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Gold Market Manipulation & that Giant Sucking Sound

By Jay Taylor        
Oct 29, 2002


During the very first days after becoming U.S. Treasury Secretary, Paul O'Neill candidly and honestly said he thought the U.S. dollar was too strong. Judging by the response of Wall Street, CNBC and the Financial Times, you would have thought he committed high treason. Yet, why would O'Neill not think the dollar was too strong? He should have known because he watched competitive pressures build against his aluminum company, not because of superior competition, but simply because his company was being taxed in the form of a stronger dollar. With the dollar growing stronger, the price foreign producers received for the sale of their production into the U.S. was rising while the price Mr. O'Neill received for his aluminum he sold overseas was declining. In other words, like American producers since the Clinton Strong dollar policy was implemented in the mid 1990's, Americans are being priced out of their own markets as well as foreign markets. Speaking as an American rather than a globalist, O'Neill knew that the dollar was too expensive.

But the powerful interests who run America, the head guys at the major banking institutions on Wall Street, do not care much about America. They are globalists who will just as soon trade with the enemy if it means gaining global wealth, power and influence. These are the same bankers who, even with Roosevelt's knowledge, traded with Hitler during World War II. (For more information on this issue, read "Trading with the Enemy" by Charles Higham). So when O'Neill spoke honestly as an American, Wall Street interests began to question whether he was up to the job of being Treasury Secretary. The "Financial Times" talked about how the new Administration needed someone who understood Wall Street rather than Main Street. Well from that pressure point on, Mr. O'Neill learned very quickly to spout Wall Street's line, namely the falsehood that America needs a strong dollar. Wall Street might want a strong dollar to keep financial markets from falling out of bed. But an overvalued dollar is no good for anyone in the long run, not even Wall Street. Having sold out, Wall Street allowed him to stay, at least for the time being.

Why does Wall Street want a strong dollar, even when it means American industry is disappearing from our shores? Because without it, the street would not have been able to suck in global capital into what now amounts to something like $1.5 billion per day. And without the strong dollar, which was engineered by the Rubin/Summers team, the stock market orgy which allowed Clinton to avoid removal from office and claim credit for the boom, would not have been possible. Armed with the knowledge of "Gibson's Paradox (see, the Clinton Administration and the Federal Reserve knew that if it were to succeed with their collectivist interventionist policies of bailing out Mexico, Long Term Capital Management, Russia, Asia, etc. it would have to "cap" the gold price. And so it did. Having been taught a lesson about the strong dollar during the first days of the Bush Administration, all indications are that Treasury Secretary O'Neill has pretty well picked up were the Rubin/Summers team left off so far as gold manipulation is concerned.

Gold Rigging Leads to a Troubled "US Centric" World Economy"

I greatly admire Stephen Roach, Chief Economist at Morgan Stanley because he seems to have the courage to speak the truth even when the truth is not always politically correct on Wall Street. Thank God there still remains one or two objectivist thinkers on Wall Street! Roach has labeled the global economy as "US Centric." By that he means that in order for the global economy to retain even a faint pulse, the U.S. consumer must continue to spend stimulate the demand side of the global economy by continuing to spend year after year, more than he earns. In other words, Americans must continue to dig themselves further and further into debt, while our capital markets continue to suck in $1.5 billion per day to make up for America's daily shortfall of savings.

Roach has been saying ever more frequently of late that for the global economy to turn to some semblance of supply and demand balance, the dollar must become weaker. That would help reduce demand and increases savings in the U.S. and reduce savings and increase demand in other parts of the world. Roach says that the dollar must decline vis--vis the Euro and the Yen by 15% and 20% if it is to be restored to a level that makes sense on the basis of trade.

This past week, Dr. Roach finally began to talk about an issue my friend Dr. John Whitney, CEO of Itronics has been so concerned about for at least a years and that is the artificially low level of the Chinese Renminbi vis--vis the dollar. Dr. Whitney has noticed that bulk commodities are being shipped half way around the world, through two canals before being imported into the U.S. Barite is one commodity the Chinese are selling into America and frankly the only reason they can compete with American producers of barite is because of the overvalued U.S. dollar or if you will, the undervalued Chinese currency. This is obviously true because: a) Production of barite is capital intensive in China just as it is here, so there are not low cost labor advantages and b) transportation costs to ship a heavy commodity around the world is extremely high. There fore the only plausible explanation for the ability of china to sell these kinds of products into the U.s. is the overvalued dollar.

That Giant Sucking Sound is from China

Ross Perrot was concerned about the U.S. losing its productive industry to Mexico when he debated George Bush Sr. on the issue of NAFTA. He warned that we would hear a giant sucking sound of industry being suctioned from the U.S. to Mexico as unfair advantages would lead to high levels of unemployment and an exodus of high paying jobs from America. There is no doubt that higher paying jobs have been fleeing the U.S. even during (or perhaps especially during) the boom days of the 1990's. But increasingly that ugly sound is now coming from China.

From a primitive economy a few years ago, China has emerged as the fourth largest industrial base in the world, behind the U.S., Japan and Germany. Moreover, it is now producing higher value products, which means it is able to import more wealth. Growth is furious, especially into the U.S. as Americans continue to borrow and spend like a prisoner eating his last meal before his date with the electric chair. According to a Wall Street Journal report last week, the U.S. imported $1.2 billion of Chinese electronic products in July and that imports of these products into the U.S. is up a whopping 47% over last year. Indeed, the Wall Street Journal article also spoke of the huge amount of capital that is pouring into China, to make that country more efficient. Bear in mind that with the dollar overvalued, U.S. not only are Chinese imports cheap, which cause Americans to buy them, but investing in China is also very low cost for American corporations.

With global capital pouring into China, not only Stephen Roach, but a growing number of economists around the world are complaining about China exporting deflation to the world. Dr. Roach mentioned how the Morgan Stanley aluminum company analysts were downgrading his profit forecasts for American companies because of the rising pricing pressure on American firms thanks to cheap Chinese exports, caused in large part by an undervalued Chinese currency. Huge waves of new supplies, coupled with excessive amounts of American debt which is now beginning to savage the demand side of our economy is, without any doubt in my mind, leading more and more toward Ian Gordon's Kondratieff Winter becoming a reality. (Read our 1999 interview with Ian Gordon at

Dr. Roach quite rightly says that to restore equilibrium to the global economy, the dollar must decline, whether Wall Street likes it or not. He says that on a trade weighted basis, the dollar needs to decline by 15% to 20% vis--vis the Yen and Euro. Then he says that unless the dollar is also devalued vis--vis the Chinese currency, the Euro and the Yen will have to appreciate by more than 15% to 20% vis--vis the dollar to make up for the overvalued Chinese currency. But that certainly won't be a fair solution for Europe and it won't solve a problem of trade imbalance between the U.S. and China.

What is really needed is a return to a fixed rate regime based on a politically neutral currency like gold. Will that happen? Not as long as the U.S. remains in the drivers seat because the U.S. in fact is now gold poor. Even if you believe the U.S. has all the gold it claims to have in its vaults (it most likely does not because it claims gold leased out is still in its vaults) the U.S. does not even have enough gold in its vaults to provide a 1% backing of its money supply (M-3). By contrast, the Euro has about 15% backing plus most of the member countries themselves have considerable hoards of gold.

Not only American consumers, but America as a whole has lived beyond its means for a long time. We have managed to con foreigners into sending their savings to America to finance consumption today and thus ensure poverty tomorrow. We are in fact consuming our seed capital and thus underwriting poverty for our children and grandchildren. But more discouraging than anything is that with the exception of Stephen Roach, Wall Street is doing all it can to dumb the American public down by ignoring one of the most simple law taught in economics 101, namely that if we consume everything today, our standard of living will suffer tomorrow. Eat drink and be merry! For tomorrow you will die. Perhaps subconsciously, America knows it is doomed and thus is simply denying reality.

Death and destruction may perhaps be an overstatement. Of course we gold bugs as well as anyone else hope it is. Yet, any sound reading of history says you should always invest when assets are undervalued and sell when they are overvalued. Gold is extremely cheap vis--vis stocks which, as discussed below remain hugely overvalued, even after trillions of U.S. dollars have been shaved off of paper profits.

The S&P 500 Remains as Screaming Sell!

The above chart is a sample of the excellent work provided at For just $10/month, you can get a huge number of charts on equities, bonds, gold and silver and gold and silver shares, all the major indexes, and a very large number of stocks as well. Our focus is always more on fundamental analysis than technical analysis, but if you want to keep an eye on the technicals, decisionpoint is as good and as reasonably priced as they come.

We have been harping about an overvalued S&P 500 at least as early as 1998, but the chart above provides you with a picture of just how ridiculously expensive stocks still are. Historically, a PE ratio of 10 (green line) has represented an undervalued market, while stocks at 20 times (red line) represented an overvalued market. The black line shows the PE ratio for stocks today. Notice how it was 1966 - the year of "irrational exuberance" when the black line crossed above the PE ratio of 20 times. Indeed, Mr. Greenspans in his more honest days, did make some sense. He quite correctly diagnosed our national market psychic as being "irrationally exuberant." Trouble is, stock prices are even more irrational now than when Mr. Greenspan made his infamous comment.

The editor of is Carl Swenlin, who also provides commentary every week about stock valuations. He told us at the end of this week the GAAP PE ratio was still a very high 33.50 times. GAAP, which stands for Generally Acceptable Accounting Principles, is the measure used historically to value stocks. So when you want to look at the market from an historical valuation, it makes sense to keep using GAAP. So we see the current PE ratio of 33.50 times compares to a normal upper limit of 20 times on the S&P 500.

The inverse of the PE ratio is the Earnings Yield, which Michael B. O'Higgins uses as a yardstick to determine whether stocks or bonds are the better buy. At the end of this past week, the S&P Earnings Yield was 2.99% which compares to a 10 Year Treasury yield at the close of this week of 4.09% and AAA Corporates which are paying somewhere around 6.30%. Stocks are indeed much more expensive than 10 Year U.S. Treasury instruments even more so vis--vis AAA Corporate debt, although the number of companies qualifying as triple A credits is quickly diminishing as we continue to slide toward a deflationary depression.

A Newer more Honest S&P Valuation Method

High as PE ratios are, they may actually be higher. Why so? To its credit, S&P has come out with a new earnings criteria that takes into account the "creative accounting" of the late 1990's that jacked up earnings by applying liberal accounting standards to the treatment of pension fund accounting and the omission of options as an expense. If a more stringent, and historically consistent means of accounting for those items are factored in, the PE ratio for the S&P 500 would be an astounding 41.59 times, equal to an earnings yield of 2.4%. This is about as high as the S&P 500 has ever been! And this is taking place after trillions of dollars of investor wealth has gone to "money heaven."

Again, if we could see a reason for optimism regarding the growth of earnings, there may be some reason for hope that over the next several years, if stocks did not rise, but by merely treading water at current levels, rising earnings may bring PE ratios back into line with historical ranges between 10 and 20 times. Yet for reasons outlined above, not only do we think earnings are not going to grow, but we think they are likely to continue declining substantially into the future. Because we take this view, we do not think Robert Prechter's unfortunate vision of a Dow below 1,000 is not at all out of the question. Incidentally Ian Gordon's target decline is pretty much in the same range as that proposed by Prechter.



The above report was included as part of Jay Taylor's extensive weekly "Hotline Transcript" report published on October 16, 2002. These weekly reports are sent to the paid subscribers of J Taylor's Gold & Technology Stocks every Saturday evening at 8:00 PM., EST. Visit for additional information.