global balance sheets become ever more shaky, now is the worst time for central banks to rid themselves of the only asset on their books that is in fact as asset and not someone else's liability. It could very well be that central bankers are beginning to understand that truth. If so, the price of gold may now be in the very earliest moments of a multi-year bull market.

Indeed with just this mini move in the price of gold up just 7.08% so far this year, our gold shares have gained an astounding 71.57%. Can you imagine what is going to happen to the gold shares when, as we anticipate, gold quadruples from its current price?

Small amounts of natural gold were found in Spanish caves used by the Paleolithic Man about 40,000 B.C.

Gold Eagle twitter                Like Gold Eagle on Facebook