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Gold on the verge of
breaking out big time!
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GATA
for starters
What about you? Sold
your gold lately? Sold your gold due to an inevitable correction coming due?
Sold your gold because of a tremendous short position build up with the
bullion banks? Sold your gold because the bullion banks are so smart and
always right? Sold your gold because of an imminent deflationary collapse
which would bring down gold prices to absurd lows of $300 or less?
Well, the list of
bearish arguments goes on and on but the reality is that nothing
fundamentally has ever changed. In other words, those very same fundamentals
which took gold up from $250 in 2001 to almost $1000 today are still in
place.
With the end of the
US dollar as world’s sole reserve currency in sight gold is poised for
a monster rally towards $5000 or more. Yes, ultra bearish reports for
gold are surfacing almost on daily basis now and yes, 12 reasons to short
gold seems to be the tune of the day these days and yes, conspiracy theories
to suppress the gold price are being ridiculed by western media as never
before so yes, for newcomers to the gold market it’s difficult what and
who to believe. Should they believe GATA which maintains the view that gold
has been suppressed for more than a decade in order to maintain the illusion
of a strong dollar? Or should they believe the mainstream gold
organizations like GFMS who refer to the GATA crowd as a bunch nuts or even
worse terrorists?
The simple truth is
that GATA has done such tremendous research and has come up with so much
evidence that even some major banks like Credit Agricole and CITI
Group have published bullish reports on gold projecting $2000+ gold based on
GATA’s findings. As John Embry of Sprott Asset Management once said,
everyone with a IQ higher than a grapefruit should admit GATA has a point.
Obviously GFMS Chairman Philip Klapwijk fails to meet Embry’s IQ
criteria since he refuses to debate GATA on grounds you shouldn’t deal
with terrorists.
To the newcomers in
the gold market I would say please read the fictitious conversation between a
staunch gold bull and GATA supporter (GB) and a mainstream investor (MI) who
isn’t so sure what to believe these days. The conversation features
discussions on traditional bearish arguments for gold, gold’s monetary
role, the gold suppression scheme, GATA’s birth, the blatant lies from
US government regarding its gold policies, Brown/Blair’s blatant lies
after announcing the sale of half of Brittain’s gold in 1999, future
for the US dollar, new world reserve currency, Chinese gold hoarding, etc.
I hope you agree with
John Embry after reading this piece that GATA has a point indeed. It’s
important to know what GATA knows since once you understand what western
central banks have done to gold last decade you’ll understand why gold
is heading to $5000 or more.
MI: I've heard that gold
is an awful investment asset and should be avoided like the plague.
GB: Oh really? Now why
would that be the case?
MI: Because gold doesn't
pay any dividend and doesn't produce any cash flow, therefore it's impossible
to assign any real value to gold.
GB: Who is telling you
that?
MI: My investment
advisor. Furthermore he points out that if you had invested in gold in 1980
you would have had a very poor result after almost 30 years. He recommends me
to invest in the DOW since the DOW
always performs well in the long term. Furthermore he warns me that gold has
been a hype as of late therefore a top must be near by.
GB: Your investment
advisor is insane.
MI: Why? It sounds all
reasonable to me…
GB: It's all about
cycles. Your investment advisor is programmed to think linearly like eg,
"the DOW always goes
up", "housing prices always go up", etc… Your investment
advisor can't think cyclical.. There are times to be invested in the DOW
but there are times to be invested in gold as well. Now did your investment
advisor tell you about gold's performance since 2001 compared to the DOW?
Has he told you that gold appreciated by almost 300% during this decade while
the DOW has lost about 40%? Now
what would you prefer? The thing is these kind of investment advisors are
always selecting a time frame which suit their agenda best. Since they don't
want to make fools of themselves they argue that gold didn't perform since
1980 and therefore has been a bad investment choice.. Again, ask your
investment advisor why he has failed terribly to get you into gold in 2001.
MI: Again he would argue
that it's impossible to assign any real value to gold since it doesn't pay
any dividend and doesn't produce any cash flow. Why should it be justified to
see gold at $1000, not at $500?
GB: Explain to your
investment advisor that gold is money and nothing else! Gold will always
remain the ultimate form of payment in the world (Alan Greenspan,
Testimony before US House Banking Committee, May 1999.), in other words,
gold is the one and only true safe haven when confidence in all other paper
currencies evaporates like snow in hell. This is exactly what you’re
witnessing now.
MI: My investment
advisor says that gold will fall anyhow from here since jewelry demand will
collapse as a result of the economic crisis. Since jewelry demand counts for
two third of total gold demand demand is most likely to fall off a cliff
thereby driving gold prices down.
GB: Really? Again, it
would suit your investment advisor to do his homework. Yes, jewelry demand
has slowed down but has been easily compensated by a record high investment
demand. The figures do speak for themselves, gold demand has been on a rise
ever since 2001 led by spectacular investment demand. A good example
concerns Greenlight Capital, a $6 billion hedge fund which turned to gold big
time this year, so please stop whining about a decrease in jewelry sales.
MI: So the argument of decreasing
gold demand as a result of current economic woes doesn't hold any ground then.
GB: Exactly, by now
you're already better informed about gold than most investment advisors. In
fact investment demand is skyrocketing to such levels that it absorbs almost
all the mine supply coming onto the market these days. On top of that we see
mine supply going down coming years. A decrease in gold demand is simply a
myth being kept alive by desperate gold bears sitting on huge short positions
that can’t be covered at current price levels.
MI: But wait, I still
don't get it. Maybe demand is overwhelming supply indeed these days but isn't
that gap filled by central banks dumping their gold into the market?
According to my investment advisor gold doesn't fulfill any monetary role
anymore thereby making it a useless asset for central banks. Now if gold
isn't a good asset for a central bank, why would it be good for us investors?
GB: Your investment
advisor is giving me a headache. Did you know that in 1971, when Nixon closed
the gold window, analysts were predicting gold to collapse from $35 to $7 an
ounce? They argued that since gold had lost its monetary role it would lose
its value. They thought that the dollar gave value to gold but sure enough it
was the other way around, it was gold that gave value to the dollar. After
delinking the dollar to gold gold didn't collapse to $7 but took off to $850.
Gold took off because investors didn't trust the dollar any longer, in other
words, investors preferred gold as a safe haven, not the dollar. Now in order
to restore confidence in the paper system central banks had no other choice
than to sell gold and bring gold prices down thereby creating a false picture
of strong paper currencies.
MI: But the central
banks can’t keep up this game forever right? I mean at some point their
ammunition will fall to such a critical low that it’ll force a
‘game over’ for the central banks right?
GB: Yes, that’s
correct! In fact we might have arrived to that critical low right now since
central banks have become net buyers for the very first time since 1987!
MI: But wait, I really
don’t understand why this paper game (suppressing gold prices to make
paper currencies look good) has been put in place in the first place. I mean
if gold were the sole anchor of our monetary system till 1971 why did Nixon
close the gold window then?
GB: Well, he simply had
to since gold was leaving the US at unprecedented speed. If he
hadn’t closed the gold window then all US gold would have crossed the Atlantic.
MI: Please explain?
GB: You see, the US had pledged the dollar to be as
good as gold in accordance with the Bretton Woods agreement after WWII.
The agreement allowed foreign central banks to exchange dollars for gold if
they wished to. Now during the sixties the US got in serious trouble
due to the Vietnam war. The costs of that war were spiraling so out of
control that the US had no other alternative as to turn on the printing
presses in order to finance its ballooning debt.
MI: So the US dollar
became a bit less as good as gold then right?
GB: Exactly! Now for the
US it didn’t matter since the world was forced anyhow to accept the US
dollar as a reserve currency but it was French President De Gaulle who raised
his voice and said in a landmark press conference (February 1965):
“What the United States owes to foreign countries, it pays, at least in part, with dollars that it
can simply issue if it chooses to”.
MI: So that’s why
the Gaulle wanted gold for his dollars then?
GB: Exactly!
MI: But didn’t the
US made it very clear that foreign nations exercising their right of
exchanging dollars for gold would be considered as 'American unfriendly'?
GB: Yes, but De
Gaulle wasn’t too impressed and sent the French navy across the
Atlantic to hand over dollars and pick up gold bullion in exchange. Did you
know that in 1965 alone, the French navy ferried back over $150 million of
gold bullion? They increased the proportion of French national reserves held
in gold hereby from 71.4% to 91.9%. The bottom line is that De Gaulle
didn’t trust the paper dollar which were circulating in ever increasing
quantities and opted for real money which is of course gold.
MI: So what you're
suggesting is that central banks and governments don't want to see higher
gold prices?
GB: Exactly! The whole
system is based upon faith and backed by nothing.. A skyrocketing gold price
would set off all kinds of alarm bells which could lead to a dollar collapse.
This is the one and only reason central banks have been dumping gold (through
sales and leasing) into the market for so long..
MI: Now if that would be
the case indeed why don’t we hear about interventions in the gold
market in the financial news media?
GB: It’s simple.
The US can’t reveal its strong dollar policy without undermining its
own credibility. Admitting they have been suppressing the gold price for so
long would have had devastating consequences for the US dollar. Therefore at
all costs, gold policies must be kept secret for the public.
MI: But that’s
just theory and conspiracy stuff. I mean, we don’t hear high ranking
officials talking about suppressing gold prices right?
GB: No, not in public or
in front of a TV camera but if you do your homework you’ll be surprised
what comes up.
MI: Could you give an
example here?
GB: Sure, you know
former FED president Paul
Volcker right?
MI: Yes
GB: Well, we all know
what happened during the late seventies, the dollar collapsed and gold took
off. Now Paul Volcker said in his memoirs (referring to the dollar crisis of
the 70's) that joint intervention in gold sales to prevent a steep rise in
the price of gold was a big mistake. He said the price of gold rose rapidly
which knocked the psychological props out from under the dollar.
Now furthermore the US government tried to prevent a dollar collapse by gold sales on its own. On Nov 1 1978
the Carter administration worried about the falling dollar announced that the
Treasury would use gold sales and foreign borrowing and draw on its reserves
with the International Monetary Fund to defend the dollar.
You see? The big
picture is simple, dollar weakness can only be addressed by attacking gold's
strength.
MI: And attacking
gold’s strength happens to take place in secrecy you say? Or let me put
it this way, did secretive gold market interventions kept the dream of a fiat
currency system alive? Is that what you suggest?
GB: You bet!
MI: But come on, where's
the proof? I haven’t heard a banking official admitting these
kind of activities. Never!
GB: Well, what about
this one. William S. White, the head of the monetary and economic department
of the Bank for International Settlements said in a speech (June 2005) to a BIS
conference in Basel, Switzerland.
"There are five
main purposes of central bank cooperation and one of them is "the
provision of international credits and joint efforts to influence asset
prices, especially gold and foreign exchange, in circumstances where this
might be thought useful."
You see? Joint
efforts to influence asset prices, especially gold, sounds similar to what
Paul Volcker said, what more proof do you need?
MI: OK, maybe
you’re right but still I don't get it why I should buy gold while I
know that central banks stand ready to intervene at any time. How can they
ever lose control about the gold market?
GB: Look, central banks
have been filling a supply/demand gap of 1200 tons for years and now they are
running out of ammunition to continue their battle against gold. On top of
that, demand is soaring at ever an increasing pace. I told you before that
almost all mined supply is being taken out by investment demand only these
days. Then we're hearing about new hedge funds pouring into gold almost on a
daily basis now, and last but not least there is a strong possibility China will be turning to gold big time.
MI: Why?
GB: Simple! China is worried about their US$ holdings and many officials are calling for diversification of China's reserves into gold. The Chinese central bank is expecting new record highs for gold
in 2009! Now why is that you think? It's because the Chinese do understand
that gold will perform better than the US$.
MI: Is that why the
Chinese have been adding about 450 tonnes of gold to their reserves since
2003?
GB: Exactly!
MI: But they just
announced that, why did they announce it only after so many years?
GB: The Chinese
aren’t stupid, they want to accumulate gold at rock bottom levels. If
they would have announced up front in 2003 they considered buying 450 tonnes
of gold it would have caused an explosion in the gold price thereby shooting
themselves in their feet. In fact most central banks announce purchases or
sales after they accumulated or sold the gold, not before.
MI: But in 1999 Gordon
Brown announced in advance the sale of half of Britain’s gold reserves.
Now why would he do that since according to your logic it would cause the
gold price to crash, wouldn’t it? Any entity who wants to maximize
their profits on a gold sale would not announce it in advance would they?
GB: Exactly! Look,
it’s simple, Gordon Brown had only one objective which was to crash the
gold price, he got what he wanted since gold tumbled down on his announcement
to its ultimate low at $252.
MI: Now why on
earth would he want the gold price to crash then?
BG: Look, gold was on the
verge of a significant break-out above $290 at that time which would have
hurt the commercial gold traders and banks which were heavily short at that
time.
MI: So you’re
suggesting that Gordon Brown in fact bailed out some big bullion dealers who
were heavily short ?
GB: Yep!
MI: That all sounds like
conspiracy stuff, I don’t believe it.
GB: Believe it or not,
all I ask you is to stay with the facts. You know that suspicion on the announced gold
sales ran so high that chief executives and chairmen of Placer Dome, Newmont Mining, Ashanti Goldfields, Homestake Mining, Gold Fields, and Anglogold wrote an
open letter to Tony Blair?
MI: Really? What did the
letter say?
GB: Well, this letter
included some persistent strong rumors that the government’s whole plan
was to drive down gold prices to save the bacon of firms who were heavily
short (gold). Here’s a quote from that letter:
On 16 June 1999, in the House of
Commons, Mr. Quentin Davies, from the Opposition Front Bench, speaking in the
debate on gold sales, said that there is a persistent rumour concerning the
position of international investment banks.
Mr. Davies said:
“…We cannot allow
the rumors to grow, because they are extremely dangerous to public
confidence. It has been suggested that the market is very short of gold, that
the short positions may be a substantial multiple of the total amount of gold
currently held by the Bank of England, and that the Bank’s real motive
is to save the bacon of firms that are running those short positions.
…Has the Government’s whole plan been simply to drive down the
gold price by whatever means, fair or foul, to save the position of certain
figures in the city which apparently, are so short and potentially in such
trouble?”
MI: OK, but Blair and Brown
denied it all and said that the gold sale decision was made consulting with
the bank of England. Blair said in the House of Commons on July 14,
1999:
“We sold gold on the
technical advice of the Bank of England, and other countries have also sold
gold.”
GB: Yes, I know he said
that but that’s a blatant lie. The Bank of England has distance itself
from the decision to sell gold reserves and came out on April 14, 2007 with
the following statement:
“In regard to the gold
sales, the Bank acted solely as agent and the decisions were taken by HM
Treasury.”
MI: So Blair/Brown were
lying then, I guess the bank officials weren’t too happy about this at
all?
GB: No they
weren’t! A senior investment bank director present at a meeting held by the
Bank of England in May 1999 to discuss the sell-off, said:
“We were told this was a
Brown thing and that the Bank had no say over what was going on. The
officials were unhappy.”
MI: This all stinks
GB: Yes, but
there’s more. Did you know that two of the big short players at that
time (JP Morgan and Deutsche bank) informed their clients the day before the
BOE gold sale announcement that gold was NOT GOING ABOVE $290? Now I’m
asking you, how on earth could they have known that? Well, the answer came
the very next day, then we all knew why!
MI: Are you suggesting
official gold reporting is unreliable then?
GB: Sure it is. You see,
as mentioned before, the western bullion banks have been suppressing the gold
price for more than a decade by excessive gold sales and loans. It’s not only the
Bank of England that lost half of its gold reserves but word is that only
about 15.000 tonnes of gold is left in the vaults of the central banks world
wide instead of the claimed total of 30.000 tonnes.
MI: But the figures
published by GFMS are suggesting that only about 5000+ tonnes of gold has
been leased into the market. That’s a big difefrence.
GB: Forget about GFMS,
the numbers they produce have nothing to do with reality. They just
report what central banks are telling them which are just a bunch of ordinary
lies. You see, central banks are allowed to report leased gold as being a
reserve asset so we will never find out how much gold they really have in
their vaults.
MI: So the central banks are
reporting gold holdings in their vaults which isn’t there you mean?
GB: Exactly! Again,
it’s estimated that only about 15.000 tonnes of gold is left in the
vaults of central banks, not the officially reported 30.000 tonnes.
MI: But why hasn’t
there been intense debate about these figures then?
GB: Oh well, there is
extensive debate but the people who brought this up are silenced by the
mainstream media.
MI: Who are you referring
to then?
GB: You see, it was gold
analyst Frank Veneroso who estimated in 1998 that about 8000 tonnes of gold
had been leased into the market. It was however Bill
Murphy who took these figures to the public when he started
LeMetropoleCafe in 1998. Murphy knew that at one point in time these short
positions had to be covered which would catapult the gold price to
unimaginable highs. But instead of covering gold shorts Murphy noticed
a few bullion banks, especially Goldman Sachs, bashing gold day in day out,
especially on technical break-out levels. He recognized this was not done in
order to maximize profits on ordinary gold trades but to suppress the gold
price. For some reason the price of gold was not allowed to rise and
the price was fixed. In order to fight this illegal price fixing game he then
started the Gold Anti Trust Action Committee (GATA).
MI: So Murphy took
Veneroso’s work to the public, but who is Veneroso?
GB: Well, Frank Veneroso
became well known for his ground breaking Gold Book which he published in
1998. Not one gold analyst ever has put so much effort in researching
gold data during the nineties as Frank Veneroso. The results were shocking.
In his Gold Book Veneroso detailed how years of central bank gold loans and
sales had artificially depressed the gold price.
MI: OK, but what about
Veneroso’s credibility? I mean, anyone could write a Gold Book with
dire conclusions.
GB: Yes, but not anyone
could work as a consultant to the World Bank, the International Finance
Corporation and to governments of Bahrein, Brazil, Chile, Ecuador, Korea, Mexico, Peru, Portugal, Thailand, Venezuela and the UAE. Furthermore Veneroso used
to be an advisor to Allianz Dresdner and managed the ABNAMRO Gold Certificate
Fund, hope this solves your credibility worry.
MI: OK, so that’s
how GATA started, what happened next?
GB: In the years that
followed Veneroso uplifted his estimated short positions to 15.000 tons
of gold. In 2001 Veneroso joined GATA at the African Gold Summit where he
held his famous presentation “Facts, Evidence and logical Interference”.
It was here that Veneroso outlined that central bank selling would hit a wall
in 7 to 10 years from then. Well, here we are in 2009 in the middle of
that projection and believe it or not, central bank selling has eased
completely indeed. Even better, central banks became net buyers for the first
time since 1987. Now was that a good forecast or what? Here you see a picture
from a South African news paper featuring Veneroso+GATA back in 2001
MI: Very impressive
but how come mainstream gold organizations like GFMS refuses to deal
with GATA, or even worse, why does GFMS Chairman Philip Klapwijk refer to
GATA as if they were a bunch of terrorists?
GB: No idea, maybe
it’s because GFMS know their own reporting is bogus but they simply
refuse to debate their numbers. Veneroso has said many times that the GFMS estimates of
gold supply/demand are so removed from historical trends and current market
reports that they have become ludicrous thereby fully discrediting themselves.
MI: But one of them must
be wrong
GB: Again, stay with the
facts. There has been no one so dead right on gold as GATA ever since 2000.
When GATA said in 2000 that gold would go to $850 they were ridiculed, but
gold did go to $850. When Veneroso said central bank selling won’t be
an issue in 7 to 10 years from then nobody took notice. Now 8.5 years later
central bank selling has dried up completely and reversed to net buying! So
I’m asking you, was GATA right or what?
MI: Hard to argue indeed!
GB: Now GATA says gold
is heading to $3500 or more and they are ridiculed again, ridiculed by
western mainstream media but gaining recognition in the East. I do hope
you’ll be giving GATA the benefit of the doubt here, like the people
from the East!
MI: Oh sure, but why
is it that GATA continuous to be ridiculed by the western mainstream press
then?
GB: It’s simple,
the US government simply cannot afford the truth to come out regarding its
gold policies. As mentioned before The US can only maintain the
illusion of a strong dollar by capping the price of gold. The US and its allies have managed to mobilize half of all central bank’s gold in order
to slow down gold’s inevitable rise, this must be kept a trade secret
at all costs in order to keep our current monetary system from collapsing.
MI: But how can the US sell its gold while their official gold holdings didn’t change for so many years?
They have reported 8000+ tonnes of gold reserves for decades.
GB: First of all
it’s hard to believe the US still maintains a gold reserve of 8000
tonnes since they blatantly refuse an independent audit of its gold reserves.
The last audit was conducted in 1956 during the Eisenhouwer administration.
Furthermore GATA found out that the US is engaged in gold swaps with Germany which made it possible for the US to sell (or lease) an additional 1700 tonnes of gold into
the market.
MI: I don’t get it
since US government denies being involved in any kind of gold swaps for
decades.
GB: Yes, that’s
what government says. Remember how reliable Blair/Brown’s statements
were on their gold sales? Same here, the truth must be suppressed at all cost
since it would severely undermine confidence in our current monetary system.
MI: But wait, GATA could file a
freedom-of-information request for a full disclosure of US gold ownership and
trading activities. Since Obama has promised an unprecedented level of
openness to the government odds are GATA will succeed. I mean, if
there’s nothing to hide for government regarding its gold
holdings/policies then they must by law provide the information being
requested right?.
GB: That’s exactly
what GATA did!
MI: Ah, any results yet?
GB: Yes, the result was
shocking but predictable. The FED
withheld 137 pages of its records involving the U.S. gold reserves because
they contain ‘trade-secrets’.
MI: Trade secrets? 137
pages? That suggests the FED
has some big secrets about gold which must be kept secret from the public.
GB: Yep!
MI: But doesn’t
the gold belong to the American people? Don’t they have the right to
know the truth about their gold and how their own government handles it?
GB: Sure they have the
right to know, that’s exactly why Congressman Ron Paul issued a bill to
audit the FED. Paul says that
Congress has a right to know what the FED
is doing and why. The bill is gaining huge support, already 64% of the House
of Representatives are co-sponsoring this bill.
MI: How does the FED
respond to such initiatives from Congress?
GB: Well, the FED
has warned Congress that if they go ahead with it would undermine its
independence and therefore it could have devastating consequences for the
dollar.
MI: Don’t make me
laugh. So if I understand this correctly then the FED
admits that by operating in a non secretive way the dollar would be toast?
GB: Well, I guess that
even an orang utang would come to the same conclusion here.
MI: So if I understand
this correctly, the banksters are asking the American people to give them
their money, then they insist to operate in secrecy and finally they tell the
American people not to worry since they will manage their money in their best
interest?
GB: Well, the farce goes
on. It’s not just about gold secrets. You know Bloomberg / Fox News
Network filed a FOIA request last year in order to find out what the FED
had done with tax payers money. In other words, who were the beneficiaries of
the bail-out programs.
MI: Really? Any results
so far?
GB: Yes, on August 24 the court answered in
favor of Bloomberg. It said the public does have a right to know. Manhattan
Chief U.S. District Judge Loretta Preska ruled that the Federal Reserve
"improperly withheld agency
records" and has ordered it to disclose the names of the
companies that took part in emergency lending programs that were instituted
as the financial markets in the United States collapsed.
MI: Wow! But the FED
will most probably appeal right?
GB: They already did!
MI: On what ground then?
GB: Well, what do you
think? The usual crap of course! The FED
says that disclosing that kind of information could have devastating
consequences for the economy.
MI: I can’t believe
my ears! So basically they are saying that the American tax payer is not
allowed to know the truth since the truth could have devastating effects to
the economy?
GB: More ore less yes. Key
word here is transparency. There’s no transparanecy. No transparaency
at the FED, no transparancy
concerning the bail-out programs, no transparancy in US gold policies etc.
MI: But this all should
be a tremendous boost for GATA’s credibility right? I mean if
there’s nothing to hide what’s the problem then? I think GATA is
right and the FED is hiding
some big secrets, especially on its gold activities indeed.
GB: Look, western
governments have no other choice as to ridicule GATA and its findings. The
irony however is that GATA’s credibility in the east is rising fast
these days.
MI: Really?
GB: Yes, listen. First
of all it was deputy chairman of the Bank of Russia Oleg Mozhaiskov who cited
GATA’s work at length in his speech to the LBMA in 2004 and concluded
that:
“Movements in
the price of gold are sometimes "so enigmatic" and central banks
and bullion banks are so involved with it that the gold market may be less
than free.”
The following year in
2005 GATA held a gold conference in the Dawson site Yukon, the site of the
Klondike Gold Rush. People came from 14 countries including Andrei Bykov, who
was one of President Putin’s top economic advisors. Bykov told Bill
Murphy afterwards that it was the best gold conference he
ever had the pleasure to attend.
Then the Chinese
approached GATA through its sovereign wealth fund. This $200+ billion dollar
fund has held three teleconference calls with GATA so far. You’re not
going to do such a thing in case you’re dealing with a bunch of nuts
indeed.
MI: Unbelievable! So China and Russia are very pro gold then?
GB: You bet. You know,
Russian President Medvedev held up a gold coin during the G8 news conference
recently and said with a broad grin on his face that it represented a
‘symbol of unity’ and a possible ‘future
currency’’.
The Chinese just
announced to have doubled its gold holdings. What more gold friendly
statements you want?
MI: But with all this
fresh demand for gold western central banks efforts to contain gold prices
will be severely undermined right?
GB: Absolutely. The
inevitable result will be an explosion in the gold price which will stun the
entire investment world.
MI: Please explain?
GB: Look at it this way,
like a compressed coil. The more you compress it the more volatile its
reaction after releasing the pressure.. This applies to the gold market as
well. More than 10 years of extensive gold leasing has led to a gold short
position of about 15.000 tonnes which can never find its way back to the
central banks vaults without causing the price of gold to explode.
MI: Maybe the central
banks don't want their gold back so there won't be a huge short cover after
all?
GB: Could be but the
thing is that the central banks still have the gold on their books as reserve
assets. In other words, they still claim the leased gold as part of their
reserves. Now if a central bank chooses to settle the leased gold with cash
instead of demanding back the gold itself then one day investors will wake up
and realize that half of all central bank is gone and hanging around the
necks of Indian and Chinese women. What will happen then is rather predictable,
investors world wide will be bidding up gold prices to levels unimaginable
today.
MI: I understand your
argument but what about all these bearish reports on gold claiming gold will
collapse to below $300 due to a deflationary collapse of the world economy?
GB: The deflationists
had it wrong ever since $320 gold back in 2002. So why listen to them now?
Every time gold dropped by $10 they came out declaring deflation had arrived
and called for a collapse in gold.
MI: Yes, but now it's
different, we’ve seen all commodities collapsing, we’ve seen the
worst downturn in world economy since the great depression of the thirties.
GB: Again, the
deflationists don't realize that gold is money. When confidence in paper
currencies evaporates likes snow in hell then investors will flee into gold
en masse since gold will always retain its value, it simply did so for more
than 6000 years. Claiming gold will collapse to below $300 is saying that the
dollar will be gaining purchasing power and act as a safe haven investment.
Nothing however could be further from the truth since any bankrupt nation
will see its currency fall into oblivion. History leaves no doubt about it.
In the end ALL paper currencies
fail!
MI: So you're suggesting
the US is bankrupt then?
GB: Technically yes,
look, the problems we're facing now emerged from too much debt.. Now the
government is trying to fix these problems by issuing even more debt.. A
trillion dollars here, a trillion dollars there, it doesn't stop. There is no
way these extensive debt levels can ever be repaid, not even by raising
income tax to 95%, so the inevitable conclusion is that only inflation could
provide the budgetary resources needed to cancel out these debts. This is
what happened to the German Reichsmark and more recently to the Zimbabwean
dollar.
MI: Are you suggesting
hyperinflation in the US?
GB: Again, it's a
confidence game. When confidence is gone, the currency is gone. Needless to
say confidence in the US$ is fading fast since trillions of fresh added debt
are surfacing almost on a daily basis now. The US doesn't have that money,
the Chinese won't lend it to them any longer, so they have to print it.
MI: So they have to print
it, sounds very familiar to what happened in the mid sixties!
GB: Yes, that’s why
China and Russia are pushing for a new world reserve currency indeed while in
the meantime adding to their gold reserves.
MI: OK, but I guess a bit
more opposition to the dollar would be necessary in order to force an
alternative?
GB: It’s only a
matter of time. This week French President Sarkozy acknowledged
as well that the US dollar can’t remain the world’s only reserve
currency due to the rise of emerging economies such as China and Russia.
MI: OK, so there’s
an increased pressure for a new world reserve currency but what will happen
if no agreement could be achieved for a new world reserve currency?
GB: Then the dollar continues
to sink and gold to rise.
MI: But what potential
gold prices are in the pipe line then?
GB: Well, there are many
ways to calculate hypothetical gold prices. In the 70's for example Jim
Sinclair predicted that gold would seek a price high enough to offset the
public debt held in foreign hands. He proved out to be right. A similar
approach these days would require gold prices exceeding the $10,000 mark.
MI: $10,000?
GB: Yes, $10,000. Look,
it sounds absurd these days but $1000 gold sounded absurd back in the early
seventies as well, yet Mr. Jim Sinclair predicted we would see $900 gold
before all was said and done. He proved to be right since gold hit a high of
$887 in 1980. Another tool suggesting $10,000 gold would be possible is the DOW/Gold
ratio. Look, as said before, there are times to be invested in equities and
there are times to be invested in gold. Unfortunately, these cycles take so
much time to unfold that our human minds don't recognize where we find
ourselves in these cycles and where we're heading to, unless you've studied
history extensively.
MI: Could you explain a
bit more?
GB: Sure, it's simple..
Again there are times that mainstream equities are the place to be. During
these times you'll see equities outperforming gold. Therefore you'll see a
rising ratio of the DOW vs
gold, in other words, the DOW/Gold
ratio will rise. When the DOW/Gold
ratio tops out it will be heading down for years to come. This happened in
2000. So when the DOW/Gold
ratio tops out you'll be buying gold since gold will be outperforming
equities for years to come. You will sell your gold again when the DOW/Gold
ratio bottoms out and you'll be buying equities again. Since the DOW/Gold
ratio bottoms out about every 35 years or so at a DOW/Gold
ratio of 1 you can expect gold continue to appreciate for another couple of
years until gold reaches parity with the DOW.
This could be eg with DOW 4000
as gold at $4000.. During a blow-off phase, however, anything could happen
and gold could spike up to $10,000.
MI: But when do you know
exactly when gold would be topping out then?
GB: You just don't know exactly
but as long gold doesn't double in value in a time frame of a year then I
wouldn't be worried about gold topping out. The momentum build up in gold
just cannot be stopped and odds are this will end in a mania stampede into
gold. We're not there yet, what we're seeing now is just the beginning.
MI: Some people claim
we are in a gold mania already so a top must be nearby.
GB: Forget about a mania
today. In 1980 we had a mania, people were queuing in lines in front of the Toronto banks waiting in order to buy gold. You know that 5% of all invested money back
then was invested in gold and gold shares? We are nowhere there yet since
only a fraction of 1 percent is invested in gold and gold shares today. Ask
your neighbors, do they own gold? You will recognize a mania when gold will
be the talk of the town, just like the high tech shares were in the late
nineties.
MI: Now how would you
play a move to $10,000? Would you invest in gold itself? Gold shares?
GB: Look, we're living
in extraordinary times with exceptional risks so please go for safety first
which indeed means the physical metals themselves. When I say physical metals
I really mean the metal itself, not an exchange traded fund like GLD or SLV.
Avoid as much counter party risk as possible and buy the physical stuff.
MI: Besides the physical
stuff, would you recommend buying some gold shares as well?
GB: The gold shares have
been trading at extreme depressed levels last year but bounced back by 100%
since October last year. Yes, I expect the senior gold shares to do well and
some even extremely well but again, go for safety first which means the
physical metals themselves.
MI: What about the
junior gold shares, they seem to be comatose. Will they survive?
GB: The juniors have
been hit extremely hard last year. Most of them are priced at bankruptcy
levels and as if gold were still trading at $250 back in 2001. The reason is
simple, most juniors had a business model of raising cash, drilling away that
cash, raising cash etc…. Needless to say this type of business model
doesn't work anymore in our current financial woes. It is extremely difficult
for most juniors to raise money at the moment. The conclusion is a simple
one, many juniors will bleed to death.
MI: But what about the
ones that will survive? Would it be good to own a few of these?
GB: Absolutely! Look, no
business system stays in extreme conditions for ever. In other words, after
staying at extreme depressed levels for a while, juniors that will survive
will be returning back to historical ratios compared to their senior
brethren. And yes, items swinging back from extreme depressed levels to
historical averages could easily overshoot to extreme overvaluation on the
upside as well over the next few years, thereby returning astronomical yields
unimaginable these days. But again be careful here, don't invest too much in
a single junior.
MI: Why are you so sure
some of these juniors will do so well coming years?
GB: It's simple, juniors
own the right of future gold supply. 75% of all new discoveries are made by
juniors. Gold will go to $5000 and maybe more, the major gold producers
cannot replace the mined reserves they produce so they have to open their
checkbooks and buy the ounces from the juniors that have them.
MI: OK, but how can you
recognize a junior that will survive and do well coming years?
GB: Well, of course no
guarantees can be given but I would say avoid those companies who have put
themselves in hibernation mode waiting for better times to come. Go for those
companies that managed to turn these challenging times into new
opportunities. Go for those companies who are financially secure and which do
have the ounces proven. Go for those companies who are producing or will go
into production shortly. Go for those companies which management has a proven
track record of success.
MI: Sounds reasonable to
me.. One more question about gold. In what time frame you expect gold to
reach $1000 again?
GB: Look, it’s not
about timing, it’s all about long term trends. The only thing you should
be worry about is the fundamental trend which is up. All else is noise. But
having said that it should be noted that the $1000 mark is one of extreme
importance. Please take a peek at the weekly gold chart here. Clearly visible
is the $1000 resistance area which has been tested for about four
times. Furthermore you’ll see an almost completed giant reversed
head & shoulder pattern. This formation has a price objective of $1250 on
it. So I would suggest to pay close attention to this weekly chart coming
weeks / months.
MI: Looks great, what
about the very short term?
GB: Well, gold finds
itself in the middle of a wedge formation which has to solve itself within
days…
MI: OK, exciting times
ahead of us I guess.
GB: You bet!
END.
Eric Hommelberg
Editor, the Gold Discovery
Letter, the Gold Drivers Report
www.golddrivers.com
All
articles by Eric Hommelberg
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