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Weekly Gold Market Update

October 4, 2000

Our next regular update will be on October l6th. Nothing is rotten in Denmark anymore. Danes have rejected the paper currency of a conglomeration of disparate nations. They rejected a currency that was not only born by fiat with no sovereign control, but also one whose longevity is suspect despite the absence of formal procedures for withdrawal. Tanks across the Rhine to quell the 63% of Germans who prefer the Dmark is not a likely prospect.

The concern of Danes that a collapsing euro might imperil their pensions should not comfort thrifty Germans. Neither may the conflicting statements of Euroland leaders. On the same day that the president of the Bundesbank called on Eurozone "to harmonize economic policies", an Irish minister denounced Euro directives that "seriously impinge on our identity, culture and traditions". Similar babel issued forth last Wednesday regarding future intervention, perhaps as the Financial Times surmised "to keep traders off guard;" What a role for money! All this confirms the wisdom of Ludwig Bamberger, Germany's late l9th century monetary authority who said: "A monetary union would be superfluous if all nations based their currencies on gold".

During the past two weeks the principal influences on the gold market have been:

  1. The gradual recovery from a perceived disappointing British auction. Why anyone would expect aggressive bidding to accommodate a seller under a time dictated mandate to sell remains a mystery. The British 25 tonnes auctions are deminimus even in the context of today's subdued 600 tonnes daily trading volume.
  2. The OPEC summit meeting. However, even Saudi Arabia's pledge to provide the oil the market demands and Iraq's vow to export could not hold oil below $30 a barrel.
  3. Coordinated intervention to support the euro. Gold rallied on the news, only to partially fall back and then to rally again. OPEC pronouncements muddied the waters, but on Friday gold was almost $3 higher than on the day before the intervention.

Most important to gold, central bank intervention cannot strengthen a currency. This was proved numerously throughout the twentieth century. Instead, coordinated intervention weakens the currencies of the intervening nations as they create their own credit to sop up the unwanted currency. These operations in the l920s, '60s and '70s are what finally drove the public throughout the world to gold. Almost weekly gold has risen against the euro. Coordinated intervention is synonymous with seeking the lowest common denominator, a typically globally bullish omen for gold.

The notion that gold must rise with one commodity, even one as important as oil, is fallacious, particularly during credit induced speculation. The Federal Reserve Board just reported that during the past five years Financial sector debt grew 98.6%. That is the credit inducement to speculation. Recent examples of speculation and its consequences include:

  1. Harvard University's announcement that venture capital contributed the lion's share of a yearly 32% gain in its endowment.
  2. A recent report that banks' risk adjusted reserves are the lowest in the fifty years history of the study.
  3. The attraction of momentum investors to electric utility shares. Mainly, utility speculation has been fueled by the purchase and sale of power plants at inflated prices, the cost of which will be borne by rate payers. Watch the inflation figures!
  4. Corporate bond ratings in the junk category are running ten times upgrades during boom times. What would a recession bring?
  5. Perhaps most egregious was Citigroup's announced acquisition of Associates Corp which obtains 20% of its earnings from low interest rate Japan, where Associates' borrowers now pay 29% after a government mandated reduction from 40% annually.
  6. Debt reduction workouts in Japan are at new records. The Japanese government estimates bank bad debts at $400 billion, but ING Barings places them at $l.6 trillion.

There is a text book definition of money, but in speculative times money may be what people think it is. The acceptance by banks of the credit balance of a margin account as a home buyer's down payment confirms how low the concept of money has fallen.

As Robert Hoye of Institutional Advisors notes, gold has lost some purchasing power in every speculative boom throughout recorded history and then later regained it, often 'and then some'.

Peter Bernstein in his new book The Power of Gold states: "Gold is not an end to itself. Gold and its surrogates make sense only to be exchanged for what we need or want". Most people do save, however, and the medium in which they hold their savings varies with perceived monetary and economic conditions. Even under the gold standard when banks became over extended and panics ensued, gold in hand was proved a prudent precaution.

Today, contrarily, many people might even applaud government supported gold price depressing manipulation so long as it kept the boom alive. In a bear market, when manipulation fails, all hell might break loose. Perhaps that is why John Maynard Keynes once wrote the gold standard "could not be tampered with and had proved reliable in practice".

The California Gold Rush began on January 24, 1848 when gold was found by James W. Marshall at Sutter's Mill in Coloma.
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