gold....

Close Of Trading: January 9, 2004

In any discussion of the future of Gold, or of the price of Gold, the first thing that must be realized is that Gold is a POLITICAL metal. In the true meaning of the word, its price is "governed".

This is so for the very simple reason that Gold in its historical role as a currency is fundamentally incompatible with the modern worldwide financial system.

Up until August 15, 1971, there has never in history been an era when no paper currency was linked to Gold. The history of money is replete with instances of coin clipping, printing, debt defaults, and the other attendant ills of currency debasement. In all other eras of history, people could always escape to other currencies, whose Gold backing remained intact. But since 1971, there is NO escape because NO paper currency has any link to Gold.

All of the economic, monetary, and financial upheaval of the past 30 years is a direct result of this fact.

The global paper currency system is very young. It depends for its continued functioning on the BELIEF that the debt upon which it is based will, someday, be repaid. The one thing, above all others, that could shake that faith, and therefore the foundations of the modern financial system itself, is a rise (especially a sharp rise) in the U.S. Dollar price of Gold.

The Debate About The NATURE Of Money

Last (US) Thanksgiving, as Gold was approaching the $US 400 level, we wrote this as our main Gold This Week commentary.

"The debate about what money is was a casualty of the 1970s and the near demise of the US Dollar by the end of that decade. This was the first decade of Gold's final separation from the US Dollar, the first decade of the global floating fiat currency era. Now, more than two decades later, the question does not officially exist. If the body of knowledge built up in the physical sciences with such effort over the past five centuries had vanished to the extent that knowledge about economics in general and money in particular built up over the same period has, most of us living today would never have been born and the rest would be living in conditions which a medieval serf would shun."

"The "price" of Gold is poised at $US 400. It will exceed $US 400 of course, it is simply a matter of time. At some point in this ascent, the world will re-discover a body of knowledge which has been suppressed, but not destroyed, and the debate about the NATURE of money will break out anew. At that point, Gold will once again have performed the service it has been performing for thousands of years. It will have refocussed attention on the things which matter."

Now, at the end of the first full week of market trading of 2004, with the Dollar plummeting to new lows and Gold having decisively breached its previous (February 1996) bull market highs, the start of the debate is drawing closer and closer. Since 2004 is an overtly POLITICAL year in the US, the efforts to delay, denounce and/or suppress this debate will be intensified. We are not yet halfway through January. The rest of this year is going to be a real donnybrook.

On January 9, spot future Gold closed for the week at $US 426.80, a new 2004 high and the highest point yet reached in its current bull market. This week, spot future Gold rose $US 10.70, smashing through the TOP of the 1993 - 96 bull market in the process.

The present position of the Gold bull market now equates perfectly with Gold in late July 1978. On July 28, 1978, spot future Gold closed at $US 201.30. This was Gold's first close EVER above the $US 200 level. It was also the signal that Gold had decisively breached the TOP of its previous bull market. That previous bull market lasted from August 1971 to December 1974 and had carried Gold from $US 35.00 to $US 195.00.

The rest is history. Gold reached $US 200 in July 1978. It reached $US 250 in February 1979 - $US 300 in July 1979 - $US 400 in September 1979 - $US 500 in December 1979. Then, it went from $US 512 to $US 850 in the first three weeks of 1980.

Ever since Gold's $US 850 high in January 1980, each subsequent bull market has topped out at a point LOWER than the preceding one. That string has now been BROKEN with Gold now more than $US 10 ABOVE the highest close reached during its previous (1993-96) bull market. A trend stretching back more than two decades has now been BROKEN. This is a big deal.

Now, go back to July 1978 (see above) and look at Silver. As Gold was breaking through the $US 200 level for the first time ever on July 28, 1978, Silver was closing at $US 5.60. After that, Gold went from $US 200 to $US 850 - a rise of 325%. Over the same period, Silver went from $US 5.60 to $US 50.00 - a rise of a little over 790%.

Take a look at the Gold and Silver charts on the front page of GTW. As it always does at points of potential acceleration in precious metal bull markets, Silver is leading Gold. It is also screaming a warning about an imminent acceleration in the upside Gold price.

Now, consider another matter. If you haven't already done so, take a look at the Gold Lease Rates. That's right, the one month Gold lease rate fell to 0.001% on January 9. There is no more downside left AT ALL. Central Banks are now offering their Gold at NO COST to any bullion bank who wants to sell it and invest the proceeds in something that pays a higher rate of return. Even T-Bills now pay a rate of return. Wouldn't you like a "mortgage" with a rate of 0.001%? Or maybe a credit card? This Gold lease rate has "DESPERATION" written all over it.

The actions of the Bank of Japan (BOJ) have desperation written all over them as well. Over the two days of January 5 and 6, the BOJ spent the equivalent of $US 7.5 Billion to suppress the Yen in favour of the $US. By the end of the week, the $US index had hit yet another low in its bear market, closing at 85.39. The BOJ is the ONLY foreign Central Bank still pitching in the currency markets trying to stem the collapse of the US Dollar. So far, all it has managed to do, at a cost in the $US hundreds of Billions, is to prevent a fall from turning into a rout.

And then there is Fed Governor Bernanke, who has charactarised the chances of a $US crisis as being "unlikely". This is the same Mr Bernanke who has spent more than a year assuring the world that the Fed stands ready to explode the entire US monetary and financial system should it appear that "deflation" might be rearing its ugly head. Mr Bernanke apparently was of the opinion that threatening to destroy the Dollar in order to "save" it would not have any effect. He would seem to be reconsidering that position.

Take a look at the soaring prices of almost every basic commodity there is (even the precious metals) over the past year. No matter, says Treasurer Snow, the US still has a strong Dollar policy.

The "debate" over the reasons why the US and its "allies" went to war in Iraq last March is now effectively over. All the "reasons" given have been systematically and long since debunked with irrefutable proof to the contrary. Even the Bush Administration is now backing off its claims of WMD's and links between Saddam and Osama. As for the "liberation" of Iraq, that one didn't survive the nationwide looting spree which took place right after the main event ended.

A much more important debate is looming. This one has been pushed below the horizon for a generation, it died as a political phenomenon by the end of the 1970s. It was killed stone dead by Ronald Reagan's actions on gaining office in contrast to his words when seeking election. Mr Reagan, the crusader for "sound money" and "balanced budgets" who trounced the "big spending" Jimmy Carter in 1980, became the biggest spending President (on a comparative) basis, since FDR. Now, George Bush Jr. is well on the way to finishing the job.

We are in a situation in which the lynchpin of the global monetary system, the US Dollar, is becoming a clear and present danger to the financial health of the world. Gold AND Silver are signalling a growing realisation of this situation. We are embarking on a political year in which a ruling Administration which has been CAUGHT OUT in more lies than any of their predecessors are bidding for another term. The "credibility" of the US Federal government inside the US is suffering. Outside the US, it is gone. At the same time, the Bush Administration faces the absolute political necessity to draw a veil over the fiscal and financial debacle which they have brought. The ONE thing that they do NOT want to have to address in the months leading up to the November election is anything to do with the nature of money.

As we said in the quote which begins this report: "At some point in this ascent (of the Gold price), "the world will re-discover a body of knowledge which has been suppressed, but not destroyed, and the debate about the NATURE of money will break out anew."

Gold is moving up in $US terms. It is not moving up in terms of other major currencies. Silver is booming in terms of ALL currencies, always an advance warning of a similar move in Gold. Watch for Gold to start to accelerate in terms of $US and start to move up GLOBALLY. When that happens - and it will, even if it takes a correction in the meantime - the debate will begin too. There is no major party politician in the US who is competent to deal with it.

(Gold Last Week | Archives)
©2004 The Privateer Market Letter

Is John Kerry, Democrat, "trailing his coat"* with a wallet of his own money in it?
* stirring for a fight at the Donnybrook Fair, Dublin.jb.editor.