!!! Fiat Money !!!

Currencies in ‘FIAT Folly'

- face Abyss of destruction

Investment Indicators from Peter George

March 12, 2004

PART ONE

Scripture

Zitat

‘They had as king over them the angel of the Abyss,
Whose name in Hebrew is Abaddon, and in Greek, Apollyon.’
(Abaddon and Apollyon both mean Destroyer.) Revelation 9:11

Summary

This is a story about the folly of government intervention in free markets. The trail we expose has its source high in the mountains of central bank control and manipulation, driven by a joint determination to protect their ill-fated FIAT money system. The word ‘FIAT’ comes from the Latin word ‘fieri’ and means ‘Let it be done’ or ‘Let there be made’. When combined with the word ‘money’, as in ‘FIAT Money’, it is used to describe:

‘an inconvertible paper currency which is made legal tender by a fiat of government’.

The phrase ‘fiat of government’ refers to ‘an authoritative pronouncement’ by government, to the effect that citizens accept printed paper currency, as if it were ‘real money’.

The word ‘money’ also comes from Latin, in this case ‘moneta’ meaning ‘to mint’. It follows that for ‘money’ to be ‘real’ – in contrast to FIAT - it needs to consist of coins produced in a ‘mint’, as opposed to paper printed in a press. The metal will then have intrinsic value. This was certainly the case when coins were made from gold and silver.

The modern day story of FIAT money begins with a brief history of government efforts to suppress the price of gold, focusing on America’s actions since the founding of the Federal Reserve in 1913. We explain why suppression of gold was pivotal in promoting the US Treasury’s “strong dollar policy” of the past decade. We show why, with the ‘dollar bubble’ recently having burst, central bank gold strategies are increasingly falling into disarray. Suppression of the dollar price of gold is no longer possible. New techniques of intervention must be found to slow the dollar’s slide and protect the US bond market. Failure will allow free market forces to vent their wrath on 22 years of stock market excess and property price exuberance. Then expect the following chain of events. The dollar slide becomes a rout. This in turn precipitates the panic sale of foreign-held US government bonds. The resulting crash in bond prices automatically implies a sharp rise in long term interest rates. In dollar terms bond values will fall more than 50%. The hard currency equivalent could be closer to 80%.

As with the Dow, the bubble in bonds has been building for all of 22 years. In May 1981, 30-year bond rates peaked at over 15%. By May 2003 – 22 years later – they had plunged to a multi-year low of 4,2%. In the June bond sell-off one month later, rates bounced back to 5,4%. If one looks at an arithmetic chart - more sensitive than log -there was a hint of trouble as long ago as May 1999. At that point rates broke up out of a long-term falling wedge formation. Although they subsequently went on to make new lows, they never pulled back into the old formation. They stayed above the down trend, and the original break still stands.

Given the 30 year bond’s current yield of 5,0%, even a 1% rise to 6% would puncture the white-hot US housing bubble by ratcheting up mortgage rates. Down pressure on house prices would kick away the last remaining prop to consumption by killing off the ‘refi’ market. Homeowners would be prevented from repeatedly increasing their bonds to draw out endless gobs of cash. Once started, the decline in prices would feed on itself, finally shattering the biggest debt bubble of all time. The fallout could lead to a Russian-style hyperinflationary depression as government responds to the crisis by printing to stave off a total economic collapse.

If this sounds too extreme, consider the following. It is an extract from a recent issue of The Privateer, a newsletter published in Australia:

“The Federal Reserve puts out a Flow of Funds Report …known as Z-1….it states that over the past year total US credit market debt increased by $2.784 trillion, or 9%.When that increase is placed side by side with annual US Gross Domestic Product – a slightly optimistic $11 trillion – it shows that last year the US economy BORROWED 25,3% of its latest annual GDP!...If that borrowing had NOT taken place THEN THE US ECONOMY WOULD HAVE CONTRACTED BY THAT SAME 25,3%!..The US economy is a bankruptcy waiting to happen.”

In other words, a resumed slide in the dollar can trigger a domino effect. As foreigners dump US bonds to avoid exchange losses, it could precipitate a crack in government bond prices, and therefore a sharp rise in rates. This will immediately feed through to the corporate and mortgage markets, fast curbing the highly-geared American appetite for debt. Halting the spiral would at once wipe out 25% of the following year’s GDP, tipping the US economy into depression. If consumers actually begin to SAVE, the scale of economic shrinkage in the first twelve months could massively exceed anything experienced in the aftermath of the ’29 crash. In the period 1930 to 1933 annual GDP declines averaged 8% per annum. This one would be three times that figure in the first year alone.

Yet THAT is what is necessary, if Americans are to learn to live within their means, pay back debts, and retain the remotest chance of preserving the long term integrity of their currency.

The purpose of this letter is to study the alternatives available for coping with the deflationary consequences of eliminating the US trade deficit and restoring the liquidity of American households. To date the only solution being put forward is one of postponing the evil day of reckoning by keeping the wheels turning. This requires taking on more debt for the US as a nation, more debt for US corporations, and more debt for US consumers. Central banks fearful of a dollar fall and its consequences for their own economies have shied away from addressing the issue of exploding US deficits. To the contrary, those of them anxious to protect their nations’ exports have sought short term relief by supporting the dollar through intervention in the currency markets. In this they have been colluding with a US Administration desperate to maintain economic momentum, as it readies itself for elections in November. Japanese actions over recent months have been a perfect example of this strategy. By printing Yen to purchase dollars, Japanese financial authorities have been able to subscribe for increasing quantities of US Treasuries bills. They have played a key role in sustaining US deficit spending at current levels.

Others have not yet decided what to do. The European Community is a case in point. At the latest G7 meeting in Florida, while calling for ‘currency flexibility’, they railed against ‘too much instability’. We are convinced they will be induced to buy dollars, following in the footsteps of Japan. The ultimate consequences of rising central bank intervention could be profound. It may well lead to a co-ordinated explosion of paper, the end result of which could be a ‘FIAT Folly’ of destructive proportions.

We are reminded of the quote by the late British economist Lord Robbins. When reviewing the aftermath of the 1929 crash in 1933, he said:

“The size of the bust is directly proportional to the size of the preceding boom.”

In defiance of the above truism, it was current Fed Chairman Alan Greenspan who boasted, many years before attaining to his present position:

Zitat

“I look forward to being Fed Chairman and printing my way out of the next Kondratieff Winter.”

His wish has been granted. Let us see whether the laws of economics and the principles of sound money will bend to the whims of a man who displays incipient signs of smoking economic pot. Whatever the path chosen, one thing is certain, the buying of gold offers a safe haven second to none, more particularly as the FIAT system begins to crumble. The other certainty is that the days of central banks being able to suppress the price of gold are over. To the contrary, they might be forced to recognize that the neatest way to sidestep major economic collapse could be through the re-introduction of gold as money – but at a price far higher price than most can conceive. The Japanese and Chinese could drive it together. One would combine the massive savings of the former with the growing economic strength of the latter, exchanging US dollars and dollar bonds, both for US gold. If the price chosen were high enough, the exchange would STRENGTHEN the dollar, not weaken it, by helping clear US debts. $2500 an ounce would be a useful STARTING point.

1. Origins and History of US Gold Strategy

The purveyors of FIAT money have always treated gold as enemy number one. Over the centuries they have done their best to denigrate the metal’s role as the ultimate store of value. The latest state of play in the currency markets suggests another victory for gold is imminent. To find out why, we need historical perspective.

1.1 From Roman coin-clipping to Chinese bark money

Official denigration of gold has been with us for 2000 years, long before the advent of central banks. Roman emperors used to clip their coins, melting down the off-cuts. In the beginning it meant they could mint more coins using less gold. When the precious metal ran out, they would replace it with brass and copper. The new coins cost less to produce and had little intrinsic worth. Their real value depended on the power of the emperor to force their acceptance on an unwilling public through an act of FIAT. A Chinese emperor went further down the road towards a pure paper currency. He wrote his decrees on pieces of bark and declared THEM to have value.

1.2 Formation of the Federal Reserve

In 1913 the long-term fate of the gold-backed dollar was sealed with the formation of a privately owned Federal Reserve. A small group of extremely wealthy individuals were given sole right to print notes and control the US money supply via their banks. Enabling legislation was rushed through Congress prior to a Christmas, when everyone was going home. The subsequent printing of paper, in lieu of gold and silver coins, was in blatant contravention of the US Constitution which exclusively specified the former. Moreover, and in contrast to its name, there was nothing ‘federal’ about the ‘Fed’, nor does it keep anything like enough ‘in reserve’. It remains private to this day.

We are indebted to The Privateer for the additional facts about the Fed given below. In the preamble to the legislation which gave it birth, was the following statement of intent:

“An Act to provide for the establishment of Federal Reserve banks, to furnish an elastic currency…”

Compare this to Isaac Newton’s reply when asked why, when Master of the Mint in Britain in 1717, he FIXED the British currency to a known and given weight of gold.

“Gentlemen, in order to calculate, you MUST DEFINE YOUR UNIT.”

Small wonder the buying power of the Fed’s elastic currency has collapsed over the passage of time.

1.3 Gold confiscation profits used to establish ESF

In 1933, in cahoots with then President Roosevelt, the money powers confiscated all gold coin and bullion. Two years later the US Treasury was instructed to raise the price of gold from $20 an oz. to $35. All profits from this heinous transaction accrued to a little known branch of the US Treasury, called the Exchange Stabilization Fund. (ESF) It was to operate independently of Congress, on express instructions from the President and the Treasury Secretary. It would use the pool of assets acquired through its profits on the confiscation of citizens’ gold holdings, to manipulate both currencies and the price of gold in the future. It would grant loans in defiance of the wishes of Congress. This occurred in 1995 when, despite a Congressional veto, the ESF rescued Mexico with a $40billion loan.

Thereafter the ESF became the main vehicle through which US financial authorities, having ostensibly dumped the official gold standard, would unofficially pay homage to gold’s continuing role by manipulating and suppressing its price. Their main purpose was to protect, by default, the dollar and US bonds. Gold is the world’s financial thermometer. By massaging its readings markets would be lulled into a false sense of security.

1.4 Monetary Policy, Gold, and the Great Depression - Bernanke

In a recent address to Lee University, Washington, on March 2, Fed Governor Ben Bernanke set out to apportion blame for the policy mistakes of the Great Depression. Drawing on a book written by Milton Friedman more than 40 years ago, he says Friedman ascribed most blame to errors by the Fed which repeatedly led to an ‘undesirable tightening of monetary policy, as reflected in sharp declines in the money supply’. Friedman particularly blamed the Fed for raising rates in the spring of 1928, in face of sharply declining commodity prices. He also laid blame at the foot of the conventional Gold Standard. In the above address Bernanke gratefully latched onto Friedman’s remarks, using it as an opportunity to pillory gold.

Naturally Bernanke himself has an agenda. He hates the discipline of gold, loves the illusion of creating wealth via FIAT money, rejects the whole concept of falling prices as something which should never be allowed, and fears the return of gold. He knows full well the dethroning of the dollar will force the US to enter a painful period of adjustment as it learns afresh to live within its means.

Bernanke admits that during the ‘classical’ gold standard period, stretching from 1870 to the beginning of World War 1 in 1914, international trade expanded markedly. Central banks experienced few problems. This ensured that currencies retained their value, both against one another and gold. He points out that during the war the standard was suspended because of disruptions to trade, and because countries needed financial flexibility to finance the war. After 1918, when the war ended, he says nations made extensive efforts to reconstitute the gold standard, believing it would be a key element in the return to normal functioning of the international economic system. He says that, contrary to expectations, the gold standard as reconstituted in the 1920’s proved both unstable and destabilizing. He gives reasons which, if carefully studied, show that the gold standard never had a chance of working.

Here are the reasons.

The war left behind enormous economic destruction, large government debts, banking systems whose solvency had been compromised by periods of HYPERINFLATION during the war. These underlying problems created stresses for the gold standard which had not existed before the war.

The system lacked effective international leadership. During the classical period, the Bank of England, in operation since 1694, provided sophisticated management of the entire international system. After the war, with Britain financially depleted and the US in ascendance, leadership passed to the Fed. “Unfortunately, the fledgling Fed, with its decentralized structure and it’s inexperienced and domestically focused leadership, did not prove up to the task of managing an international gold standard.”

Finally, and after World War 11, new labour-dominated political parties rose to power which were sceptical of the merits of maintaining a gold standard if it in any way threatened employment.

Bernanke concluded that declines in the money supply in the post-World War 1 period, induced by adherence to the gold standard, were a principal reason for economic depression, but that those countries leaving the gold standard were able to avoid the worst effects and begin an earlier process of recovery. As a case in point he mentions that one of Roosevelt’s first actions as President was to float the dollar, resetting its value at a significantly lower level.

What Bernanke does not explain is the following:

After the disruptions of World War 1, the price of gold should collectively have been raised substantially, with weaker currencies devaluing in relation to their stronger counterparts. Instead Britain went back at the old rate, as did most other countries. No account was taken of the inflationary effects of war. Yet intrinsic currency values had all been undermined.

When the US reset the value of its dollar in 1935, it did so in terms of GOLD. The price was raised from $20 an ounce to $35. Foreign central banks were helped to settle outstanding war debts to the US, selling off gold at higher prices. Increasing the price gave a major boost to world liquidity and assisted in the process of effecting a general reduction in debts. As in any cyclical upturn, this was a necessary pre-condition to encouraging post World War II economic recovery.

What Bernanke does not tell us is that recovery in the US itself was deliberately sacrificed by the pernicious manner in which Roosevelt went about raising the price of gold. First he confiscated all gold in the hands of the public. Only later did he raise the price. This ensured that all profits accrued to the secret Exchange Stabilization Fund. Imagine the boost to money supply in the US if the benefits had remained in the hands of the public. But you can bet your bottom dollar the private owners of the Fed had their own gold stored offshore and were able to realize the full benefits of the rise in price, as and when it suited them, tax free and offshore.

They knew it was coming.

1.5 Bretton Woods displaces the Gold Standard

The Bretton Woods Agreements of July 1944 took the limited 1935 demonetization of gold a step further. Instead of merely banning purchases of the metal by US citizens, having been shattered by reckless government spending during World War II, the Gold Standard itself was replaced with a Gold Exchange Standard. Bretton Woods achieved this by declaring the US Dollar to be ‘as good as gold’ – but only for official transactions between foreign governments. They were given the RIGHT to exchange their dollars for gold at will. Few bothered to do so until there was a perceived threat that the exchange was no longer capable of being honoured.

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1.6 France forces closure of the US Gold Window in 1971

In 1968 President De Gaulle of France decided to test the 1944 American promise to back its currency with gold. In an attempt to stem the relentless flow of dollars devouring French industry, he began returning French-held dollars to the US Treasury, demanding gold in exchange. In the aftermath of the Paris Student Riots of 1968 which followed, he was forced from power. In retrospect only the naïve would believe the US innocent of stirring the subsequent turmoil. De Gaulle had dared declare the emperor naked.

By 1971 outflow of gold from the US Treasury had become a torrent. Caught between the escalating costs of fighting a war in Vietnam, and the burdens of funding previous President Johnson’s plans for a ‘great society’, his successor Nixon was forced to close the ‘gold window’. Dollar backing went, with it any pretence at fiscal discipline. Over the following decade US money supply mushroomed 1000%. Dollar purchasing power collapsed. The gold price soared. Overall commodity prices increased sharply. Between 1971 and 1980 the CRB index rose from 100 to 330. Despite more than trebling, the increase was puny in comparison to the move in gold. The noble metal played catch-up, escalating 24 times from $35 TO $850 in ten years. Over the entire decade it amounted to an annual compound growth of 34%. None of this would have been possible under a gold standard.

1.7 Rockefeller pressures Reagan into dropping gold

It was late 1980. In the middle of Reagan’s nomination campaign as contender for the Republican Party, there was talk of the US returning to a gold standard at a price of $1000 an ounce. Reagan’s chosen running mate Jack Kemp was an ardent proponent. It was not to be. Banker David Rockefeller offered to cancel decisive support for Carter, switching to Reagan, conditional on the latter dumping Kemp and taking Bush. More particularly, Reagan was told to can the idea of a return to gold. He was ‘advised’ to halt the printing of money - which had run riot under previous President Jimmy Carter. The Bankers instructed him instead to borrow. He turned to the debt markets. Budget deficits began to rocket. Gold plunged into a 20 year bear market as the bank rate was briefly hiked to levels in excess of 20%. By 1981, long term bond yields had dutifully peaked above 15%. Borrowing exploded but the cessation of printing set rates on a long term trend lower.

1.8 Greenspan secretly hammers Gold in ’87

In August 1987, Greenspan took over as Chairman of the Fed. By October the crash of ’87 was underway. In response, the price of gold momentarily shot from $320 to $420. The records show that Greenspan then called on the Exchange Stabilization Fund to hammer the price. The ESF promptly dumped sufficient to stun the market into submission. Simultaneously the Fed opened the credit taps, successfully calling on major central banks to join the party. The ruse worked. The drive into debt was able to continue because gold was kept under wraps. Kondratieff was forced to depart and come back later. The world economy recovered.

1.9 Gibson’s Paradox and the Gold Standard – Lawrence Summers

By early 1993 gold and commodity prices began to push higher. A year later they entered a mini boom. Enter Gibson’s Paradox and a deliberate Treasury strategy of targeting the price of gold. If a rising trend signalled inflation, pushing up long term bond rates, then suppressing gold could conversely help to hold them down. So it was reasoned.

Shortly before joining a new Clinton administration, as Undersecretary of the Treasury for International Affairs, Lawrence Summers co-authored an article entitled:

‘Gibson’s Paradox and the Gold Standard’.

At the time he was professor of political economy at Harvard.

It was Lord Keynes who gave the name ‘Gibson’s Paradox’ to the correlation between long term interest rates and the price of gold. Keynes showed that as REAL long term rates of interest FELL, reducing the carrying cost of gold, the price of gold went UP.

Lawrence Summers article proposed implementing the strategy in reverse. By suppressing the price of gold, long term rates could be induced to fall, stimulating growth without signalling inflation.

1.10 Central banks launch leasing of gold

By 1995, in order to give reverse effect to Gibson’s Paradox, central banks began to promote the ‘leasing of gold’ on an increasing scale. They would use ‘approved’ bullion banks as intermediaries. The latter would borrow gold from central banks at nominal rates, on-lending it to gold producers wishing to raise funds for expansion. They would hedge future production by selling it forward. AngloGold and Barrick were among the first to take advantage, recognizing in the new central bank policy of ‘leasing’ a fresh determination to drive down the price of gold. It was a form of ‘selling’ without having to declare it as such. By participating in the programme at the outset, these two major gold producers sought to ‘get out while the going was good’, albeit at substantial cost to the industry in general. They were ‘supping with the devil’, knowingly helping central banks to depress the price. Some say a deal was done with De Beers. “Help us with gold. We’ll take the heat off the diamond monopoly.” Anglo and Barrick probably also reasoned as follows:

‘If we can’t beat them we might as well join them.’

From 1995 to 1999, the strategy of selling forward worked to the advantage of both of them. As additional supplies of gold hit market, the price slumped from an intra-day high of $420 in early ’96 to an intra-day low of $253 by September ’99. There was a major panic less than 4 weeks later when gold shot to $331 in the wake of the Washington Agreement in which central banks had committed themselves to limit ‘sales’ of gold to what they thought the market could bear. In defiance of the spirit of the agreement, ‘leasing’ operations were totally excluded and continued unabated. But it took all the Gold Cartel’s efforts - and the rapid sale of up to half Germany’s total stock of 3400 tons, possibly as much as 1700 tons – to prevent a runaway explosion in price. The details are given in 1.11 below.

Eighteen months after plunging to a 20 year low of $253 in September ‘99, before again shooting wildly up to $331a month later, the Cartel finally succeeded in bringing the gold bull under control. It was achieved with great difficulty and at great ultimate cost – most of which has yet to be paid. By February 2001, the metal had effectively ‘double-bottomed’ at $254.

From thereon out gold has been on a tear. Its recent intra-day peak of $430 marked a 14 year high. Based on forward sales at prices closer to $300, Barrick Gold’s current ‘marked to market’ loss exceeds $2 billion. Using ‘inside information’ from central banks has turned out to be a costly exercise. Serves them right, some might think.

1.11 Government Pegging Operation brings down bond rates

As sales of ‘leased’ gold accelerated, slipping the price from $400 in 1995 to $253 by 1999, US long bond rates obediently fell from 8% to 4%. The leasing programme was effectively a ‘Government Pegging Operation’ and had temporarily proved ‘successful’. GATA’s Reg Howe of http://www.GoldenSextant.com commented as follows:

“Without this deliberate government interference in the free market for gold, falling rates would have led to rising gold prices which, in today’s world of unlimited FIAT money, would have been taken as a warning of future inflation and likely triggered an early reversal of the decline in REAL long term rates…………..During this period, as real rates declined from 4% to near 2%, gold prices fell from $400 to around $270 rather than rising toward the $500 level as Gibson’s Paradox and the model constructed by Summers indicated they should have…..The low real interest rates of the past few years have been engineered with far more sophistication than those of a generation ago, including the co-ordinated and heavy use of both GOLD and INTEREST RATE DERIVATIVES. ”

Summers’ article earlier demonstrated that, in the absence of substantial government interference to control gold, the artificial suppression of real long term interest rates would have lead to a rise in the price of the metal. The quote above showed that at one stage in the late ‘90’s, gold was trading at half its natural price - $253 instead of $500.

1.12 1998: Greenspan confirms Central Bank strategies on gold

In testimony before the House Banking Committee on July 24th 1998, Fed Chairman Greenspan unthinkingly showed his hand in response to a question:

Zitat

“Central banks stand ready to lease gold in increasing quantities should the price rise.”

In September ’99, following announcement of the Washington Gold Agreement to limit central bank sales of the metal, the price of gold spiked from $253 to $330 in a matter of days. In panic response the US and UK central banks mustered their resources to tame the rise and save the ‘shorts’ – bullion banks who had borrowed and sold gold lower down. This was probably when the ESF and the German Bundesbank decided to co-operate. Each had banks in trouble. In the presence of three witnesses, Bank of England Governor Eddie George later spoke to Nicholas Morrell, CEO of Lonmin:

“We looked into the abyss if the gold price rose further. A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake. Therefore at any price, at any cost, the central banks had to quell the gold price, manage it. It was very difficult to get the gold price under control but we have now succeeded. The US Fed was very active in getting the gold price down. So was the UK.”

In response to the sharp rise in gold, the US and UK central banks had behaved exactly as Greenspan predicted. Of greater interest than being able to predict their strategy was a simple question. Where did they get the gold to sell into the market? Unlike their worthless FIAT paper currencies, gold cannot be printed. It has to be ‘borrowed’. The Germans provided the answer.

1.13 Mystery of the disappearing German gold

As the scale of central bank ‘sales’ increased, tell-tale signs began to appear as to who had lost metal. After an extensive investigation, GATA stalwart James Turk of http://www.GoldMoney.com, discovered a SMOKING GUN. He noticed that the designation of all 1700 tons of US Treasury gold held at Westpoint Military Academy had by September 2000 been changed. In the words of John P. Mitchell, Deputy Director of the US Mint, the gold was:

‘renamed better to conform to audited financial statements, from ‘Gold Bullion Reserve’ to ‘Custodial Gold’.

The logical conclusion was that ‘the better conformation’ arose because the strict application of prudent accounting principles no longer allowed the Treasury to use the term ‘US Gold Reserves’. More than half had been swapped out to ownership by other central banks – almost certainly the German Bundesbank.

When GATA began to query what had happened, Treasury flunkies quickly renamed the gold a second time, but using a more innocuous phrase - ‘Deep Storage Gold’. The new terminology was subsequently applied to describe all Treasury gold. In a thoroughly researched article, GATA’s James Turk explained why he believed the Bundesbank today has title to all gold stored at Westpoint. It was in return for having lent 1700 tons of its own gold to the US Treasury. The purpose at the time was to facilitate Treasury gold deliveries into Europe, much of it from September 1999 onwards when the price spiked from $253 to $330.

On numerous occasions in the three years since this transaction was concluded, there have been ad nauseam repeat announcements from Germany’s Bundesbank President, Ernst Welteke, threatening to dispose of hundreds of tons of German gold. Each statement has been timed to coincide with periods in gold’s history when the price of the metal was poised to burst into new high ground. On no occasion has the gold ever actually been sold.

1.14 Germany threatens to sell as price hits 2004 high of $430

The latest German threat to sell gold was issued eight or more weeks ago, and repeated for good effect a fortnight later. On the first occasion, German magazine Der Spiegel wrote the following:

“The Board of Germany’s Bundesbank has opposed a plan by its president, Ernst Welteke, to sell off some 600 tons of the central bank’s gold reserves to promote education and research. Welteke won’t get a majority for this proposal.”

1.15 GATA’s take on the German threat

Having repeatedly cried ‘wolf’, German threats no longer carry water. Even if carried out, GATA believes the gold has already gone. A ‘sale’ at this stage would be no more than an accounting gimmick to write off gold that’s no longer there. GATA believes half the German gold – 1700 tons - was borrowed by Deutsche bank, and the balance by the US Treasury who swapped it for coin melt at West Point. GATA further believes that neither party is in any position to return it and that any attempt to retrieve it would send prices through the roof. At some point it obviously has to be settled. This can happen in one of two ways. It can either be returned, which seems unlikely, or netted off and declared a ‘sale’ post facto. If losses are to be contained before the price rises into the stratosphere, then the sooner these deals are ‘netted off’ the better. Hence Welteke’s pressure to conclude a ‘sale’. There is little doubt that the Bundesbank president is a loyal supporter of the Gold Cartel, willing to spew out empty threats whenever called on to help.

The latest announcement was given headline treatment in local South African papers. Only in the last paragraph did one read that a majority of Welteke’s Board of Directors opposed his proposal. In other words it was stillborn from the outset. Yet the international press insists on presenting it as a fait accompli. It is part of the insidious and relentless campaign against gold. It is pathetic that even South African papers should condone lies and propaganda by the FIAT money gang.

1.16 A threatened ‘sale’ of 37 tons by Norway

A week after the German gold sale proposal first reared its head, Norway made a similar announcement. In this case the Norwegian central bank helpfully disclosed a ‘sale’ of 17 tons. What they failed to mention was that at latest count 95% of Norway’s gold had already been leased to the Bank of England. More particularly, being an oil producer of note, Norway had no shortage of foreign exchange and absolutely no need to sell off gold. Clearly they were asked to do so, pandering to American entreaties and a Treasury cry for help. The US needed to halt a threatening run in gold.

1.17 Britain drops out of gold cartel – keeps options open

On March 8 the Central banks of 15 European nations renewed what was referred to as the ‘Washington Agreement to limit gold sales’ – originally signed in September 1999. According to Patrick Hosking of the London Evening Standard:

“Britain astonished the gold market by dropping out of the official cartel that caps sales.”

Economics correspondent Philip Thornton said:

Zitat

“Britain said it has no plans to sell any of its gold reserves over the next five years.”

Britain, which had sold two thirds of its gold reserves in recent years, said because it had no plans to sell gold over the next five years, it had decided not to participate.

Well-known gold bear Philip Klapwijk of Goldfields Mineral Services – ridiculed for his gross understatement of the extent of leasing of gold – commented as follows:

‘I would have expected the UK to have been in the accord. Ducking out will give Britain more leeway to lend gold.’

The 15 central banks announced a new pact to restrict annual sales to 500 tons or 2500 tons over a five year period. This up from the 2000 ton limit set in 1999. GATA believes that by announcing another 5 year renewal of the Washington Agreement, many analysts feel the guaranteed gold deficit supply will further heat up a market already on fire.

We believe with Klapwijk that Britain’s refusal to participate has its origins in a Bank of England’s desire to keep its option open. Should the gold price explode in such manner as to embarrass their friends at the Fed, they can always announce that due to ‘changed circumstances’ they have changed their minds and now wish to sell. In that event they will not be beholden to Europe and their latest agreement to limit sales. The French know their British neighbours well - ‘Perfidious Albion’ indeed. Britain’s decision to stay out reinforces our view that the Fed is worried but also shows that remaining stocks of gold available to the Cartel are fast melting away. It confirms our view the game is over.

Demise of US Gold strategy – implications for bonds

The purpose of studying the history of US gold strategy in such detail has been to demonstrate conclusively that in the face of a falling dollar, US gold strategy is dying a natural death. With its end comes a whole new threat to the health of US Bonds. Co-ordinated suppression of gold over an extended period of time served as an important weapon in maintaining artificially low long-term interest rates. These were necessary to prolong growth and later stave off recession. Conversely, an imminent explosion in the price of gold will expose the bond market to the cold winds of reality. A panic sale of dollar-denominated bonds could send US long-term rates rocketing higher, as foreign holders run for cover. The reasons would be a resumed slide in the American currency, a sharp rise in inflation and a marked deterioration in the perceived solvency of US debt.

As gold breaks free, new policies will therefore have to be found to lend artificial and temporary support to both the dollar and US bonds. Failing that, this could be the year the US bond market crashes. As prices fall, rising rates will puncture the housing bubble. Refinancing has already begun to slow quite dramatically. Shaky economic recovery will terminate abruptly unless dollar printing on a massive scale is called on to replace international borrowing. The Fed will need Ben Bernanke with all guns firing. Do central banks have a less dangerous way out? The gold market was easy to manipulate while central bank stocks lasted. The capitalization of the bond market is infinitely greater and will require a massive leapfrog in the scale of intervention. US gold stocks theoretically stand at 8,000 tons or 260m ozs. At $400 an oz they are currently worth $100 billion. In contrast the capitalization of outstanding US Government Bonds amounts to $18 trillion with the corporate market contributing a further $20 trillion.

Instead of selling and suppressing gold, central banks will increasingly be cajoled into supporting the dollar, switching the proceeds into US bonds. This is a different kettle of fish and the execution of such a blunt strategy will be nowhere near as easy as selling off gold. It will necessitate huge and sustained intervention in the currency markets and is already happening. More and more central banks will be drawn in. How long it can continue is a matter for discussion. By the time the strategy implodes, the FIAT currency system will likely have damaged itself beyond repair.

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Currencies in ‘FIAT Folly'

- face Abyss of destruction

Investment Indicators from Peter George

March 12, 2004

PART TWO

2. Currency intervention is unsustainable

2.1 Japanese David squares up to Dollar Goliath

Unlike the David of the Bible, the Japanese David has no special anointing or strategy and is therefore fated to die in battle, outclassed by an opponent double his size. Ignoring the forces ranged against them, the Japanese Ministry of Finance has set out single-handedly to slow the dollar’s slide. To achieve this they have committed to SELL yen and BUY dollars. Their purpose has been to protect Japan’s vital export markets to the US by keeping the yen artificially cheap. Last year they bought $190 billion by printing and dumping the equivalent in Yen. This year they budgeted to purchase in excess of $670 billion. William Buckler’s ‘Privateer’ suggested the figure could top $930 billion.

Towards the end of last year, in one month alone, they were forced to purchase $47 billion. In the month of January 2004, they admit to having spent a much higher $67 billion. Despite these desperate moves, and until very recently, the yen/$ rate continued to fall, down from 120 a year ago, to a February low of 105. Japanese financial authorities used to draw a line in the sand at 119. More recently they lowered it to 115. In January they threw billions at 106 and lost. Then came the latest dollar rally, dragging the EURO down from 129,50 to an intra-day low of 120,50, simultaneously spiking the Yen back to 112. The dollar had become oversold. It is enjoying a brief rally but the long term trend remains unchanged. In due course it will resume, even if the Japanese Ministry of Finance temporarily succeeds in pushing the Yen back up to its September 2003 ‘head and shoulder’ break point of 115. They will never be able to keep it there. The dollar’s fundamentals are simply too sick.

The downtrend will resume. Below 100 Japanese exporters will suffer serious hurt. Technical downside projections for the yen suggest three levels within reach. There is a short term move to 100, a medium target to 80, and a long term possible probe towards a bone-chilling 60. The implications for the profits of Japanese exporters are dire. The country’s mini-recovery looks fated to enjoy a half-life of less than a year, despite Japan’s participation in the booming Chinese market.

2.2 Odds stacked against Japan

The challenge for Japan is to finance the entire US debt market – not just the trade deficit. Last year the trade deficit alone topped $500 billion. This year Merrill Lynch projects $600 billion. If that was all they had to contend with, Japan might have a fighting chance. But the Budget Deficit is exploding even faster than the Trade Deficit and on some estimates will approach $1,000 billion this year. This figure would include the cost of paying for the Iraq clean-up operation – which stubbornly refuses to go away - and would make annual allowance for the cost of bailing out the black hole called ‘social security’.

In the summary we quoted The Privateer as saying that last year the rate at which Americans slid into debt exceeded $2,7 trillion. This included household spending. The Privateer also showed that unless this rate was maintained, GDP would collapse. The government naturally wishes the figure to grow.

At the end of our summary we noted that the combined capitalization of the official and corporate bond markets in the US, currently approaches $40 trillion. Much of that has been financed by foreigners. Imagine the effect on long term rates if 10% of these bonds were placed on the chopping block! Where would the Japanese find another $4 trillion? Without aid from Europe the problem would be insurmountable. If the dollar slide accelerates it could spark off a Tsunami wave of selling in the bond markets, flattening the hapless Japanese – and anyone else who dared to intervene.

2.3 Can China afford to revalue the Yuan?

The Chinese have hitched their wagon to a falling dollar, purposing to slide down with it. In this they appear at first sight to be revisiting the dangerous competitive devaluation strategies of the 1930’s. Yet if viewed in an overall context, their trade surplus with the rest of the world is not substantial. With the US it is huge but is driven by American companies relocating factories to take advantage of dirt cheap Chinese labour. In most cases the transfers are accompanied by a significant investment in the latest plant and equipment. There is no way the Chinese will stop this, even less so the American corporations whose manufacturing facilities are being given a new lease of life. The Chinese are therefore enjoying the fastest industrialization in economic history but still have 200m unemployed. In the process they are driving commodity prices through the roof. Some are approaching their all-time highs of the 1980’s. As an example, shipping container rates have risen five-fold. Even silver is breaking free of the grip of COMEX bears. Only gold is lagging, clear testimony to the lingering effects of central bank manipulation. That is why the metal represents such outstanding value. When the dollar crash resumes, gold will explode.

So is a Yuan revaluation the answer? Greenspan has warned against it. He says up to 50% of Chinese bank loans are ‘non-performing’. He says this is only sustainable if depositors’ funds are kept in place. However, a flotation of the Yuan could cause capital to leave China, undermining the country’s banks and destabilizing the world economy. Before taking such a step, Greenspan has warned that the Chinese government should first inject official funds into their banking system, by way of fresh capital, sufficient to cover all bad loans. Contrary to Greenspan’s concerns, others have suggested the Chinese banking crisis has been completely overblown. They say that because the Chinese have a total aversion to paying tax, the government uses the system to fund public expenditure. So-called ‘bad debts’ are in essence no different to US Treasuries. They are a disguised form of borrowing by government. China is easily able to pick up the tab.

In a recent book by Richard Duncan, entitled ‘The Coming Dollar Crisis’, the author highlighted what he considered to be the greatest danger to the world economy – the curtailing of American demand for imports. He predicted that as the dollar crash proceeds, the US trade deficit will eventually shrink. If the bond market collapses simultaneously, the process could accelerate out of control. Americans would literally stop buying products from overseas. This would instantly remove a huge source of global demand from the world economic equation. Unless replaced, Duncan says we face the likelihood of an acute global depression. He may be right. Unfortunately the solution he proposes comes from fairyland. He would have the international community pressure emerging market nations to raise wage rates by an average of 25%. He says this would give a balancing boost to world demand. Try telling that to the Chinese and Indians while their unemployed number in the hundreds of millions. It’s not going to work. The bottom line is that China’s international trade is no longer generating a large overall surplus – with the US yes, not with her neighbours and all the world’s producers of commodities. And that is where China’s most significant influence is being felt - in the commodity markets. Her rapid growth has driven some prices up 40% and more in less than 12 months.

2.4 Will a dollar crash help US exports?

CNBC recently interviewed a Chinese IT engineer who had resigned from Microsoft after 14 years, having previously been trained at an American University. He was one of the company’s brighter stars but is returning to China to launch his own version of the Microsoft Empire. The difference is this: For the cost of two American engineers he can hire 40 Chinese who are equally well-trained.

The American manufacturing sector is being gutted by competition from China and India. The problem is that the extent of the gap is such that even a 50% further devaluation of the dollar will have little impact. The fault lies at the feet of current and previous US Administrations, The Fed, and Treasury Secretaries of the likes of Robert Rubin. Together they devised and promoted their ridiculous ‘strong dollar policy’. What it did was artificially prolong the period in which the US was allowed to live beyond its means. By staving off recession and an early dollar crash, the process of healthy market adjustment was precluded from doing its work. Now it’s too late. There is nothing left for a weak dollar to stimulate back into life. The patient is on permanent Asian ‘life support’. Remove dollar buying and the end will come rapidly. Maintain the support operation and the cost will rise in parabolic fashion as did the printing of money during the German inflation of the 1920’s. Next to be drawn into the funding net will be the Europeans. The bottom line is that:

“The US economy has made a huge shift – from manufacturing to service and now finance. There are relatively fewer jobs in finance compared to manufacturing and the financial jobs are more highly skilled. As the economy moves this way, the infrastructure for manufacturing deteriorates, and to re-establish the ability to compete effectively with lower cost structures is extremely difficult and expensive. We expect the reallocation of resources to take approximately TEN years.”….InsideGold Team

2.5 Europe and a sliding dollar

Under the disciplined direction of new ECB chief Jean-ClaudeTrichet, the EURO block at times proclaims a bold belief in sound money, to the extent of welcoming EURO appreciation against the dollar. They state that recovery in world trade is sufficient to sustain EURO exports in face of a strengthening currency. Yet Italian retail sales are down 1% year on year and German sales 2%. This has opened the door for impassioned pleas by European politicians, calling for intervention to slow the dollar’s slide.

Six months ago there was mention of the ECB possibly raising interest rates. All such talk has ceased. Instead there are suggestions that at some point in the future the bank might actually choose to CUT rates, in an effort to discourage EURO buying. If it happens it will serve only as a brief palliative.

The EURO reached a high of 129 against the dollar on January 12, 2004. A month later, on February 18, it made a marginal further high of 129,27. Then a European bank conveniently dumped $2,5billion worth of EURO’s. In an article the following day entitled:

“Ramifications of possible ECB intervention”,

author Dan Norcini gave credence to speculation that the intervention came from the ECB itself. Others think the selling came from a major European central bank. In any event it was sufficient to trigger a hedge fund short-covering panic. Two days later the US announced its second worst monthly trade deficit in history - $42,5 billion. This would normally have battered the dollar to a low. The deliberate attack on the EURO two days earlier prevented this from happening. Nonetheless the dollar faces a major problem. Despite the dollar index having dropped some 30% in the past three years, the trade deficit continues to deteriorate. There are reasons for this. Some were discussed above. The main obstacle is the Greenspan-orchestrated credit bubble, causing Americans to live way beyond their means. The difference is imports.

A second reason is the faltering US recovery. Latest employment figures showed a very disappointing increase of only 21,000 for the month instead of a hoped-for 140,000. Even the 21,000 was entirely made up of newly hired government employees. Worse still, a whole bunch of fulltime employees who lost their jobs were replaced with the same number of temporary workers. The news hammered the dollar, causing the EURO to spike back to 124. Although there is a small risk of a final sell-off to 119, the dollar may already have seen its best. From a technical perspective there is a long term projection to 180 with a likely twelve month target to 145.

Once the dollar bear resumes, the EURO will inevitably push through the 130 barrier, triggering a point of pain. Above 135 we believe intervention will begin in earnest. A week ago the London Financial Times confirmed our view:

“A drop in inflation combined with a EURO close to 1,35 and clear evidence of a slowing global growth will be needed to prompt a cut in rates which have been held at a post-war low of 2% since June, say analysts.”

Once the dollar rally terminates, the EU will face a decision. Apart from cutting rates, do they print EURO’s to support the dollar, or in the interests of retaining financial integrity, do they allow the market to take its course? If the latter, they risk the prospect of losing global market share to Asia. We believe the political unity of Europe is insufficiently strong to withstand the pain of a major recession. We think they’ll be forced to print, joining the Asian support operation for the dollar and US bonds. As the world-wide printing process gathers steam, central banks will eventually endanger the entire FIAT money system, hastening the demand for a return to currencies backed by gold.

As and when the ECB is forced to man the dikes in earnest, printing EURO’s to hold the dollar, the EURO’s attractions in relation to gold will come to an end. Gold will begin to rise sharply against all currencies. That train of events seems inevitable. The prudent will act early and buy gold now.

2.6 The Fed strategy of ‘benign neglect’

The US Fed has been unleashing a wall of printed dollars and an avalanche of freshly created bonds. How else could they simultaneously avoid recession, spin out a credit bubble, cut taxes and fight a war? Despite massive Asian intervention in the world currency markets - buying dollars which get invested in US bonds and treasuries – until recently the dollar slide continued unabated, but at a gentler pace than would otherwise have been the case without the intervention. For the Fed and Treasury it was like a game of ‘chicken’. Those central banks prepared to print competitively to support the dollar and US bonds, would continue to do business with the American consumer as their currencies weakened in concert. Those that refused to play ball would lose market share. We assume – despite protestations to the contrary – that most will eventually print. Even yesterday, New Zealand commentator Neville Bennett referred to a recent decision by his country’s central bank. The latter has taken a firm decision to step onto the plate and buy dollars to reduce or reverse the appreciation of their currency,

Essentially the Fed attitude has been one of benign neglect. Although in one breath Greenspan rails against the scale of Japanese intervention to support the dollar, secretly he must be grateful. Without Japanese buying, US bonds would be in meltdown mode. Then, instead of rallying as the dollar slides, they would react normally and fall together.

3. Debacle brewing for US Bonds in 2004

3.1 Relationship between nominal bond rates and the price of gold

It took five years, from the closing of the gold window in 1971, before US bond rates began to respond negatively to the consequences of dispensing with the golden rod of financial discipline. In the decade from 1971 to 1981, and without the risk of losing gold, the US money supply was allowed to rise by 1000%. As a direct result inflation began to move up rapidly. In response to both, the US 30-year bond rate increased from 6% in 1976, to nearly 16% by 1981. During the same timeframe, the gold price enjoyed its sharpest acceleration ever, jumping from $105 in 1976 to $850 in 1980. The turn only came when the Fed hiked the Fed funds rate over 20% and real rates caught up with inflation.

The positive correlation between nominal US long-term interest rates and the price of gold is important. It dispels the myth that rising rates are always bad for the metal. To the contrary, RISING RATES bring FALLING BOND PRICES. As bonds constitute by far the largest repository for world savings, falling prices deter investors, driving them into the arms of gold, the world’s prime ‘asset of last resort’. The process only reverses when interest rates GET REAL – high enough to compensate for both rising inflation and the growing risk of default.

3.2 US bonds face triple threat – inflation, currency and default

Inflation

In January US consumer prices rose 0.5% month on month, compared to only 0.2% in December. The latest figure is equivalent to an annual rate of 6%. It is common knowledge that actual rates far exceed that but have been statistically damped and massaged down to avoid a panic in bond prices. Oil and petrol prices are exploding but are excluded under the guise of ‘seasonal adjustments’. Rentals are substituted for house prices. The former are under pressure, both in the US and the UK, due to a growing surplus of ‘buy to rent’ accommodation. House prices are at all-time highs but don’t reflect in the inflation figures.

January PPI figures are late. It would be no surprise if sooner or later the monthly rate bursts through 1%, giving an annualized rate of 12%. How can the Fed Funds rate stick at 1% and the 30-year bond rate remain below 5%? At some point – despite massive Japanese buying - the 30-year bond rate will begin to track inflation. Expect a rise in long term bond rates from 5% to 7% over the next 12 months. In three years the rate can more than double to 12%.

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Currency losses

In two years the EURO has appreciated 44% against the dollar, from 86 to 1,24. While earning less than 5% on income account, foreign bondholders have suffered currency losses averaging 20% a year. If the EURO rises to 145 by end-2004, holders of dollar bonds will lose another 17% this year alone. With a long-term target of 182, the average annual currency loss over the next three years will probably range between 12% and 15%. Will foreign bondholders swallow this indefinitely? At some point the 30-year bond rate will adjust to compensate for currency losses. Expect a rise over the next three years from 5% to 12% on currency fears alone. This excludes the inflation risk. Both factors are negative and will serve to reinforce each other.

Risk of Default

President Bush’s first Treasury Secretary, Paul O’Neill, resigned when he saw long term projections of US Government Debt exceeding $45 trillion. America’s Comptroller General, David Walker, wrote a letter of warning to the New York Times in early February. He said the current system of financial reporting provides an unrealistic and misleading picture of the country’s financial condition. Gross federal government debt is put at $8 trillion or $24,000 per man, woman and child. If the deficit on big ticket items like Social Security, Medicare, Civilian and Military Retirement and Health Care, and Veterans’ Medical care is included, the figure will more than quadruple to $100,000 for each and every American, exceeding $28 trillion in total. By 2040 the US own Comptroller General predicts there will either have to be a 50% REDUCTION in federal spending or a DOUBLING of taxes, in order to balance the budget. Neither is either possible or likely. As the dollar slides imported inflation will add to the inflationary effects of internationally booming commodity prices, causing rates to rise sharply. Rates will not only rise on account of ballooning debt levels, the cost of servicing existing debt will also go up sharply. This occurs as rollovers take place at higher and higher rates. Economist Dr Ravi Batra predicted the financial condition of the US would one day resemble a giant version of Thailand before it went bankrupt. He may well be right. Yields on Brazilian, Argentinian and Russian bonds went roaring into the high twenties. Why should the US be immune? Her cocktail of problems is beginning to mushroom. Given a trigger, US bonds could face a deluge of selling in coming months.

4. Mission Impossible – continuing support for dollar and US bonds

If the fundamentals underlying US bonds deteriorate as predicted, the task of supporting the dollar will become ever more difficult. As printing escalates, damage to the FIAT system will begin to spread from the dollar to every other currency which participates in the strategy of intervention. Those that don’t will face major losses on the trade front and growing political pressure to conform.

Unlike their paper counterparts, the world wide stock of precious metals has proved impervious to the pernicious practices of both politicians and bankers alike. The latter can temporarily rearrange ownership by surreptitiously leaking metal from central bank vaults to the market. They cannot call the noble metals into existence in the same way they are calling on printers to spew out Dollars, Yen and EURO’s. The days of FIAT money are drawing to a close. Those assets which suffer in a high rate environment are to be unceremoniously dumped. They include industrial shares and all types of property. The bubbles are set to burst.

The person wishing to preserve his savings will be foolish not to switch a significant portion of his assets to physical gold and silver and the shares.

5. Lasting impact of Gold Cartel deception

The overall policy of manipulating gold was designed by a ‘Gold Cartel’ which includes the Fed and other central banks working in tandem. ‘Bullion Bank’ participants merely acted as ‘instruments’ of higher authority. If and when the gold price soars and these same ‘bullion bank’ counterparties are unable to repurchase what they sold ‘short’, they will doubtless have guarantees in place from government, letting them off the hook. This will entail the central banks writing off their gold loans and settling in cash. Effective central bank gold stocks will then more than halve, from a published level of 32,000 tons, to actual ‘stored-in-the-bank’ physical holdings, of less than 12,000 tons.

For the benefit of those who doubt the truth of what we allege, consider the following. A while ago the US-controlled IMF issued a secret instruction to central banks. The effect was to fudge the size of their gold loans. They were advised against differentiating between ‘gold loans’ and physical holdings. Balance sheets were to include the two lumped together under one heading, as ‘gold on hand’. We suggest the purpose was to prevent citizens from panicking as they saw central bank gold loans escalating, and the physical metal disappearing from vaults. The accounting procedure advocated by the IMF is in blatant contravention of ‘good governance’ reporting standards. No wonder we have ENRON and PARMALAT. Private operators are emulating the deceitful patterns set by officialdom. The IMF instruction was nothing more than a high-level attempt to conceal the degree to which central banks have secretly been forced to dump gold. When questioned, the IMF denied they had issued such a decree.

Fortunately for those seeking the truth, the governments of Portugal and the Philippines, were unaware of the devious motivation behind the instruction. When questioned by members of GATA they openly admitted details of the IMF cover-up. The purpose behind these central bank gold strategies has been fully explained. Our allegations can no longer be dismissed as ‘figments of the imagination’ or ‘products of a wild conspiracy theory’. Until recently the investment community was able to reject them out of hand as being ‘off the wall’. To an increasing extent that is no longer the case. More and more high profile individuals are accepting GATA’s theories. They have been well-documented and are based on careless public statements by members of the central bank community itself – not least by Fed Chairman Greenspan and Eddie George, ex Governor of the Bank of England. Better still, GATA’s theories have been irrefutably confirmed by sound statistical analysis of observed market behaviour, thanks to the efforts of GATA stalwarts like Mike Bolser.

As in old-fashioned ‘trench warfare’, the accelerating dollar slide is slowly forcing central banks to abandon their long-standing strategy of trying to suppress gold. The pretence of gold’s lack of attraction can no longer be maintained. The latest renewing of the ‘Washington Agreement’ was significant because of Britain’s refusal to participate. They didn’t want their hands tied. There growing dissension in the ranks. It will increase. The central bank search for a fall-back strategy is set to fail. FIAT money is doomed.

CONCLUSION

We believe the substantial and extended 16 month rally in world markets has come to an end – led by the Dow Transports and NASDAQ. Expect major new lows as the year progresses. We are in a long-term bear market which could eventually wipe out 90% of peak values. That means the Dow can fall from its recent rally high of 10,700 and all-time peak of 11,700, way below its October 2002 low of 7,200. Over the next three years we could see a repeat of the ’29 crash. That could bring a 90% meltdown to 1000.

We also believe US bond values have peaked. Rates are close to multi-year lows but a sharp reversal of trend is in prospect. 30-year bond rates have formed a major reverse head and shoulders formation. Expect rates to rise from current levels of 4,67% to 7% within 12 months and 12% within three to five years. If that happens the price of 30-year bonds will more than halve. In EURO terms they could fall 80% in value.

Expect the EURO to rise from its recent intra-day low of 120, to 145 by year end, 160 next year and 180 in year three.

Although shortly due for a correction, the CRB index at 280 can eventually push through its all-time high of 332, before trebling to 1000 over the next 7 years, having bottomed two and a half years ago at 180, in October 2001.

Gold and silver will be the most exciting metals of all – as FIAT folly wreaks its havoc. Uranium will also do well as oil and coal prices double and treble, forcing energy consumers to switch increasingly to nuclear power. Expect gold to double in price over the next 18 months. Stocks will do even better. Goldfields SA could rise from R80 to R500 over the same time period.

Uranium peaked at $43 a lb in 1980. It fell to a low of $7 in 2001. It has since risen to $17 but could bounce back to $43 over the next 18 months. If Uranium moves in line with the index the next 7 years could propel the price to an eventual peak of $130/lb. A gold-uranium stock like Aflease could rocket from R3 to R23 in the next 18 months and double that in 5 years – as long as they FOCUS on developing their OWN assets and exercise restraint when looking at takeover targets.

The South African Rand is in a massive long-term bull market. Although a short-term correction from R6,7 to R7,5 is not impossible, we target R6 by year end, R5 the following year, carrying on down as gold explodes. Despite Rand strength, the gold price in Rands will continue to rise rapidly, but at a lesser pace than its dollar equivalent.

The Japanese NIKKEI is a long term leading indicator for all other world markets. It peaked at 40,000 in 1989. It fell to a multi-year low of 7,600 in April 2003. It has since rallied 50% to a recent intra-day high of 11,500. A monthly high/low chart stretching back to 1985 shows that the NIKKEI broke down out of a major wedge formation in July 2001when it crashed through 12,000. The current rally is presently no more than that. It has taken the index right back to the long term downward-sloping support line – now turned resistance. If it gets repulsed from here the NIKKEI bear could resume in earnest. If our prediction of long term major strength in the yen is realized, Japanese exports will face a serious pricing problem in the years ahead. From a fundamental standpoint the NIKKEI could eventually crash to a final bear market low of 1000 before the worst is over. We are aware this view runs counter to the current bullish stance of the highly reputable Allan Gray group. They appear to have done well out of the Japanese rally. Maybe they should be taking profits? We do not believe the Japanese recovery is sustainable.

RECOMMENDATIONS

On the basis that the international bear market in equities is set to resume with a vengeance, we would remind readers of the pessimism ruling 16 months ago when the Dow was 7,200 and the German Dax was scarcely half its current level of 4,000, having bottomed at 2200. If you rode the markets all the way down, take advantage of the rally. Get out and get liquid while the going is good. Current levels won’t last long. This advice applies particularly to those relying on pension and retirement funds – not just freely traded investment portfolios.

Today TRINITY HOLDINGS has a portfolio of FSB registered funds through OVATION GLOBAL, most of which are gold-based and managed by TRINITY HOLDINGS. One fund is entirely invested in ‘physical gold’. Available monies can be invested through a number of wrappers, including ENDOWMENTS, RETIREMENT ANNUITIES, PENSION, PROVIDENT, PRESERVATION and LIVING ANNUITIES. Although the law allows these transfers, some insurance companies may try and block your wishes. In most cases one can circumvent their manoeuvres by being patient and persistent. After all its your money, not theirs!

Where possible, the ultra-cautious ought to emulate the grand old man of investing, Warren Buffet. After Bill Gates of Microsoft, Buffet is the world’s second richest man. He is currently sitting on $36 billion in cash. Other than his private 130m ounce hoard of silver, he sees nothing worth buying.

Those with a normal appetite for risk, prepared to adopt a contrarian investment stance, ought to invest a goodly portion of their assets in a portfolio of gold and gold shares. Keep an eye out for attractive commodity stock opportunities but retain the majority of the portfolio in gold. Remember, in a depression even commodities get slaughtered. Gold alone is immune. Platinum is not money.

If a real crisis materializes, even cash in the bank is suspect. It is far safer to stick to the yellow metal. From time immemorial gold has retained its buying power through war and revolution. It has proven itself the perfect store of value.

PETER GEORGE
Tel. : (27) 21- 700- 4880
Cell : 082- 806 – 3147

A personal profile of Peter George

He turned 61 in August, 2003. Born in Natal, South Africa. Graduated with a BA (PPE) – Politics, Philosophy, and Economics - at Oxford University, England, followed by an MBA at the University of Cape Town. He was a Member of the Johannesburg Stock Exchange from 1969-1981, Chairman of Wit Nigel gold mine from 1983-1987, and a Member of the South African Bond Exchange from 1993-1997. He and his associates currently own an option to repurchase and reopen the Wit Nigel gold mine. Today he writes a regular commentary on world markets, currencies, and gold. This is available via e-mail or, by special arrangement, via surface mail. His own e-mail address is pgportfo@trinityholdings.co.za

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[Blockierte Grafik: http://www.moneyfiles.org/usapower.jpg]

doktor Fart

Wenn es nun anscheinend selbst Thaksin Shinawatra endlich begriffen hat, das mit: "ganz Asien finanziert und subventioniert die USA", dann sollten es ja eigentlich auch die Japaner endlich kapieren.

Wenn die Asiaten aufhören ihre Dollar Erlöse in Staats Anleihen der USA anzulegen, müssten die Amis die Zinsen happig erhöhen damit sie ihre Anleihen weiterhin unter die Leute bringen können. Bei den jetzigen Tiefstzinsen wollen immer weniger kaufen.

Damit wird es für die USA immer schwerer ihr riesiges Handelbilanz Defizit zu finanzieren.

Dass die Zinsen steigen werden steht für mich bereits fest.

Das steigende Zinsen eine nicht zu bewältigende Last beim jetzigen Verschuldungsstand für die USA Bürger darstellen, und die dortige Bevölkerung sukzessive, aller Wahrscheinlichkeit nach, wegen dem in ihrer Wirtschaftsgeschichte einmalig hohen Verschuldungsgrad, extreme Finanz Probleme erleben dürften, die mit Flickschusterei und Preismanipulationen wie sie von der FED täglich via Geldpolitik, Interventionen, und Preismanipulationen an den Börsen, und beim Gold vorgeführt werden, nicht mehr aus dem Sumpf herauskommen kann, liegt für mich mehr als nur nahe.

Ganz kurz gesagt: Hohe Zinsen werden der hoch verschuldeten USA den wirtschaftlichen Kollaps bescheren.

Thailands Regierungschef Thaksin hat`s kapiert, spricht es aus, und will jetzt handeln, und weniger US Anleihen kaufen. Andere Länder, nicht nur asiatische, werden bald schon folgen.

Gruss

ThaiGuru

The Empire of the Yen.

Hans Schicht

From a Different Perspective II:

Japan, China and Taiwan, all three are holding huge dollar reserves. But the underlying reasons for holding are not the same. China and Taiwan acquired their dollar reserves through export surpluses, especially exports to the United States. And both, China and Taiwan see their growing dollar holdings as only a minor evil compared to the great opportunity created to build their industrial base and infra-structure for the future.

Japan's dollar holdings originally accumulated in the same way. That is to say, through merchandize export surpluses. But that kind of surpluses are not the main source for Japan's dollar accumulation any longer. Today, outright financial paper acquisition of dollar denominated assets against yen assets has replaced Japan's export surpluses as the main source for its growing dollar holdings. What is happening is nothing less than pure financial action and has no relation to export and trading surpluses.

Japan's reasoning is not to keep the yen lower vis-à-vis the dollar in order to stay competitive in the export markets, neither to help its banks and neither to support the US dollar on whatever grounds. It would go against all logic if Japan would be persevering buying dollar assets for such reasons, considering the great danger the totally disproportionate mountain of dollar denominated debt papers in its treasury presents. It must be with a far more important goal in mind, that Japan is pursuing its present financial policies.L

I cannot think of any reasons for financial cooperation between Japan and the USA. Altruism in support of America and the dollar is not in the Japanese character. America thinks it has Japan under control, but Japan thinks otherwise. Japan has always hated and despised the West. Japan has never accepted its defeat in the second world war and Japan will never forgive the "Japan bashing" and the humiliation its financial institutions suffered when in the eighties the American banks pulled the rug out from under the Japanese banks. For the Japanese, the war is going on. This time not on the battlefields, but on the financial markets, between the yen and the dollar. This yen-dollar battle is subtle, not played in the open by Japan. Smilingly and seemingly cooperating, - careful not to awaken any suspicion - , Japan is preparing for revenge, preparing to slay the dollar and replace it with the yen as the supreme Asian reserve currency.

Till recently the dollar had no trouble maintaining itself as the world's prime reserve currency. But times are changing. The dollar has become over-stretched and overvalued. Mistaken and failed politics have infused world wide doubts about the real power of the United States and kindled the suspicion that the dollar might be nothing else than a paper tiger, sustained only by bluffing and bullying its way.

Challengers to the dollar empire are on the rise: the euro, the yen, and the gold-dinar. And soon the dollar will not be the world's sole reserve currency any longer. Japan wants it place.

Let us go back and look how the dollar managed earlier to achieve world reserve currency status. New York did it by flooding the world with dollars and making the world accept these dollars as assets worth holding, meanwhile not tolerating whatever competition. And how did New York manage to flood the world with its dollars? As long as America was still a creditor nation, by extending dollar loans and credit in whatever form. Later on, once America had turned into a debtor nation, by seeing to it that the ever growing amount of American deficit dollars would not return to the homeland or be presented for payment in real value. And if returned , then only to be reinvested in America's financial markets.

Financial wars are in may aspects like military wars: expand by conquest. To expand militarily, hardware is needed, but to expand financially, only fiat paper and credit have to be created preferentially out of thin air. Where dollars are used is United States' financial territory, where euros are used European territory, and where yen are used, Japanese territory. As simple as that.

Slowly but surely, in a subtle way, Japan is pushing, seemingly off-hand, to replace the dollar holdings of East and S.E. Asia with their yen. Where the US once had to go through the lengthy process of first extending loans and then flooding the markets with US debt paper, Japan, in order to achieve reserve currency status for its yen, has it easy. Today Japan needs nothing else to do, than to substitute the dollars held in the public and private reserves of the East and SE Asian nations with their fiat yen. Lots of yen! And lots more still will be needed till reserve status will have been reached. Japan will also have to prepare for it that all these yen will not return to the mother country. Just imagine, the power and prestige the newly acquired reserve currency status will bring Japan.

Slowly Japan is building its yen empire, not in the least worried about the mountain of dollar paper in its coffers. At some future date, all these dollars will easily be written off with the stroke of the pen against the major advantages the reserve currency status will offer. And the more dollars Japan will have accumulated, to more Japan will be able to hold the USA to ransom.

The crux of the matter for Japan are not the dollars it is taking in, but the quantities of yen it can spew out and have accepted by the markets. And once there will be sufficient yen in foreign circulation to guarantee the reserve status, Japan will be ready to start dumping and trashing the hated dollar down. At that very moment everybody else too will start dumping dollars for yen. The dollar will become zilch and Japan will be able to buy the USA for nothing, winning the final battle of the war.

It has to be well understood however that Japan is not interested in accumulating gold as backing for the yen. Japan's strategy will be following the same pattern as New York for the dollar. Flood as many yen into Asia as possible and do not allow any competition, neither dollars, euros, gold or silver. Asia for Asia and the Asians! And that counts for finance as well as for business! Make no mistake!

But Japan will not be the only upcoming challenger to the dollar to vie for reserve status. There are more countries and regions under the sun playing with the same idea. One day we might even have several reserve currencies functioning simultaneously: the yen for Asia, the euro for Europe and Africa, a "new-dollar" for North and Central America and perhaps a "mercator" for the Mercosur countries of South America, if the latter will ever get their act together. But their time will be short lived, as all will hold nothing else but worthless fiat.

Besides the USA, Japan is not the only country with an anti-gold stand. Although not directly anti-gold, most governments are showing little interest in gold presently. Not even to serve as back up for their currencies, or for a re-introduction of the gold standard. They could not afford so anyhow under the present circumstances. There is little gold left in the treasuries and secondly most governments are anyhow drowning in debt already. As long as they can get away with it, governments will go on imposing their fiat currencies by hook and by crook.

Official rejection of gold does not mean however, that the ascent of precious metals will be delayed. The real future of gold and silver does not depend on governments, but rests on the basic value the ordinary people attribute to it. Once the latter will wake up from years of misleading information and manipulation and once they will see through the maze of the lies, then that will be the day for gold and silver to shine. And the day is not far off.

March 25, 2004

Hans Schicht

[Blockierte Grafik: http://www.goldseek.com/news/LemetropoleCafe/lmpc.jpg]

http://www.lemetropolecafe.com

Inflation, Debt, Spending, Wages and the Dollar

By: Dan Norcini

In light of some recent editorials dealing with certain of the above mentioned subjects, I thought that I would throw my contribution into the kettle so as to add to the mix and provide an alternative perspective to some of the opinions being expressed by various writers to the gold community. This essay is really born out of the many emails I have been receiving asking me for my thoughts on this writer and that writer’s comments and in particular the new buzz word, “synthetic short dollar position.”

Let me begin by stating that I am going to be displaying a series of charts making some comments on each one and then attempting to tie the entire collection together in one brief summary. I will also add this disclaimer before I begin. I am not an economist nor do I pretend to be one. I approach these things from the perspective of a trader who is attempting to formulate an overall fundamental view of the U.S. economy and position myself accordingly so as to profit.

[Blockierte Grafik: http://www.lemetropolecafe.com/img2004/Norcini0428A.gif]

The first chart you are looking at above is the Personal Savings Rate as a percentage of income for the United States going back to 1995. It is fairly obvious that the savings rate in this nation is nothing short of abysmal and has been in steady decline for the nearly the last decade. It has rebounded a bit off the low point reached just after the September 11 tragedy where it dipped under 1% but is currently still beneath 2%. Keep in mind that a savings pool is necessary to fund future economic expansion and capital investment. Of course, Lord Keynes and his followers tend to view savings and savers as some sort of pestilential breed of parasite and would no doubt be pleased with this chart but then again Keynes and his proselytes forfeited all credibility long ago.

[Blockierte Grafik: http://www.lemetropolecafe.com/img2004/Norcini0428B.gif]

This above chart contains the actual CPI number from 1995 to the present. It takes only a quick glance to realize that the idea that the nonsense the Fed has been spoon feeding the public about deflation has been a convenient excuse to continue to prime the money pump. Additionally, if anyone actually believes that the CPI is an accurate reflection of true costs of goods and services in this nation I have some fairy dust for sale that can take him to never-never land where he can fly along with Peter Pan. Thanks to the wonders of hedonic indexing and the constant juggling and re-weighting of the various components that make up the index, the infernal index is basically useless for real world experience. Still, it is the only thing we really have to work with and thus it is presented as an object illustration of the inexorable rise in prices that the American consumer is faced with today.

[Blockierte Grafik: http://www.lemetropolecafe.com/img2004/Norcini0428C.gif]

Next we come to the Personal Consumption Expenditure data. This illustrates what is referred to as consumer spending and is an excellent indicator as to what the general public is doing with its money. Notice the steady rise with barely a hitch over the last decade. There was a brief, sharp dip after September 11, 2001 as can be seen on the chart but other than that the line basically heads straight up with an occasional steady reading with no fall-off to speak of anywhere. No doubt part of this spending is due to population growth as well as overall employment growth over the years plotted and that is to be expected. The point is that spending continues unabated and thus far shows no sign of letting up.

[Blockierte Grafik: http://www.lemetropolecafe.com/img2004/Norcini0428D.gif]

Now we come to the Retail and Food Service Sales data. Again, this is another gauge of consumer spending and is used to judge the general mood of the public. Notice the dip after September 2001 when the American public pulled in its reins for a season. Still, it appears that Americans continue to have a healthy appetite for dining out and loading their shopping carts with goodies galore.

There have been some comments made by some that the Retail Sales figures are not all that strong when one considers that the numbers reported are not adjusted for inflation and thus simply reflect the rising costs of goods and services. The thought is that once adjusted for inflation, the sales number is actually disappointing. That raises a legitimate point and is worth examining in a bit more detail so the following chart is the same data when adjusted for inflation relying on the data used to compile the CPI index that we have seen in the former charts.

[Blockierte Grafik: http://www.lemetropolecafe.com/img2004/Norcini0428E.gif]

As you can see, even the inflation adjusted numbers still show a strong uptrend. The main difference stands out in the year 2000 when the inflation adjusted figures were trending flat to down while the unadjusted raw data was still heading up. As a matter of fact for the entire year 2000 and most of 2001, REAL retail sales were stagnant - the increase in those sales as reflected on the unadjusted chart during that time frame were related solely to price increases as reflected by the CPI. Last year however, REAL retail sales actually began an ascent that continues to the present. As a matter of fact, the rise is most impressive- consumers are indeed spending money. The question I personally have when viewed in light of the charts to follow is “where are they getting the money to spend?”

These next two charts reveal a great deal about the current state of our economic recovery when combined with the data that has preceded them to this point. Both charts are from the Bureau of Labor Statistics data and deal with Average Weekly Earnings. I took the data back a decade just for comparison’s sake.

[Blockierte Grafik: http://www.lemetropolecafe.com/img2004/Norcini0428F.gif]

Notice that the average weekly earnings figure has shown a nice, slow but steady rise over the last ten years. Back in 1994, the average worker’s earnings in one week were right around $390. For each year thereafter wages have continued to rise bringing us to 2004 where the average for this year will come in somewhere near $522 (I extrapolated this figure from the first three month’s data released thus far this year). Now, if this were all we had to go on, one could make the assumption that good ol’ John Doe has seen his income increase every year for the last decade and is in terrific shape to feed any future economic expansion with continued spending on more goodies and services. However, that assumption is fatally flawed. Just as we wanted to index the Retail and Food Service Sales to inflation to get a true reading of where consumer spending is at, so we ought to index these numbers to the CPI to obtain what we will refer to as Real Wages (wages adjusted for inflation). The results of this calculation are astonishing and are included in the following chart.

[Blockierte Grafik: http://www.lemetropolecafe.com/img2004/Norcini0428G.gif]

Let’s put this in a bit of perspective. From 1994 to 2004, a period of ten years, the average weekly earnings has increased $131.39 from $390.73 to $522.12 for an annual increase of $6,832.22 Adjusting that same figure for inflation using the CPI wage deflator over the same period of ten years yields an average weekly increase from an inflation adjusted $254.55 to $280.26 or a mere $25.71. That translates to a pitiful annual increase after a decades worth of labor of $1,336.92 when adjusted for inflation. To put into blunt English and strip away the flowery language – the average worker makes some $1300 more a year than he did ten years ago. And to think this is the productivity miracle that Greenspan never tires of praising. The increase in property taxes alone due to inflated real estate appraisals by local governments is enough to eat that up and more. Is it any wonder that consumers are falling further and further behind and consequently being forced to go deeper and deeper into debt to maintain their current lifestyles?

The last chart is included as a further confirmation that no serious concerted effort is being made by consumers to reduce their overall levels of indebtedness.

[Blockierte Grafik: http://www.lemetropolecafe.com/img2004/Norcini0428H.gif]

The financial obligations debt ratio is the ratio of household debt payments to disposable income and includes mortgage payments, loans, car lease payments, credit card payments, homeowner’s insurance, and property tax payments etc. as a percentage of disposable income. Note carefully that this is not the actual amount of total indebtedness as a percentage of disposable income but rather the PAYMENTS ON THAT DEBT as a percentage of disposable income. The data subset also assumes the MINIMUM payment permitted by the creditors in regards to the outstanding consumer debt and loans. Unfortunately I have vainly attempted to locate more current data that is inclusive of this year but the data stops in July 2003. Still it is helpful as to determining a change in trend even if it is incomplete at this point.

Notice that as the economy went into recession back during the last two years of the first President Bush’s term, consumers retrenched and began scaling back and made an effort to reduce their overall level of indebtedness. The low point was reached just as the economy was coming out of recession when Clinton took office in early 1993. From that point forward, it has trended higher with occasional periods of mostly insignificant decline. It appears to have peaked in later 2001 or early 2002 and has tailed down somewhat from there although it was still near 18.5% in the summer of 2003, a good 2.5% higher than the trough in late 1992. My explanation for this slight decrease evidenced on the charts is the massive wave of mortgage refinancing that has taken place as a result of the Fed’s reduction in interest rates to 45+ year lows. Consumers have not paid down outstanding debt – they have simply rolled credit card payments, outstanding loans, student loans, etc., into home mortgage loans at ultra low rates and reduced their monthly payments commensurately. The total amount of principal is still the same – just the interest payments have been reduced and subsequently the monthly payments and that is what the chart is reflecting.

Dan Norcini

April 27, 2004

Dan is a professional off-the-floor commodity trader residing in Texas and can be reached at dnorcini@earthlink.net with comments.

Fiat money

Aus Wikipedia, der freien Enzyklopädie

Fiat money, auch Kreditgeld genannt, ist Geld, dessen Deckung entweder nicht vollständig oder aber tautologisch ist.

Nicht vollständig ist die Deckung dann, wenn man bei der Rückgabe des Geldes Dinge zurück bekommt, die real weniger wert sind als der nominale Wert des Geldes.

Tautologisch ist die Deckung dann, wenn man bei der Rückgabe des Geldes keine nützlichen Güter, sondern lediglich Forderungen zurück bekommt, die eben wieder auf fiat money lauten.

Beispiel:

Gibt man 1000 € an die Europäische Zentralbank zurück, so erhält man nicht einen Schrank oder ein Fahrrad, sondern man erhält ein Zahlungsversprechen irgendeines Schuldners, etwa 1000 € zu einem späteren Zeitpunkt zu zahlen. Wird dieses Zahlungsversprechen eingelöst, so erhält man wieder 1000 €. Man ist also wieder da, wo man vorher war.

Die Bezeichnung fiat money ist abgeleitet aus dem lateinischen fiat lux (Es werde Licht), denn solches Geld kann einfach nach Bedarf geschaffen werden (Es werde Geld), und der Erschaffer (in der Regel die Zentralbank) muss nicht befürchten, je dafür gerade zu stehen.

Bei tautologischer Deckung kann es den Zentralbanken egal sein, wieviel ihr Geld eigentlich wert ist. Das liegt daran, dass z.B. die EZB bei Einlösung von Euro-Scheinen nur Euro-Forderungen zurückgeben muss. Lautet beides (Passiva und Aktiva) auf Euro, so ist der Marktwert des Euro egal, denn die EZB kann die Einlösung in jedem Fall vollziehen, da sie ja keine realen Werte zurückgeben muss.

Praktisch alle Währungen sind heutzutage tautologisch gedeckt und damit fiat money.

****
Eine sehr empfehlenswerte, und noch bedeutend umfassendere Beschreibung von "Fiat Money", in englischer Sprache, gibt es hier zu lesen:

http://en.wikipedia.org/wiki/Fiat_money

Gruss

ThaiGuru