Interesting things going on in the gold world, as reported by Jay Taylor.
Gold
No doubt about it, gold is looking very, very strong. And as Richard Russell points out, with the price of gold now more than 10% above its 200 day moving average, we might expect a bit of consolidation below $370. Indeed some of the GATA folks have been speculating that $370 is a very crucial level for the Hannibal Lector short sellers, namely the bullion banks.
What we do know is that the prospects for gold have not looked this good in a long, long time. Here are some obvious reasons to be bullish about gold at this time:
Evidence that the gold cartel as GATA calls it, is finally reaching its limits. We think the fact that gold has risen so far above the $330 level at a time when crony capitalist companies like Barrick and Placer Dome and the gold bullion banks are so, so short the yellow metal, suggests the gold manipulation scheme is now about to get away from the Cartel. How much gold is left? As Jim Rogers pointed out in my interview with him, we don't know because the government won't allow an audit. But based on the supply and demand work provided by Frank Veneroso and other work carried out by GATA, there is every reason to believe there is far less - (the best estimate is approximately ½ less) than the government is reporting. Thus we think the day or reckoning for our ESF gold suppression policy makers may be at hand.
Indeed, we think this issue may well be at the heart of the reason why Treasury Secretary Snow has been stumbling and bumbling in his public statements about the strong dollar and perhaps why former Treasury Secretary O'Neil resigned. If as we believe, the gold manipulation was the real force behind the strong dollar and if the Treasury is running out of a supply of gold ample enough for it to continue to dishord, the handwriting may now be on the wall for the person who is exclusively permitted to inhabit the office of the Exchange Stabalization Fund, namely the U.S. Treasury Secretary. If it is true that the Treasury believes it can no longer spare any golden "bullets" to defend the dollar, as the recent rise in the price of gold suggests to me, then I think we could be very close to seeing an explosion in the price of gold up to at least $600/oz. which the work of Frank Veneroso suggests is a non-panic equilibrium price for gold.
Mining Companies are unable or unwilling to deliver gold to bullion banks
The pressure on the Treasury is of course now being increased by the policies of all the big mining companies to unwind their hedges and things could get very interesting when mining companies refuse or are unable to make good on their obligations to deliver gold back to the bullion bank cartel. Along that line of thinking, check out the following story from GATA this past week.
Newmont is Telling J.P. Morgan to "Take a Hike!" The following was reported from GATA Thursday: "The big gold news of the day concerns gold derivatives. There is a commotion going on behind the scenes in the bullion-banking world. Word has it that Newmont Mining is taking it to one of the Hannibal Cannibals, JP Morgan Chase. It has to do with their Yandal operation in Australia, which Newmont inherited when it took over Normandy. That property has 3 million ounces of gold reserves with a 3.7 million ounce hedge on - one that is going underwater as the gold price soars. Morgan has called Newmont for a margin call. Supposedly, Newmont is telling Morgan to stuff it, or more appropriately, if you insist on the margin call, the property is yours. I'm told that Newmont is willing to buy back their hedges from Morgan, but only for so many cents on the dollar. In other words, they are playing hardball. Newmont can walk because the property is "fully encircled," meaning it is a stand-alone project. Of course, it won't do much for their bullion-banking relationships. "The following was filed yesterday with the SEC:
"Newmont Yandal Operations Limited ("Yandal") advises that on May 21, 2003, it received a notice from a gold hedge counter party alleging a right to terminate a gold hedge counter party contract with Yandal before its scheduled maturity, based on the alleged occurrence of an early termination event under the contract. Yandal estimates the payment required to be made under the contract would be approximately U.S. $46 million based on an assumed spot gold price of A$560 per ounce. "In addition, Yandal also received notice today from Newmont Mining Corporation (NYSE: NEM) ("Newmont") that it intends to make an offer to acquire all of the 8 7/8% Senior Notes currently not owned by Newmont, in addition to all of the gold hedge counter party contracts entered into between Yandal and counter party banks. "
(original filing is here.
"The problem is not a small one for Morgan if Newmont walks. The hedge is 700,000 ounces more than their reserves and that's if someone is mining them. 700,000 times $370 gold is $259 million. At $470, it's $329 million. If the mine somehow becomes inoperable, the problem could become catastrophic. It serves Morgan right for allowing that kind of hedge in the first place. That's not a hedge, it's a speculation, put on back in the Hay Day of the gold rigging operations. What goes around comes around. Chase influenced Newmont to put on a big hedge at the bottom of the market around $265 gold, right before the Washington Agreement was announced. "The ramifications for the gold industry could be dramatic if Newmont sticks it to Morgan. Gold is only at the $370 level. What happens when gold rises hundreds of dollars per ounce? There is liable to be one counterparty risk problem after another. Ever hear this one before?
Institutionalization of Pro-gold Policies
Potentially very significant also is the fact that on June 1st a change in Chinese law will make it legal for Chinese people to buy, sell and own gold. Also the institutionalization of exchange traded gold bullion accounts should also spur demand for gold as an investment as the Toqueville Funds John Hatheway recently discussed.
Declining Confidence in the Dollar. The declining level of confidence in the dollar is perhaps the most important of all forces behind my bullish view on gold. The decline in the dollar is still fairly well controlled. But as the truth becomes every more recognized, that the strong dollar policy was largely a hoax in the first place, we could witness a massive and very rapid rise in gold, which would be the mirror image of a decline in dollar confidence.
Congressman Paul's Dialog with Alan Greenspan
Time will not permit me to analyze the exchange between Congressman Ron Paul and Alan Greenspan that took place in the joint economic hearings this past week. I typed it up just as it was recorded. No attempt was made to clean it up for grammar or to improve sentence structure in their exchange. What you see is what you heard if you watched/listened to this most interesting exchange between these two men, both of whom have an intellectual understanding of why gold is money and why it should be money while only one of them has remained true to his convictions.
"Dr. Paul: Good morning Mr. Greenspan. I have two questions. One is generalized and it deals with the dollar system and the monetary system that you are required to operate. And then one more specific factor that affects the strength of the dollar.
"The big debate now in financial circles is the strength of the dollar, whether it is good or bad vs. what a strong dollar should do to us or for us. And I would like to suggest is that there should be another alternative rather than arguing the temporary case for a strong dollar to help us, as it seemed to in the latter part of the 1990's vs. whether the weak dollar will now help us in our exports, rather than this manipulation of the dollar.
"I hope someday we will talk about a stable dollar. One that does not fluctuate so readily. We deal in the world today with fluctuating exchange rates and all currencies are inflated at different rates. Nobody advocates that we have 50 different currencies in this country. That would be totally chaotic and yet the world is required to operate that way. But there is no soundness to it, no restraint on the monetary authorities.
"And the other challenges we have to look at some day is whether or not we should continue to accept this notion that we can achieve positive central economic planning through the monopoly control of money and credit and the setting of interest rates, which is really contradictory to true capitalism. I think that is where part of our problem is. The Austrian economists for years, Mises, Hyek and Rothbard have argued that this is the source of our problem. That the manipulation of interest rates too low causes the boom and then eventually the bust has to come. And we see this over and over again.
"We talk about productivity and other events that are important, but we fail to talk about the initial cause of the mal investment, the over capacity which then requires the correction. Because we operate the reserve currency of the world we have the advantage of others taking our money and our dollars and holding them. But currently the expectations are that our current account deficit may soar to $600 billion next year. And we do know that throughout history, and most economists agree that these kind of current account deficits cannot be maintained and that they will eventually lead to a weaker dollar and higher interest rates.
"So I think you are under the gun. On the one hand you want to stimulate the economy with low interest rates which weakens the dollar. At the same time the weak dollar will eventually push up the interest rates. My question then is, when or do you think we will ever talk about a sound, stable currency? And the other question is more specific. Even though what the Fed does in the creation of new money is the key element, there are other factors too like jawboning the so-called speculators for a day or two. But that really can't change things. Jawboning doesn't work. Ultimately in 1979 interest rates had to go to 21% to restore some order to the dollar.
"But you talked about the war and the supposed benefits after the war was over and after it started. But I think what has not been recognized is the ongoing foreign policy of our adventurism and our plans - those same people who argued the case for Iraq are arguing the case of Syria and they are arguing the case for Iran. At the same time we don't have our allies close to us. We don't have people pouring into dollars like we did in the 1990's. So that by its self it has a subjective relationship to the perceived value of the dollar. And I want to know whether you think that element in foreign policy today specifically has affected the future perceptions of the dollar's value is going to be?"
Greenspan: "Dr. Paul, let me address the last question first. As I think you may remember we in the United States government have made a decision in which the value of the currency will be discussed only by our chief economic spokesman, which is the Secretary of the Treasury. And we at the Fed have adhered to that for quite a long period of time. I think it is important to have one voice speaking on that issue.
"With respect to the more general question about sound stable currencies. This as you know is a very fundamental debate among economists. You point out quite correctly that there is a single currency in the 50 states of the United States. The reason why we are able to function in a manner that others are not is because an exchange rate that is a unit specific currency tends to bring together all of the imbalances in an economy in an exchange rates price. In other words, at the boarder, an exchange rate essentially rebalances all the imbalances between two contiguous countries or it might have been in the United States between two states.
"If you lock the currency in and you cannot adjust the currency at the border. Then the adjustment must occur in capital flows or labor flows. The only two other ways you can get major adjustments that are required between two disequilibria economies. The advantage of the United States is that because we have stripped out all barriers to interstate commerce (I should say "most") we are able to get equilibrium adjusted solely through capital and labor market flows and we have a fixed currency. The reason why it is feasible at this moment in a lot of other areas of the world is that capital and labor flows are not adequate to pick up the full adjustment process. In and endeavor to fix exchange rates in the face of imbalances induces financial breakdowns as have occurred.
Dr. Paul: "May I just interject. I'm not talking about fixing these rates. I'm talking about a single currency that could be universalized."
Greenspan: "That's the algebraic equivalent of fixing currency rates. In other words, if you lock in legally all rates, its irrelevant what you call the currency in one nation or another. It's the lock that matters and if you have for example as we did, the gold standard for a very substantial period of time, was the single currency of the world. It didn't matter what you called the other currencies because they were all locked into specific units of gold. And so the notion of a stable world currency requires a degree of flexibility in capital and labor flows which we have not yet achieved."
Second Round of Questioning for Congressman Paul
Dr. Paul: "I wanted to follow up on your comments about not being able to talk about the value of the dollar. I find that rather ironic. The Federal Reserve is in charge of the monetary system and you as Chairman have a lot to say about what monetary policy is and how much money will be printed and how much interest rates will be. So we find it a bit ironic that you can't comment on the value of the dollar and that you defer to Treasury. Now Treasury can play a role by intervening in the exchange markets but that's very temporary. But I understand the policy and we don't expect you to change that but in a way you are really in charge and it is too bad that we can't get comments on the value of the dollar.
"I did want to remind you about the follow up on the question of foreign policy, how foreign policy anticipation about what we might be doing around the world might affect fiscal and monetary policy and trade policy and how that effects perceptions of the dollar and whether or not that is important. But on the currency issues, I'm still not interested in going back to fixed currency rates such as the Breton Woods Agreement. That's not my interest because even then Henry Hazlet wrote very correctly that Breton Woods would break down with that so called gold exchange standard.
"But if you have achieved what you hoped, that is that central banks now have done such a good job in managing paper money that it is starting to act like a gold standard, now that would be an historical achievement You realize that? Because it has not been done in 6,000 years of recorded history. And history is on my side of this argument that paper money doesn't work very well. Paper money ends badly. We may be seeing some signs today around the world that paper money is a very shaky system.
"But I have a more specific question in dealing with that. In a return to commodity money, if we have a third world nation that destroys its currency and they don't have the advantages we have politically, if they destroy their currency and they want to link their currency to gold, because they know history, they are not allowed to do it. The IMF prevents them from doing it. There is an IMF rule that says they can't do it. So wouldn't this be a good time for us to become more neutral and not antagonistic toward gold and say to the IMF 'our position is that if you choose to go back and get stability and soundness to your currency by linking it to gold, we ought to permit that?'"
Greenspan: "I believe a country has the capability of doing that. I'm not sure what the rule is in the IMF. If they were to link their currency to gold and they believed it was going to stabilize their system, they wouldn't need the IMF."
Dr. Paul: "But there is a prohibition if they want to stay in the IMF. What about the foreign policy question."
Greenspan: "I don't feel I can answer that without breaching the agreement about not taking about the currency. I don't know how to phrase an answer to your question without implicitly doing that."
Dr. Paul. "O.K. I yield back."
Gold
No doubt about it, gold is looking very, very strong. And as Richard Russell points out, with the price of gold now more than 10% above its 200 day moving average, we might expect a bit of consolidation below $370. Indeed some of the GATA folks have been speculating that $370 is a very crucial level for the Hannibal Lector short sellers, namely the bullion banks.
What we do know is that the prospects for gold have not looked this good in a long, long time. Here are some obvious reasons to be bullish about gold at this time:
Evidence that the gold cartel as GATA calls it, is finally reaching its limits. We think the fact that gold has risen so far above the $330 level at a time when crony capitalist companies like Barrick and Placer Dome and the gold bullion banks are so, so short the yellow metal, suggests the gold manipulation scheme is now about to get away from the Cartel. How much gold is left? As Jim Rogers pointed out in my interview with him, we don't know because the government won't allow an audit. But based on the supply and demand work provided by Frank Veneroso and other work carried out by GATA, there is every reason to believe there is far less - (the best estimate is approximately ½ less) than the government is reporting. Thus we think the day or reckoning for our ESF gold suppression policy makers may be at hand.
Indeed, we think this issue may well be at the heart of the reason why Treasury Secretary Snow has been stumbling and bumbling in his public statements about the strong dollar and perhaps why former Treasury Secretary O'Neil resigned. If as we believe, the gold manipulation was the real force behind the strong dollar and if the Treasury is running out of a supply of gold ample enough for it to continue to dishord, the handwriting may now be on the wall for the person who is exclusively permitted to inhabit the office of the Exchange Stabalization Fund, namely the U.S. Treasury Secretary. If it is true that the Treasury believes it can no longer spare any golden "bullets" to defend the dollar, as the recent rise in the price of gold suggests to me, then I think we could be very close to seeing an explosion in the price of gold up to at least $600/oz. which the work of Frank Veneroso suggests is a non-panic equilibrium price for gold.
Mining Companies are unable or unwilling to deliver gold to bullion banks
The pressure on the Treasury is of course now being increased by the policies of all the big mining companies to unwind their hedges and things could get very interesting when mining companies refuse or are unable to make good on their obligations to deliver gold back to the bullion bank cartel. Along that line of thinking, check out the following story from GATA this past week.
Newmont is Telling J.P. Morgan to "Take a Hike!" The following was reported from GATA Thursday: "The big gold news of the day concerns gold derivatives. There is a commotion going on behind the scenes in the bullion-banking world. Word has it that Newmont Mining is taking it to one of the Hannibal Cannibals, JP Morgan Chase. It has to do with their Yandal operation in Australia, which Newmont inherited when it took over Normandy. That property has 3 million ounces of gold reserves with a 3.7 million ounce hedge on - one that is going underwater as the gold price soars. Morgan has called Newmont for a margin call. Supposedly, Newmont is telling Morgan to stuff it, or more appropriately, if you insist on the margin call, the property is yours. I'm told that Newmont is willing to buy back their hedges from Morgan, but only for so many cents on the dollar. In other words, they are playing hardball. Newmont can walk because the property is "fully encircled," meaning it is a stand-alone project. Of course, it won't do much for their bullion-banking relationships. "The following was filed yesterday with the SEC:
"Newmont Yandal Operations Limited ("Yandal") advises that on May 21, 2003, it received a notice from a gold hedge counter party alleging a right to terminate a gold hedge counter party contract with Yandal before its scheduled maturity, based on the alleged occurrence of an early termination event under the contract. Yandal estimates the payment required to be made under the contract would be approximately U.S. $46 million based on an assumed spot gold price of A$560 per ounce. "In addition, Yandal also received notice today from Newmont Mining Corporation (NYSE: NEM) ("Newmont") that it intends to make an offer to acquire all of the 8 7/8% Senior Notes currently not owned by Newmont, in addition to all of the gold hedge counter party contracts entered into between Yandal and counter party banks. "
(original filing is here.
"The problem is not a small one for Morgan if Newmont walks. The hedge is 700,000 ounces more than their reserves and that's if someone is mining them. 700,000 times $370 gold is $259 million. At $470, it's $329 million. If the mine somehow becomes inoperable, the problem could become catastrophic. It serves Morgan right for allowing that kind of hedge in the first place. That's not a hedge, it's a speculation, put on back in the Hay Day of the gold rigging operations. What goes around comes around. Chase influenced Newmont to put on a big hedge at the bottom of the market around $265 gold, right before the Washington Agreement was announced. "The ramifications for the gold industry could be dramatic if Newmont sticks it to Morgan. Gold is only at the $370 level. What happens when gold rises hundreds of dollars per ounce? There is liable to be one counterparty risk problem after another. Ever hear this one before?
Institutionalization of Pro-gold Policies
Potentially very significant also is the fact that on June 1st a change in Chinese law will make it legal for Chinese people to buy, sell and own gold. Also the institutionalization of exchange traded gold bullion accounts should also spur demand for gold as an investment as the Toqueville Funds John Hatheway recently discussed.
Declining Confidence in the Dollar. The declining level of confidence in the dollar is perhaps the most important of all forces behind my bullish view on gold. The decline in the dollar is still fairly well controlled. But as the truth becomes every more recognized, that the strong dollar policy was largely a hoax in the first place, we could witness a massive and very rapid rise in gold, which would be the mirror image of a decline in dollar confidence.
Congressman Paul's Dialog with Alan Greenspan
Time will not permit me to analyze the exchange between Congressman Ron Paul and Alan Greenspan that took place in the joint economic hearings this past week. I typed it up just as it was recorded. No attempt was made to clean it up for grammar or to improve sentence structure in their exchange. What you see is what you heard if you watched/listened to this most interesting exchange between these two men, both of whom have an intellectual understanding of why gold is money and why it should be money while only one of them has remained true to his convictions.
"Dr. Paul: Good morning Mr. Greenspan. I have two questions. One is generalized and it deals with the dollar system and the monetary system that you are required to operate. And then one more specific factor that affects the strength of the dollar.
"The big debate now in financial circles is the strength of the dollar, whether it is good or bad vs. what a strong dollar should do to us or for us. And I would like to suggest is that there should be another alternative rather than arguing the temporary case for a strong dollar to help us, as it seemed to in the latter part of the 1990's vs. whether the weak dollar will now help us in our exports, rather than this manipulation of the dollar.
"I hope someday we will talk about a stable dollar. One that does not fluctuate so readily. We deal in the world today with fluctuating exchange rates and all currencies are inflated at different rates. Nobody advocates that we have 50 different currencies in this country. That would be totally chaotic and yet the world is required to operate that way. But there is no soundness to it, no restraint on the monetary authorities.
"And the other challenges we have to look at some day is whether or not we should continue to accept this notion that we can achieve positive central economic planning through the monopoly control of money and credit and the setting of interest rates, which is really contradictory to true capitalism. I think that is where part of our problem is. The Austrian economists for years, Mises, Hyek and Rothbard have argued that this is the source of our problem. That the manipulation of interest rates too low causes the boom and then eventually the bust has to come. And we see this over and over again.
"We talk about productivity and other events that are important, but we fail to talk about the initial cause of the mal investment, the over capacity which then requires the correction. Because we operate the reserve currency of the world we have the advantage of others taking our money and our dollars and holding them. But currently the expectations are that our current account deficit may soar to $600 billion next year. And we do know that throughout history, and most economists agree that these kind of current account deficits cannot be maintained and that they will eventually lead to a weaker dollar and higher interest rates.
"So I think you are under the gun. On the one hand you want to stimulate the economy with low interest rates which weakens the dollar. At the same time the weak dollar will eventually push up the interest rates. My question then is, when or do you think we will ever talk about a sound, stable currency? And the other question is more specific. Even though what the Fed does in the creation of new money is the key element, there are other factors too like jawboning the so-called speculators for a day or two. But that really can't change things. Jawboning doesn't work. Ultimately in 1979 interest rates had to go to 21% to restore some order to the dollar.
"But you talked about the war and the supposed benefits after the war was over and after it started. But I think what has not been recognized is the ongoing foreign policy of our adventurism and our plans - those same people who argued the case for Iraq are arguing the case of Syria and they are arguing the case for Iran. At the same time we don't have our allies close to us. We don't have people pouring into dollars like we did in the 1990's. So that by its self it has a subjective relationship to the perceived value of the dollar. And I want to know whether you think that element in foreign policy today specifically has affected the future perceptions of the dollar's value is going to be?"
Greenspan: "Dr. Paul, let me address the last question first. As I think you may remember we in the United States government have made a decision in which the value of the currency will be discussed only by our chief economic spokesman, which is the Secretary of the Treasury. And we at the Fed have adhered to that for quite a long period of time. I think it is important to have one voice speaking on that issue.
"With respect to the more general question about sound stable currencies. This as you know is a very fundamental debate among economists. You point out quite correctly that there is a single currency in the 50 states of the United States. The reason why we are able to function in a manner that others are not is because an exchange rate that is a unit specific currency tends to bring together all of the imbalances in an economy in an exchange rates price. In other words, at the boarder, an exchange rate essentially rebalances all the imbalances between two contiguous countries or it might have been in the United States between two states.
"If you lock the currency in and you cannot adjust the currency at the border. Then the adjustment must occur in capital flows or labor flows. The only two other ways you can get major adjustments that are required between two disequilibria economies. The advantage of the United States is that because we have stripped out all barriers to interstate commerce (I should say "most") we are able to get equilibrium adjusted solely through capital and labor market flows and we have a fixed currency. The reason why it is feasible at this moment in a lot of other areas of the world is that capital and labor flows are not adequate to pick up the full adjustment process. In and endeavor to fix exchange rates in the face of imbalances induces financial breakdowns as have occurred.
Dr. Paul: "May I just interject. I'm not talking about fixing these rates. I'm talking about a single currency that could be universalized."
Greenspan: "That's the algebraic equivalent of fixing currency rates. In other words, if you lock in legally all rates, its irrelevant what you call the currency in one nation or another. It's the lock that matters and if you have for example as we did, the gold standard for a very substantial period of time, was the single currency of the world. It didn't matter what you called the other currencies because they were all locked into specific units of gold. And so the notion of a stable world currency requires a degree of flexibility in capital and labor flows which we have not yet achieved."
Second Round of Questioning for Congressman Paul
Dr. Paul: "I wanted to follow up on your comments about not being able to talk about the value of the dollar. I find that rather ironic. The Federal Reserve is in charge of the monetary system and you as Chairman have a lot to say about what monetary policy is and how much money will be printed and how much interest rates will be. So we find it a bit ironic that you can't comment on the value of the dollar and that you defer to Treasury. Now Treasury can play a role by intervening in the exchange markets but that's very temporary. But I understand the policy and we don't expect you to change that but in a way you are really in charge and it is too bad that we can't get comments on the value of the dollar.
"I did want to remind you about the follow up on the question of foreign policy, how foreign policy anticipation about what we might be doing around the world might affect fiscal and monetary policy and trade policy and how that effects perceptions of the dollar and whether or not that is important. But on the currency issues, I'm still not interested in going back to fixed currency rates such as the Breton Woods Agreement. That's not my interest because even then Henry Hazlet wrote very correctly that Breton Woods would break down with that so called gold exchange standard.
"But if you have achieved what you hoped, that is that central banks now have done such a good job in managing paper money that it is starting to act like a gold standard, now that would be an historical achievement You realize that? Because it has not been done in 6,000 years of recorded history. And history is on my side of this argument that paper money doesn't work very well. Paper money ends badly. We may be seeing some signs today around the world that paper money is a very shaky system.
"But I have a more specific question in dealing with that. In a return to commodity money, if we have a third world nation that destroys its currency and they don't have the advantages we have politically, if they destroy their currency and they want to link their currency to gold, because they know history, they are not allowed to do it. The IMF prevents them from doing it. There is an IMF rule that says they can't do it. So wouldn't this be a good time for us to become more neutral and not antagonistic toward gold and say to the IMF 'our position is that if you choose to go back and get stability and soundness to your currency by linking it to gold, we ought to permit that?'"
Greenspan: "I believe a country has the capability of doing that. I'm not sure what the rule is in the IMF. If they were to link their currency to gold and they believed it was going to stabilize their system, they wouldn't need the IMF."
Dr. Paul: "But there is a prohibition if they want to stay in the IMF. What about the foreign policy question."
Greenspan: "I don't feel I can answer that without breaching the agreement about not taking about the currency. I don't know how to phrase an answer to your question without implicitly doing that."
Dr. Paul. "O.K. I yield back."
