Taylor on the us Dollar & Gold

November 19, 2002

Gold Trashed Gives Birth to the Big Dollar Lie

With gold's role as honest asset money and the currency of last resort psychologically removed from market participants, Mr. Greenspan was the free to kick money growth into high gear. Mr. Greenspan could have obeyed his conscience and refused to accommodate this process of systemic theft and lose his job. But he chose instead to become an accomplice to this process of legalized theft of hardworking Americans for the sake the enormous acclaim that was to come his way during the bubble of the late 1990's. In 1997 Greenspan grew M-3 grew by 8.41% followed by 10.57% in 1998, 8.05% in 1999 and 7.86% in 2000 when the stock market bubble finally was pierced. This massive money creation was sought by the Clinton Administration, and Greenspan accommodated their wish. But had he not also responded to the other wish of the Administration, namely to cap the gold price, that massive monetary bailout would have tanked the dollar and the effort to print money to solve bailouts would have failed. Had the price of gold not been capped, and indeed driven lower, the stock market bubble never would have expanded to the outrageous levels it did before peaking in March 2000 because hundreds of billions of dollars of foreign savings would never have inflated U.S. financial markets - at least not to the extent they did.

The interventionist philosophy of the Clinton boys required they cap gold. Like Nixon who found gold getting in the way of political gains, the Clinton boys also trashed gold when honest money in the form of gold got in the way of their bailing out their crony capitalist friends in the banking industry from Mexico, Russia, Long Term Capital Management and numerous Asian countries. Intervention in the gold markets through Central Bank dishording (via sales, swaps and loans) explains why the price of gold declined even as real rate of interest continued to decline through the second half of the 1990's. So when Mexico came along, it is no mystery why strange trading patterns began to occur in the New York gold market in 1994 until this time. Each of the major monetary problems of the 1990's was an excuse for Greenspan to pump huge amounts of money into the system and with each new pumping, the price of gold had to be pushed lower so that the dollar would remain strong. Summers knew that from his study of Gibson's Paradox. And so after being shaken down after his 1966 irrational exuberance speech, Mr. Greenspan caved in and along with the Clinton Administration, set the U.S. up, if not the global economy up for what looks ultimately be a major deflationary depression.

Pushing on a String with 12 Rate Cuts

The largest annual growth in M-3 took place in 2001 when it grew at an astounding 12.25%. In addition to massive interest rate cuts the events ofSeptember 11, 2001 gave another excuse to pump more money into the system. The massive money creation and rates cuts prompted 90% of Wall Street analysts to predict with complete confidence that if the money supply was being increased, the economy could not help but rise as the stock market returned on track toward its 30,000 milestone on the way to 100,000 in a few short years.

But now note the significant decline in M-3 growth in 2002. It has plummeted to a mere 3.93% through the first 10 ½ months of 2002. Clearly part of this decline was intentional by the Fed. But the assumption that it made, that the massive infusion of money into the economy in 2001 would lead to economic growth and a return to higher stock prices has not occurred. Why not? We suspect the "Pushing on a string" analogy of the 1930's has something to do with the Fed's lack of success. Not since the 1930's has two or more successive interest rate cuts failed to drive the stock market higher one year later. Now, after 12 rate cuts, the market remains substantially below its highs.

Why so?
What happens is that as companies and individuals become less credit worthy, either they stop seeking to borrow and/or their banks won't lend new money to them. And as the process of borrowing slows down, the money supply growth slows down. So despite housing and automobiles being the two major driving forces in any advanced economy, and despite both of those industries being red hot this year, and despite all kinds of fiscal stimulus, M-3 growth has plummeted from 12.25% in 2001 to a mere 3.93% or slightly over 4% on an annualized basis in 2002.

Debt Service costs is Suffocating Demand

As a result of the excessive money creation by Mr. Greenspan the global economy is now in quite a vulnerable position. As Stephen Roach points out, most of the world relies on the U.S. continuing to dig itself deeper and deeper into debt to buy the goods and services produced by the remainder of the world. But like heroin or any other lethal drug, debt eventually becomes life threatening. A glance at the growth of total U.S. debt from all sectors shows that it is growing exponentially while GDP is growing in a straight line over time and at a much slower pace. While debt is rising vertically and GDP grows at 2% if at all, a larger and large percentage of America's cash flow is being siphoned out of the demand side of the economy to repay debt.

Not only that, but when Mr. Greenspan pumped trillions of dollars into the system, he sent irrational signals into the markets such that mal investment 7 became common place. How many hundreds of billions of dollars went up in smoke when so much money was sloshing around in the system served to encourage people to invest in all sorts of fantasy tech telecom stories? Yet, while trillions of dollars have disappeared into "money heaven" the debt from which that money was manufactured, still remains on the collective balance sheet of the American economy. But alas, thanks to mal investment, there is no income flow from which to service it.

Theft & Immorality from the Top Down

From a moral perspective, those who work in jobs closest to the money creation process (i.e. bankers, CEO's and politicians), have "stuck more than their fair share of these newly printed claims against wealth in their own pockets," thus robbing honest hardworking American of they wealth the create with their hands and brains and which is rightfully theirs.

So indeed the American economy is becoming increasingly phony. The real jobs, jobs which create real wealth, are being sent to China in large part because of an overvalued dollar which must be sustained in an attempt to keep our still grossly overvalued financial markets from a complete collapse. Through slight of hand and spin, the Fed Chairman tries to keep Americans spending more than they earn and at the same time convince them and everyone else that doing so is good for the economy even though that process defies every notion of sensible economics, at least over the longer term. America is literally bankrupting itself - indeed it is destroying itself from the inside out.

Keep Americans buying and building house and cars. Never mind if America is no longer generating enough wealth to pay for them. We can always borrow from foreigners. But that too is a lie. Ladies and gentlemen, the U.S. is already broke because to keep the wheels of this economy from falling off we have to enslave ourselves to foreign lenders to the tune of $1.5 billion per day!

If our policy makers can keep a lid on the price of gold, this process may go on a while longer. How long it will take before it is no longer possible to "fool mother nature" remains to be seen. How much gold is left in the U.S. coffers with which they can try to deny reality? No one except perhaps the ESF knows because the U.S. isn't allowing anyone to audit America's gold. It has not been done since the days of Ike and repeated requests for a gold audit have fallen on deaf ears.

Apparently transparency is good for everyone except the Federal Government. What we do know is the Treasury distorts its gold accounting by claiming gold leases are in fact gold remaining in their balance sheets. From the work of Frank Veneroso, it is possible to suspect ½ or more of the gold claimed to be in the Treasury and on the books of other central banks has been sold into the market over the past several years. And as long as the gold price remains below its equilibrium and as we see growing demand from Asians and others to horde gold, 8 we realize that the amount of gold the Treasury must dishord to hold the $325 line MUST be increasing, perhaps quite rapidly. That is the simple law of supply and demand that our policy makers cannot change.

So we could be weeks or months away from a sea change in the markets. We will continue to watch the dollar because that will be the key. When the dollar breaks, it will signal a loss of confidence and willingness of foreigners to continue sending money to a dying economy. When that moment arrives, I fear things could deteriorate very quickly for the U.S. When the dollar begins to crash, interest rates will rise even as the economy declines which in turn will mean an end of the housing bubble, the bond bubble and of course the final death warrant for the stock market in this the 4th Kondratieff winter since the founding of America in 1776.

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GOLD

 

I am encouraged by the resiliency of gold. After getting pounded in the middle of the week with the Iraq announcement, Gold finished the week at $320.30, above its 20-day moving average ($318.23), above its 50-day moving average ($317.15) and above its 200-day moving average ($308.83).

I think the following summary of gold by Richard Russell sums up my feelings perfectly. Here is what Richard said in "Richard's Remarks" of November 15, 2002. "With all this debt piling up, with all the new credit being created - and with the threat of increasing bankruptcies looming, there will be an increased desire for something intrinsic, something that isn't created out of debt.

"Yeh, I'm talking about gold. "And what do you know-I've been having new thoughts bout the gold situation. The new thoughts are that I don't think serious gold buyers are at all anxious to see gold surge to new heights-at least not at this time. No, I think gold is under serious quiet ACCUMULATION, and the accumulators are actually hoping that gold "takes it slow."

"One of those groups is the gold mines who are still hedged and who are anxious to get rid of their hedges. The last thing these mines want is a booming gold market at this time. Another group is the 'silent accumulators,' those who see the writing on the wall, and who are quietly buying gold at what they consider 'dirt cheap' prices. A third group is the gold banks who have a huge short position in gold. Still another group are the commercial shorts, part of these, of course are the gold banks.

" If you examine the weekly gold chart that I included on page 6 of the recent Dow theory Letters, you will note that within the rising channel there are six distinct declines in gold. But this is important-note that each decline ended at a HIGHER LEVEL than the preceding decline. This is a tell-tale sign of accumulation.

"The most recent decline in gold took December gold down to a closing low of $311.20. This close at $311.20 was just above the rising 200-day moving average of December gold. "From there gold rallied again. As I write the 50-day moving average of December gold stands at $319.20. December gold this morning sold at $319.70, slightly above its 50-day moving average. The two immediate upside targets for Dec. gold are $325 and the $330. I don't think gold buyers are anxious to see those two targets bettered today or tomorrow. No, they'd rather accumulate gold at dirt cheap prices.

The Federal Reserve Bank of New York holds the world's largest accumulation of monetary gold.

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