What's Going on with Bonds & Gold?

December 4, 2001

Interesting that the bond market got roughed up pretty well last week after having rallied sharply for the past several weeks. Most people who think about the bond market are suggesting it is a reaction to the trillions of dollars Alan Greenspan continues to create out of thin air via his control of the printing presses. The bond vigilantes are going back to work it is said. By forcing interest rates higher, they will ensure Mr. Greenspan's scheme to inflate will not work. They may even be telling Mr. Greenspan and the Bush Administration that their manipulative practice the prior week, when they discontinued the use of the long bond, will not work. So the popular is that bonds are declining in value is signaling a fear of inflation, especially given the enormous amount of money Alan Greenspan has been printing.

We would like to suggest a far different dynamic may in fact be coming into play, that being the one that Ian Gordon believes will unfold, if it has not already started, as we enter the Kondratieff winter (Depression). Normally in a depression led deflationary environment, owning U.S. Treasuries might make excellent sense because as interest rates plummet, the value of these instruments, which have no credit risk, would rise dramatically. However, Ian argues that with the U.S. now being the world's largest debtor nation, when the U.S. economy tanks, the dollar will plummet as foreigners pull hundreds of billions of dollars out of the financial markets in the U.S. Thus, even as we enter a depression, Ian believes we will also find that a crashing dollar will result in DRAMATICALLY HIGHER INTEREST RATES even as economic activity grinds to a halt. Ian also figures that when the dollar crashes, gold will rise to levels hard to fathom by all but the most bullish of us gold bugs.

Richard Russell Wonders - Why, if Bonds are Signaling Inflation, is Gold Not also Signaling Inflation?

Richard Russell proposed the standard inflation explanation for declining bond values this past Friday. But then he wondered why gold was not rising even as the bond market was crapping out. The answer may be closer to Richard than he believes. On Monday he wrote the following with respect to gold.

  • I'm receiving an increasing amount of mail and e-mails from subscribers who are convinced that gold is being manipulated and held back. The rumors say that it's being done by the Fed and the Treasury using leading brokerage houses to do the actual dirty work. Goldman Sachs is the outfit most often mentioned.
  • If this is true, if manipulation is what we're seeing, then what's happening is that the trend, possibly the primary trend, of gold is being artificially held back. And if this is true, then somewhere ahead we will see and upward explosion in gold as the manipulators fail in their efforts to hold back the primary trend in gold.
  • I'm looking at a weekly chart of gold. What I see is a huge base, a base that has been in the process of formation since April of 2000.
  • The upside resistance, as I see it is-first the 283 level, which is the level of the 50-day moving average on December gold. The much more important resistance level is the 295-296, the area of three preceding peaks, the peak of June 2000, the peak of May 2001 and the peak of September 2001.
  • So those are the two levels to watch on Dec. gold, 283 and 296. If, and I say IF, the primary trend of gold has turned bullish, then it's just a matter of time before gold will better those two resistance levels.
  • "The base is there, but as I say, it all depends on whether the primary trend of gold (after 20 years of a bear market has finally turned bullish.

I have the utmost respect for Richard Russell's talent as a market analyst. We need more smart and independent thinkers like him. I have added him to my list of others whom I admire for their smarts. Most notably in these pages are people like Ian Gordon and David Tice as well as Dr. Ravi Batra (though he comes at it from a different angle). And judging by some other Richard made in recent weeks, I can see that he has a great deal of understanding about the vital role gold plays in guaranteeing economic freedom.

But about the only fault I can find with Mr. Russell is that he has been slow to investigate and hence to understand that gold is manipulated by our policy makers. This is important because as we pointed out recently, the defiance of Gibson's paradox, which required gold to be suppressed if the U.S. were to successfully bail out the world. And bailing out the world provided the liquidity that led to the greatest stock market overvaluation in the world, not to mention market mal functions from a grossly overvalued dollar that also was made possible by a manipulated gold price.

As a subscriber of Richard's I plan to write to him sometime myself, and hopefully gain a dialog with him or better still to convince him to talk to Bill Murphy, or some of the prominent members in the GATA army. If Richard Russell came to understand the truth about the manipulated gold market, it could really help the public begin to understand the nature of the financial atrocity against the American people that has been carried on a massive scale since the mid 1990's.

A rising gold price signals trouble for the status quo. But since our politicians and banking industry are so set on creating an economic illusion for their own immediate gains, the are failing to allow gold to record impending economic problems by manipulating the price downward. It would be like draining the mercury out of a thermometer before giving it to a sick patient to check his temperature. Since the temperature does not rise, the assumption is made that there is no underlying infection! There are underlying infections of enormous proportions in the U.S. economy which, especially since the mid 1990's have been obscured by a rigged gold price.

Evidence of market manipulation in the gold market is overwhelming. Anyone who takes an objective look at it can reach no other conclusion. In the event you have not checked out this material, I urge you to do so by visiting www.GATA..org or www.goldensextant.com. Actually, on Monday, Richard has been showing a more open mind with respect to the possibility of our government rigging the gold market. This past Monday he made the following comment:

THE NEWMONT ACQUISITIONS IS GOOD NEWS!

We think the proposed acquisitions of Normandy Mining Limited (an Australian company) and Franco-Nevada Mining Corporation should be great news for the gold mining industry and bad news for the bullion banks and their lackey servants like AngloGold and Barrick.

Following the acquisition, the new Newmont will become #1 in the following stats:

  • In gold reserves with 97 million ounces
  • In gold production with 8 million ounces annually.
  • In leverage to gold among the major mining firms.
  • In trading liquidity.
  • In Earnings Before Interest, Taxes, Depreciation and Amortization.

Newmont has long been averse to hedging in the gold markets. I recall visiting the company's CFO, a man named Fontain, in the early to mid-1980's. I visited Mr. Fontain with Warren Maggi, who at the time was part owner of Mace Westpac, the gold bullion trading subsidiary of Westpac and my boss Graham Bell, both Australians. After making us wait for about ½ hour before allowing us to enter his office, Mr. Fontain looked over the top of his glasses and scowled at us, muttering, "Ok, so what do you guys want?" Warren, being the senior member of our team, lead the discussion. He tried to convince Mr. Fontain that he should hedge part of his gold sales to reduce risk of lower gold prices.

As I recall, Fontain was completely hostile to the notion of hedging because of the potential loss of earnings that shareholders might suffer when the price of gold rose to much higher levels. He pointed out that Newmont had an exceptionally strong balance sheet that could easily withstand much lower gold prices so he was dead set against any notion of selling his gold production forward. As a young lending officer, I remember that visit as being one of the most unpleasant experiences in those days when I called on many large Fortune 500 firms.

Indeed much has changed since my early 1980's visit with Newmont. Since then the company has taken on a huge amount of debt. But in fact, Newmont has been one of the least hedged gold producers, at least among the major companies. Having taken on a significant debt load in recent years, the "Hannibal Lector" bullion bankers may have eventually forced Newmont to hedge a major part of its future gold production. By so doing, these flesh eating corporate organizations would have extracted their normal pound of flesh and perhaps eventually succeeded in bankrupting the company as they nearly did to Cambior and Asahati following the Washington Agreement.

If the acquisitions of Normandy and Franco-Nevada takes place, it will help protect Newmont against "flesh eaters" like Goldman Sachs and J.P. Morgan by strengthening Newmont's balance sheet very significantly. The new Newmont will hold $700 million in cash and its debt to net book ratio will decline sharply from 41% to 18%. In addition, the company expects to realize $70 million to $80 million in annual after-tax synergies after the first full years, increasing to approximately $80 million to $90 million a year by the end of the second year.

Of equal importance in my view is that this soon to be largest gold producer, intends to remain largely unhedged, which is consistent with the attitudes of old man Fontain many years ago. Going forward, the company has said it expects to deliver production into Normandy's existing hedge contracts, but will seek to unwind the positions when economically attractive. This may also help arrest the destructive conduct of the Hannibal Lector bullion banks who either knowingly or not, have aided and abetted the immoral activities of the gold price fixers who sit atop the Fed and the Executive branch of the U.S. government.

In 1934 President Franklin Delano Roosevelt devalued the dollar by raising the price of gold to $35 per ounce.