Which Will Rule -- The Dollar or Gold?

by Richard Maloney AIC Investment Bulletin

The May 7th announcement by the United Kingdom Treasury that it intends to sell 125 tonnes of gold ( with a current market value of about $6.5 billion ) over the coming 12 months had less than the hoped for effect on the dollar price of the metal. The announcement stated that the UK Treasury would auction 25 tonnes of gold every other month beginning in July. Thereafter, the bank indicated that it would auction an additional 290 tonnes in the medium term for a total sale of 415 tonnes. This would reduce the UK Treasurys total holdings to 300 tonnes with a valuation of about $2.7 billion at current quotations.

The effects of these announcements on the dollar gold price were a $7.00 drop on Friday, May 7th, and a further $3.00 per ounce decline on Monday. The official announcement stated that the reason for the sale was the desire of the Treasury to restructure its reserves and "to achieve a better balance in the portfolio by increasing the proportion held in currency". If the sales of the UK Treasury gold are completed with the entire 415 tonnes being sold, these auctions will reduce UK Treasury gold holdings from the present 17.0% of reserves to approximately 7.0% of total reserves. The World Gold Council ( WGC ) reports that this amount is below the 15% that the European Central Bank holds and below the 18% proportion that all central banks hold on average. The WGC further notes that the 7.0% gold reserve is substantially less than the Euro-System ( the ECB plus the individual central banks of the nations that compose the EC ) . The UK Treasury reserves also will be much below the reserves of the Euro-System as a whole, which are 30% in gold. The UK Treasury proportion of reserves held in gold, estimated to be 7.0% after the sales, will be far below that of other leading European nations. Germany has 40% of its reserves in gold, Italy holds 75% in bullion, and France has 55% of its total reserves in gold. Meanwhile, the U.S. has recommended that both the International Monetary Fund ( IMF ) and the European Central Bank ( ECB ) both sell gold to lower the proportion held as bullion.

The Contest Continues

The gold sales by Britain and the continuing urgings of U.S. monetary and financial authorities that the IMF and the ECB reduce their gold holdings indicate a desire by the U.S. that nations become dependent on the U.S. dollar and other fiat currencies as their reserve currencies. This will facilitate control by the central bankers, and the U.S. Treasury in particular, on an increasingly world monetary scene. Will the announced sales greatly impact the price? We do not believe that the sale will significantly change the long-term trend of the dollar gold price. What the sales will do is simply transfer a portion of aboveground gold from central bankers to be available to industrial users, and thus slightly reduce costs for these consumers.

Annual demand for gold approximates 4,000 tonnes and the WGC reports that annual new production of gold is about 2,500 tonnes. With the demand for gold reaching a record quarterly total of 806.6 tonnes in the fourth quarter of 1998 ( an annual consumption rate of 3,225 tonnes ) , there surely is no excess supply of newly mined gold to the market. The contribution of another 600 to 625 tonnes of scrap gold recovered annually ( during the past four years ) has brought the available real gold to a total of 3,100 metric tonnes. With the rate of annual consumption now 3,225 tonnes and rising, the dollar gold price was set to move inexorably higher in the world marketplaces. Consequently, we have a repeat performance of the U.S. Treasury and International Monetary Fund gold auctions of the late 1970s, when every effort was exerted to discredit gold as a worthwhile store-of-value and monetary metal. Of course, the scam didnt work in the end; the price skyrocketed to $850 for a few brief moments before settling back to more realistic levels. We do not expect that the present manipulations will succeed in overcoming market forces over the intermediate-to-longer term. It is equivalent to placing your thermometer in the refrigerator on a hot day; then looking at it every now and then and saying: "Well, its only thirty-eight degrees." It is chicanery at its worse.

Political and Monetary Stability

The recent announcement of the UK Treasury gold sales should be placed in the context of the political and monetary situations with which the Western monetary authorities are faced. With the war in the Balkans going badly and both Russia and China calling for an end to the bombing, the Clinton administration may well have been faced with a potential monetary crisis. It should be noted that interest rates rose during early May with the long Treasury heading toward the 6.0% level. With relations with China deteriorating, specific charges of espionage by the Chinese in the headlines, Chinese banking authorities may have reduced their purchases of U.S. Treasury obligations. This would account for the Federal Reserves purchases of U.S. Treasury obligations in front of the refunding auctions scheduled during the week beginning May 10th. The Feds actions were directed at stabilizing interest rates and sending a message to market participants that the Fed would not allow market forces to drive long-term interest rates to levels much above 5.85%. This would account for the openness with which the Federal Reserve announced its market interventiona whiff of openness not entirely characteristic of this administration.

IMF & Swiss Gold Sales

The urge to drive the gold price lower also assumes that the International Monetary Fund ( IMF ) and the Swiss monetary authorities will join in reducing their gold holdings through the auction route in the next several years. The International Monetary Fund is considering the sale of gold for the purposes of providing relief to Heavily Indebted Poor Countries ( HIPC ) through a contribution to an initiative established for this purpose. The IMF holds 103 million ounces of gold and is the worlds third largest gold holder behind the U.S. with 262 million ounces and Germany with 112 million ounces.

There are 41 nations that fall into the category of Heavily Indebted Poor Countries. These are nations indebted to the multinational banks that are faced with substantive losses if the loans to HIPC nations are liquidated via the default route rather than repayment. Because the international banking interests are demanding repayment, the lender of last resort, in this instance, is the IMF. The IMFs only real asset is gold if one excludes the growing portfolio of doubtful loans also held by the IMF and fiat currencies. Because many of the HIPC nations are also gold producers, the sale of IMF gold would actually be self defeating to the cause of helping these nations. This point was recently brought out in testimony before the Domestic and International Monetary Policy Sub-Committee studying this problem. Opposing the IMF gold sales, Mr. George Milling-Stanley of the World Gold Council, testified that IMF gold sales would have a negative effect on the gold price and harm the very nations that they wish to assist. Approximately 5.0% of the exports of the HIPC nations as a whole consists of gold; lower gold prices would do nothing to assist these nations. Mr. Milling-Stanley further noted that the fear of sales of gold from official reserves is the primary reason for the gold price falling to its lowest point in 20 years. Despite the desire of international bureaucrats to sell IMF gold, it remains to be seen if the necessary approvals will be obtained.

InflationWell Hidden

The administration has touted the small changes in the Consumer Price Index and the Producer Price Index as proof positive that there is no inflation. Imagine for a moment if the Dow Jones index were included in the CPI; surely a different reading would shine forth. The hundreds of billions of dollars pouring into the equity funds are an indication that excess purchasing media is available in the economypurchasing media far in excess of that represented by goods and services being offered in the marketplaces of the world. A portion of that excess purchasing media recently has begun to flow into gold. To mask the effect of this flow of funds, the Clinton administration likely asked Tony Blair, the British Prime Minister and Labor Party leader, to announce that Britain would be selling gold out of the UK Treasury. This latest and well refined performance of the modern day coin-clippers of old is a well camouflaged charade; pity the effort garnered only a tepid downturn of $10 per ounce ( or 2.4% ) a modest retreat indeed for a promised expenditure of 415 tonnes of gold bullion. One can only wonder what central bankers will sell when only fiat paper currencies remain in their reserves?

link at

http://www.thebullandbear.com/resource/RI-archive/699-attack.html

-- Andy (2000EOD@prodigy.net), August 14, 1999

Answers

cynic,

to be honest the whole gold area is a minefield - it's quite obvious that there is blatant and illegal manipulation going on - Bill Murphy has launched a GATA law suit but this will be tied up and not get anywhere for quite some time - my advice to you is search back in the archives using "gold", and also check out the editorial pieces at www.gold-eagle.com

I know this is all pretty academic and dry for most people but it will pay you to delve into this area a little more deeply - you will eventually get a feel for what we may be in for...

-- Andy (2000EOD@prodigy.net), August 14, 1999.

Andy,

Regarding getting a feeling for what we may be in for, I am starting to get the same Oh Shit feelings I got when I first discovered the whole Y2k situation. It's almost hard to believe how dangerous the whole US currency and financial market scene has become. But, that's what happens in a Ponzi scheme. It always crashes in the end. Damn those who felt they had to make their "killing" by controlling the monetary system this way. And damn those who felt they had to make their fortune in the phoney derivatives game. We will all take it on the chin now, including those who thought they could control this.

-- Gordon (gpconnolly@aol.com), August 14, 1999.

I fear you are right Gordon,

with just four months to go all I'm trying to do is try and outsmart the big boys - alas I will probably come off worse, they have all the aces, it's truly a rigged game. At least I'll go down fighting. The other 40 million Americans with their life savings in the markets - well, they are in for a very rude awakening...

-- Andy (2000EOD@prodigy.net), August 14, 1999.

Andy:

I have been reading Gold-Eagle and I've learned a lot (had a lot to learn, so that wasn't too difficult!). So thanks for the advice. These next few months will be interesting indeed. Regards.

-- cynic (cynic@skeptic.com), August 14, 1999.

GOLD!!!! Get you some.

-- Porky (Porky@in.cellblockD), August 14, 1999.

Don't forget Silver!! Get you some.

-- Porky (Porky@in.cellblockD), August 14, 1999.

Excellent post Andy.Only thing missing is,Gold will not go up until the manipulators of the biggest ponzi scheme in the history of mankind get annihalated.They will do everything possible to keep gold down.So my strategy is gold call options.And if u do buy gold cover your ass with puts.Eventually it will come down to a high stakes game of chicken,all the funds shorting gold, one big one will get nervous and cover...just like the yen carry trade.Boom went the dollar down hard, all the wigs early 98 were calling for the yen over 150 Ha. Same will happen to the gold carry trade.The price of gold will explode straight up.So be patient we are almost there.Fun will begin starting labor day,climaxing late October.Then watch the pollies dash towards Sams. post her. straight up like the shuttle.

-- Drken (Drken@bubble.gone), August 15, 1999.

Drken,

agree with you :) - care to hazard a guess at a timeline for this? I have not as yet taken the plunge with calls, time is running out if I'm gonna do anything at all - any suggestions on calls??? G. sucks are rumoured to be buying 20,000 dec. call contracts at $300 - I would have thought gold will be way past 300 by then... ?

-- Andy (2000EOD@prodigy.net), August 15, 1999.

don't you know??we're going back to the lead-standard

-- zoobie (zoobiezoob@yahoo.com), August 15, 1999.

The option on the call might work. You'll need to get out well before the December call date and convert to gold or physical cash.

The reason I say way before is because as it all comes unglued it gets very hard to actually get paid on that option. The Fed, SEC and others may halt all trading to protect thier collective a$$.

Just like selling the market short if it all goes to hell and just collapses then you have a great paper profit but all the people that owe you that money are bankrupt and your money is in the hands of some bankruptcy judge.

-- LM (latemarch@usa.net), August 15, 1999.

Having absorbed what I have for the past 2 years on this gold business, I can say that there has been a great deal of mind manipulation evident since the early 70's. The dollar used to be a gold certificate redeemable in gold. We have gone very far astray of our concept of what is money.

Gold has been a universally accepted *money* for a very, very long time. Nothing has changed. American's perceptions have changed. That is the cruxt of the problem.

When you dabble in puts, calls and all other sources of paper contracts, you are dealing with the need to have the system from which it springs kept intact.

What is about to occur will cause that system to become crippled. The term 'blood from a turnip' comes to mind when attempting to collect on your paper contracts.

Paper contracts will be worthless, and so will the thing we call the dollar which is a paper contract backed by nothing but false assumptions.

Good luck.

-- OR (orwelliator@biosys.net), August 15, 1999.

Andy,

My strategy is to buy out of the money Jan2000 gold call options of 2nd tier gold producing companies.Example CBJ.TO now at 4.40 high 21+$,has proven reserves.Bought Jan2000 6$ call for .25$ minimum amount of money exposure.Cash is King.When gold pops I suspect CBJ.TO will pop too,if gold does nothing there is no crash Y2k is a nonevent(odds of that 0%)my options expire minmum cash exposure.All bases covered.When TSHTF market collapses, gold pops, gold producers % wise will rise higher than gold.Sell my options purchase bullion. But the most important part of the plan is to have a home in country well stocked with food water etc...

-- Drken (Drken@bubble.gone), August 15, 1999.

Andy,

I am starting to think the the fiat system will not collapse until January 2000. The puppet masters will blame the fall on Y2K. They are doing everything in their power at this time to hold the system together.

My own personal belief is that silver will be the backing for a new world currency. Theres alot more of it. I believe that they will take total debt and divide that into total silver on earth and that will re-value the PM's. Maybe a tenth ounce of gold will back the $500.00 bill and one half ounce of silver will back a $50.00 bill. etc.

You can never discount the movements of the ultra wealthy like Warren Buffett the second richest man in the world. Why would a man like this, take PHYSICAL POSSESSION (not a paper trade) and storage costs that come with it of over 179,200,000 ozs of silver? Why does Goldman Sachs OWN 50% of all the gold at Comex?

I want to thank you for everthing that you have contributed to this forum on the markets. I am just starting to check the forum out again on a daily basis after leaving in January. My personal preps were completed then.

I have spent the last 7 months investigating on a daily basis the financial markets the way I studied Y2K the previous year and a half. I would venture to say that there is less then five hundred people in this country that has dedicated more time than I on these two topics.

If everyone on this forum knew what I know, that you know about the manipulation going on in all the markets, the machine would not have a chance. Socialist Democracy would fail and we would get back what our fore fathers intended when they wrote the Constitution. I would be willing to bet that 95% of the population thinks are forefathers intended on us being a democracy. WE ARE A REPUBLIC!! Big Big differance in the two. Thats why if it is not, stopped we will continue on the path to facism. But,I have a feeling that the people are starting to awaken and there will be many surprised politicians come election day. I have nothing but hope for our world and Y2K will be a sort of cleansing. GOD IS JUST !! Gods Will, will be done in the end to start a new beginning.

-- flierdude (mkessler0101@sprynet.com), August 15, 1999.

QO BTW that was a SILVER certificate redemable in SILVER (got a couple of them for a keepsake) CR

-- Chuck, a night driver (rienzoo@en.com), August 16, 1999.