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Gold Commentary - March 7, 2003


It's Breathtaking

Last week's "bombshell" dropped on the Gold market on February 27 was the "news" that a foreign Central Bank (which turned out to be Portugal) had sold 30 tonnes of Gold - during the previous week. No one saw fit to mention who BOUGHT the gold, the Gold had already been sold a week earlier, and the Gold sale was completely within the bounds of the "Washington Agreement - these bounds having been known about ever since the Washington Agreement was entered into by the EU way back in September 1999. Mere details, Gold slumped $US 7.80 from $US 354.00 to $US 346.20.

This week's "bombshell", dropped on Friday, March 7, was a rumour that two of Osama Bin Laden's sons had been captured in Afghanistan. The precursor to it was a report last weekend that Khalid Shaikh Mohammed, reportedly high in Osama Bin Laden's chain of command, had been captured by Pakistani officials. Strangely enough, way back on October 30, 2002, the Asia Times reported that Khalid Shaikh Mohammed had been killed in a police raid on his apartment. The Asia Times also reported that the man's wife was "exhaustively interrogated" by the FBI, but that news of Mohammed's death was internationally suppressed.

Mere details, Mr Bush used the "capture" of Mohammed as one of the key items of the speech he made in the lead up to his March 6 press conference. And the next day came the rumour of the wounding and "possible arrest" of Osama Bin Laden's sons. The rumour came from a Pakistani "head of security". It has been disputed by US officials. There is no proof forthcoming from anyone. No matter, Gold slumped $US 6.00 from $US 356.90 to $US 350.90.

All this is desperate, and desperately silly, stuff. Unfortunately, the GIGANTIC pressures on the global financial and monetary system which they are designed to deflect attention from are approaching meltdown. The best illustration of that fact this week has been the renewed swan dive in the international value of the US Dollar.

Between January 21 and the end of February, the $US index was hovering in a narrow range just above and just below the 100 level. On Jan 21, the $US index closed at 100.47. On February 28, it closed at 99.81. But over the first week of March, the $US index has plummeted from 99.81 to 98.10 (it hit an intraday low on March 7 of 97.62). If one assumes the average estimate of $US 8 TRILLION worth of US assets of all descriptions, all denominated in $US, held by foreigners, this is serious. Over ONE WEEK, the $US index fell 1.7%. One point seven percent of $US 8 TRILLION is $US 136 Billion. Even if US investment markets had not fallen at all over the first week of March, this is what the Dollar fall knocked off the value of these foreign investments in the US.

To make matters worse, in the middle of the week, Treasury Secretary John Snow told a reporter that he was not concerned about the fall of the US Dollar. Of course, the Dollar fell even faster on this news, and Mr Snow was forced to rapidly clarify his remarks. "Let me reiterate my support for a strong Dollar", he said. Pity the poor Japanese, whose financial authorities seem to be the only ones crazy enough to think that they can "strengthen" the Dollar if only they buy enough of them. The Bank of Japan has been intervening in the currency markets for weeks, buying Dollars to try to keep the Yen down to a point where their vital export industries can still function. They are losing, and now the Nikkei, which they have been trying to "buy upward" since the end of November, has sagged to new post 1970s lows. The Nikkei closed on March 7 down 2.7% or 225 points to 8144. That's down a breathtaking 79.1% since its December 1989 all time highs.

The Treasury's "debt subject to limit" has been frozen $US 25 million below the current $US 6.4 TRILLION debt ceiling since February 19. The latest official estimates for US budget deficits is for a cumulative deficit of at least $US 2 TRILLION over the next decade. This estimate is from the same "officials" who were predicting budget supluses not much more than a year ago. In the face of this, more and more Wall Street pundits are now betting on another rate cut when the Fed meets on March 18. On Friday, March 7, both three and six month Treasury paper hit new low yields of 1.10% (the present Fed Funds rate is 1.25%).

There is nothing about the cost of any war or subsequent occupation of Iraq included in any future budget estimates. We can't penny pinch when "freedom" is at stake says everyone from Bush to Greenspan to Snow to Powell to Rumsfeld ad nauseum. The Fed is adding "reserves" to the system at awe inspiring rates. We are in the midst of an ongoing bout of fiscal, monetary, and economic insanity with few paralells in history. But what is REALLY breathtaking is that the vast majority of people seem to take the pronouncements of the various financial powers that be seriously.

In the midst of a situation in which the most transparent nonsense is desperately clung to for fear of having to actually examine the REAL situation, the "unnatural" performance of Gold against the US Dollar is completely to be expected. As the "reasons" which are invented for each bout of Gold selling become ever more absurd, and as the warnings about the "risk" of owning Gold (and Gold stocks, of course) become ever more strident, they mark the steps by which an almighty smashup in the fiat paper global system come closer and closer. A long time ago, The Privateer coined a phrase: "the Gold reverse barometer". In essence, this "measures" the pressure on the financial system by the perverse action of the Gold price. When EVERYTHING mandates a higher Gold price, and the Gold price falls, the barometer is pointing straight at a coming storm in the paper system.

The last time that the reverse Gold barometer worked this well was in the first half of 1997. Gold fell away dramatically in the first half of the year, after three years during which it had been trapped in an extraordinarily tight trading range against the $US. As you probably remember, the Asian Crisis hit in July 1997 and within a year, it had come very close to collapsing the entire global monetary system. That one was bad, but the one that the reverse Gold barometer is pointing to now is going to be a REAL lulu.

Having said all that, Gold actually ROSE this week, albeit only $US 0.60. Gold is still "up" on the year in $US terms, although most paper currencies are up more. It has now been just over a month since Gold hit its 2003 intraday high of $US 384. The most rumoured starting date for a US attack on Iraq (UN or no UN) is March 17. If that rumour is correct, the attacks on Gold are due to be stepped up. If they are, remember the "Gold reverse barometer", and the fact that Gold is in a PRIMARY bull market.

In the succinct words of Richard Daughty: "if printing money could painlessly prevent whatever problem-du-jour was popular, from deflation to "market upsets," then economics as a science could be written on a 3 X 5 card". As far as the economic powers that be are concerned - IT IS! Relax and wait, one of these days, a sojourn into the Gold markets by the financial powers that be is going to backfire horrendously. There's no telling when it will happen, there's no doubt that it will happen.

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©2003 The Privateer Market Letter

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