· Gold on the verge of breaking out big time!
· GATA for starters
by Eric Hommelberg
September 02, 2009
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 a 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 toaste?
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 $300 is saying that the dollar will be gaining purchasing power and act as a safe hafen investment. Nothing however could be further from the truth since any bankrupt nation will see its currency fall into oblivion. History leaves no doubt about it. In the end ALL paper currencies fail!
MI: So you're suggesting the US is bankrupt then?
GB: Technically yes, look, the problems we're facing now emerged from too much debt.. Now the government is trying to fix these problems by issuing even more debt.. A trillion dollars here, a trillion dollars there, it doesn't stop. There is no way these extensive debt levels can ever be repaid, not even by raising income tax to 95%, so the inevitable conclusion is that only inflation could provide the budgetary resources needed to cancel out these debts.. This is what happened to the German Reichsmark and more recently to the Zimbabwean dollar..
MI: Are you suggesting hyperinflation in the US?
GB: Again, it's a confidence game. When confidence is gone, the currency is gone. Needless to say confidence in the US$ 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.
We will be publishing a series of interviews in the coming months with CEO's of junior mining companies that will survive in our opinion and could do well in coming years. If you would like to get a copy of these interviews and want to be kept updated on our charts then please sign up for our FREE GoldDrivers Report HERE
Comments are welcome at
ehommelberg@golddrivers.com
Eric Hommelberg
GoldDrivers.com Inc
NOTE:
For readers who want to have an in-depth coverage of GATA and its claims I strongly suggest to read the following reports/editorials:
Not Free Not Fair -
The long term manipulation of the gold price Aug 2004 – by John Embry/Hepburn
Gold & GATA May 2005 - by Eric Hommelberg
Remonetisation of gold – start hoarding Jan 2006 - Credit Agricole report
Covert selling (via central bank lending)
has artificially depressed the price for a decade.
Central banks have 10–15k tonnes of gold less than their
officially reported reserves of 31k. This gold has been lent to
bullion banks and their counterparties and has already been sold
for jewellery, etc. Non-gold producers account for most and maybe unable to cover shorts without causing a spike in the gold price.
GOLD: Riding the “Re-Flationary Rescue” Sept 2007 - CitiGroup report
Central Banks: Capitulating on Gold?
Official Sales ran hot in 2007, offset by rapid de-hedging – Gold undoubtedly
faced headwinds this year from resurgent central bank selling, which was
clearly timed to cap the Gold price. Our sense is that central banks have been
forced to choose between global recession or sacrificing control of Gold, and
have chosen the perceived lesser of two evils.
Major GATA battle Victories in the Gold War – Dec 2008 - Adrian Douglas