(This appeared in The Privateer #383 - published on October 3, 1999)
Here is the actual statement made by the ECB on Sunday, September 26 (Source - Reuters):
"The European Central Bank and the central banks of Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, Switzerland, and England.
Statement on Gold
In the interest of clarifying their intentions with respect to their gold holdings, the above institutions make the following statement:
1. Gold will remain an important element of global monetary reserves.
2. The above institutions will not enter the market as sellers, with the exception of already decided sales.
3. The gold sales already decided will be achieved through a concerted programme of sales over the next five years. Annual sales will not exceed approximately 400 tons and total sales over this period will not exceed 2,000 tons.
4. The signatories to this agreement have agreed not to expand their gold leasings and their use of gold futures and options over this period.
5. This agreement will be reviewed after five years."
Most people with an interest in Gold will remember the "Washington Agreement". They will remember it because, on the two trading days (Sept. 27 and 28, 1999) after the agreement was announced, the Gold price soared $US 40.20 from $US 267.90 to $US 308.10.
What they may NOT remember is that the Washington Agreement was announced right after the G-7 Heads of State meeting in Washington.
Now, almost two years later, there is another G-7 Heads of State meeting going on, this one in Genoa, Italy. In 1999, the potential for a "shock" announcement in the aftermath of a G-7 meeting was not high. The Asian financial crisis had been "weathered", seemingly successfully. Economic "growth", in the U.S. especially but also in Europe, was robust. And Asia was soaring out of the trough it had been in a year earlier.
Now, two years later, the world is either in or on the brink of recession. Disagreements, especially between the U.S. and Europe, about the best way to face and overcome this problem have been deepening steadily. The Europeans have refused to go along with the Fed's rate cutting frenzy despite pressure from U.S. officials which has been growing throughout the year. On top of that, another "currency crisis" like the one the world was "emerging" from in 1999 has broken out again. This time, the break has not come in Asia, but in South America.
For months, the Bush Administration has been making it clear that it wants Europe and Japan to get aboard the inflation bandwagon and start slashing rates and adding to "liquidity". For months, the Europeans and the Japanese have been refusing to do so. Now, with the Heads of State meeting in Genoa, we are being told that the U.S. Dollar is NOT on the agenda for the meeting. This is, of course, another shining example of the BIG LIE. We don't think that the perpetrators will get away with it.
Two years ago, the Europeans dropped a bombshell which became known as the "Washington Agreement". This does NOT mean that they (or the Japanese) will drop another one in the aftermath of the Genoa meeting. But the potential is most certainly there, far more than it was in 1999.
The term "bubble" is a useful one in financial analysis, referring as it does to any market which has seen prices blown up to disproportionate levels. But, in this context, what is the opposite of a "bubble"? We don't know of a convenient word to use, but if one wants to describe the present $US Gold "price", that is what we are seeing. How about an "elbbub"? Kinda catchy - don't you think?
A "bubble" has nowhere to go but DOWN. An "elbbub" has nowhere to go but UP.
"...Argentinians, Brazilians, and many other citizens of Latin American nations are stampeding into U.S. Dollars and other U.S. "assets" - just like their Asian counterparts did at the start of THEIR crisis four years ago."
(Gold last week)
In 1997-98, the financial contagion which began in South-East Asia and spread to envelop the world WAS acknowedged as a crisis - when it hit the U.S.. Now, the financial contagion which has begun in Argentina and Brazil is NOT being acknowledged as a crisis - because it has NOT (yet) hit the U.S.
Or has it? The US Dollar index has been falling steadily for two weeks - DESPITE the flight capital which has been storming into the U.S. out of Latin America. Gold lease rates, especially at the short end, have retreated to their lowest point this year. And now, currency markets are questioning whether the Bush Administration is going to change their "strong Dollar policy". In reality, of course, the Bush Administration would like a "weaker Dollar". What they would NOT like is any slackening in the foreign demand for Dollars. Their problem is how to engineer it so that the Dollar can go down and everyone will STILL want to buy more of them.
That is an insoluble problem. In the upcoming issue of The Privateer (published on July 22), we examine the present state of the Dollar by applying "Gresham's Law" - and some less well understood corollaries of Gresham's Law. Gresham's Law states that: "Bad money drives out good money".
And so it does, when those who deal with money have a choice in the matter. It is U.S. policy that NO-ONE have any choice in the matter. The U.S. Dollar is the KEY currency, the RESERVE currency, and so it MUST remain.
The insoluble problem is that the U.S. Authorities are producing more and ever more Dollars, and going deeper and deeper into global debt. The problem was compounded by Treasury Secretary O'Neill (See Gold last week) when he made the incredible statement that Treasury debt paper was not a REALLY "real asset".
The danger is that someone OUTSIDE the U.S. will take him seriously. The danger is acute right now because the U.S. Administration is going to defend the Dollar's status at all costs at the Genoa meeting. As we said, the potential for a "bombshell" NOW is far higher than it was when the G-7 Heads of State met back in 1999.
