Weekly Gold Market Update

August 24, 2000

Hello everyone, this is Harry Bingham reporting on August 21, 2000. Our next scheduled update is September 5th. Having rebounded from a test of important support levels reached on August l0th gold rallied sharply and closed Friday up $4.80 from the August l0th bottom and up $l.70 for the week. Gold's preceding decline occurred on extremely thin volume. Rising open interest as prices declined indicated that light speculative selling outweighed even lighter commercial demand on the Comex. Australian producers were also reported to be selling as the Australian dollar recovered some lost ground. Improved tones of the stock and bond markets may also have contributed to investor apathy toward gold. Treasury bill rates however failed to confirm the bullish market assessment. Ninety-day bill rates are again within 25 basis points of Fed Funds, and only a decidedly easy Federal Reserve policy could sustain even a slightly closer relationship.

It warrants recalling that while gold is stable over the long term its value is not constant. During periods of market euphoria or despair gold may become the reciprocal of the value placed on stocks, bonds and currencies. Gold lost half its purchasing powers during World War I and its bull market aftermath and then regained all of it during the 1930's. Something similar happened after World War II, including the l970's when the public finally converted collapsing credit instruments to gold.

Speculative fever is infectious and today encompasses the markets, the boardrooms and the halls of government. These are some examples along with warnings of impending risk:

  1. Telecommunications companies, fresh from awarding Britain a $35 billion largess for mobile phone licensees, last week bestowed on Germany $46 billion for similar rights, to be financed mainly with debt. Warning – Telecom bonds have fallen and credit agency rating reductions are in the offing.
  2. Unilever will finance its $22 billion purchase of Best Foods with debt. Warning - Unilever bonds were downgraded a virtually unprecedented four notches. Bondholders beware!
  3. Brazil swapped $5 billion of Brady bonds for 40 years global bonds. Confidence runs high. Warning, The Financial Times editorialized: "Brazil is not out of the woods yet". Former Argentine President Menem warned of a looming Argentine depression or devaluation to the detriment of Brazil as well as Argentina. An Argentine devaluation would also impugn the integrity of currency boards. Argentina's monetary dilemma is that it has linked its currency to a rudderless ship, which may survive with the wind at its back but will fail to maneuver when the wind shifts.
  4. G.D.P reports look good, but wholesale and retail inventories are rising – Warnings – Several retail chains report earnings and credit collection difficulties. In the midst of a record economic expansion credit rating downgrades are running twice the number of upgrades. As Alan Greenspan noted, most bad loans are made in good economic times, but the impact is felt only when the economy weakens. Now the FDIC is running losses in boom times.
  5. Direct investment is supporting some emerging market currencies despite internal financial weakness and shrinking export surpluses. – Warning, India's currency has weakened because of huge fiscal and growing current account deficits. India's GDP is twice South Korea's.
  6. In Japan debts owed in bankruptcy have tripled this years while land prices and consumer prices fall despite rising corporate investment. A simultaneous Japanese and U.S. recession would be a chilling prospect for emerging markets. It could also chill the currency markets if much of the $900 billion of foreign exchange held by emerging nations were to be dumped on the market.
  7. As mortgage origination's declined Freddie Mac and Fannie Mae have stepped up their sub-prime lending activities. Freddie Mac has even proposed a 20 billion per year Euro financing even though its liabilities are in dollars. Currency risk will be swapped away in exchange for yet another derivative risk. – Warning, Alan Greenspan has said that this subsidized financing threatens general economic imbalances.
  8. On just one day $30 billion of new private equity funds were reported. The warning is obvious.
  9. Topping it off, the British government is suspected of encouraging Toyota to demand that its suppliers bill in Euros to foster the adoption of the Euro as Britain's currency. Meanwhile the European Central Bank is expanding credit at a 10% rate to offset capital outflows. Time was when governments sought to link their currencies to the highest quality standard – gold. Today they seek the lowest common denominator.

 

John Maynard Keynes once wrote: "The situation is serious when enterprise becomes a bubble on a whirlpool of speculation." Eighty years earlier, John Stuart Mill wrote that "...money, like a machine, exerts an independent influence only when it gets out of order." When money is out of order, the public's preference for gold usually rises.

78 percent of the yearly gold supply--is made into jewelry.

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