WHY GOLD-SHARES ARE LIMPING
The name of the game has
While during the nineties gold-control was designed
to support the dollar, since 2003 it has actually allowed
the dollar to fall faster and further - but without doing
damage to the number-one symbol of "Amerikan" economic
power: the mighty Dow.
In fact, the Dow was the main beneficiary of
this recent dollar-drop, as you can see here:
(Focus mainly on the last two months of action
here. The red boxes refer to points made in an earlier essay.)
The interesting part here is that, since mid-2003,
whenever the dollar even stabilized the Dow has resumed a
downward moevement. The last two months should convince anyone
that there is a definite negative correlation in effect.
At first blush, this makes no sense at all.
How could a rapidly deteriorating dollar be
good for US stocks? A falling dollar makes US assets less
attractive to foreigners because repatriated profits are worth
less when changed to the home currency. It also makes foreign
goods more expensive at home, so Americans have less money
left over to invest in stocks, one would think, right?
Welcome to the brave new world of terminal fiat-decay.
In this "new economy" nothing makes
sense anymore. Formerly predictable relationships between
economic parameters are turned on their head:
(1) Gold and
the Dow are moving up and down in sync.
(2) During the most
serious recent phase of dollar-decay from September to December
2004, US treasuries have remained largely stable.
bullion outpaces the mining shares.
(4) During the recent
2001 recession and subsequent flip-flop recovery, US consumers
have loaded up on debt like never before - instead of saving
like their forebears did.
(5) Official CPI numbers are slightly
up but still benign as could be, but the Fed is raising rates
every chance it gets - and that even though the official stance
on the dollar is down and rising rates tend to support the
What gives? And now, gold control is supposed
to enable the dollar to fall rather than support it, as one
would normally expect??
How does that work?
It works because gold is no longer the real
threat, and that's because an artificially high dollar is
no longer desirable. The US needs a drastically lower dollar
to (hopefully) start getting the mounting current account
deficit to reverse course.
It also needs a low greenback because the euro
needs to be torpedoed if the dollar-reserve system is to have
any chance at survival. The US regime further needs its currency
to fall to attract foreign manufacturing to the US to make
up for the jobs lost to China - a brand new trend that most
people are not even aware of. And the recently inverse dollar-Dow
relationship is now amply documented by the charts above.
What the US cannot tolerate, however, is a powerful
rising trend in gold shares.
Gold shares are the only thing that can attract
mainstream US investors away from the mainstream stocks and
so lead to a gold blow-off and a Dow collapse. Americans don't
invest much in bullion. Having been ‘paper-trained'
for several generations now, they consider it "too cumbersome."
You can't sell bullion in your basement by calling your broker
or making a few clicks online - but with gold shares, you
can do it.
The New Face of Gold Manipulation?
Apparently the bullion banks that are so short
gold have either cleaned up their act somehow or have otherwise
insulated themselves against rising bullion prices. As previously
observed, all the several alleged "Maginot Lines"
were crossed without any apparent hickups in the financial
system. (Or maybe the gold camp's estimate of the bullion
banks' resources were wrong, and the real line is $500 gold?
The point is, rising gold no longer appears
to be the number one enemy. As long as the Dow is rising along
with gold, a rising POG now seems tolerable to the system.
If you were in the "gold-price management"
business and wanted to keep US investors from getting too
hyped up about gold, what would you do? Would you keep shorting
gold when everybody and their brother is already on to your
game, or would you shift it to the shares, where nobody expects
you to be active - yet?
Would you do it in the price of bullion, into
which you know few investors are actually putting their money
- or would you do it in the market segment they all are piling
into when gold starts looking good?
That's one way of explaining the lagging share
prices. So far, it's pure speculation and extrapolation from
a few know factors. Maybe someone with a stronger motive to
prove this will look into it and find the evidence, but the
point is that bullion is the clear winner in this new era.
What is Driving Bullion Prices?
Another way to explain this consists of looking
into who and what is pushing the price of "physical",
and whether those factors lie sufficiently within the US government/banking
sector's control to do anything about them. It's more than
"just" the falling dollar. The dollar has fallen
about 40% since its early 2002 peak - but gold has risen about
70% since its mid-2001 bottom!
Here is what may explain bullion's rise:
1. Muslims, Chinese, Indians, and Russians have no intention
of enriching companies of countries like South Africa, Australia,
Canada - and especially the US - by investing in their mining
shares. They understand the value of the metal itself (maybe
with the exception of private Russian investors), so that's
what they go for. As far as these countries and areas' official
policies go, they don't mind destabilizing the dollar at all,
as along as it doesn't hurt them too much. Pumping money into
US company stocks - and therefore into the US economy - isn't
these groups' top priority, really. (When it comes to US productive
assets, however, China doesn't seem to mind. Gives it some
nice leverage for the future, rather than potential stock-loss
2. In the long term, gold miners, though they
profit from higher prices in their own currencies, still have
to operate in their own economies. As far as US miners go,
only those holding metal instead of cash as their assets will
be able to post serious profits when inflation goes from tame
to hyper as the world-wide dollar- drubbing continues.
3. India may be setting itself up to becoming
the major bullion player in the world. That only makes sense
- because it already is. India's official gold reserves are
far below those of the major financial powers of the world,
but look at how much the population is estimated to own according
to India's Commerce and Industry Minister, Khamal Nath: Currently
9,000 tons, and soon expected to become 15,000 tons. That's
about what GATA and many others estimate al of the world's
central banks to have left in terms of actual, unencumbered
gold reserves. (Which country do you think is better prepared
to weather the coming storm: the US - or India?)
4. Chinese and Japanese official gold buying
is gaining momentum. At the same time China intends to align
its now spot-oriented domestic trading to the world wide futures
trading system, intending to become a major player in the
international gold trading arena. Yet, despite this official
trend toward derivatives and hedging practices, individual
Chinese savers are expected and officially encouraged by their
government to buy and hold physical to hedge against financial
and currency risks. More on that in the next section.
None of these factors lie within the sphere of US legislative
or Fed control.
It is by now almost unanimously accepted that
China will succeed the US in being hte world's economic locomotive
at some point in time. It is only reasonable to co0nclude
that China is also slated to dominate the world's future financial
order, just as the US has since Bretton-Woods.
In the light of that, the following takes on
a humongous significance for the future of gold and its role
in any future world monetary system: Zhou Xiaochuan, the governor
of the Peoples Bank of China, stated his vision of how gold
will figure into China's future monetary policy on September
6, 2004 at the London Bullion Market Association's Annual
Precious Metals Conference in Shanghai. In his statement,
he observed that:
"From the micro-economic perspective,
allowing people to hold assets in gold can improve social
welfare benefitting both the country and its people. Also,
the dual characters of being an ordinary commodity and a currency
allow gold to well hedge against risks. So it is practical
to develop individual gold trading business."
One can only hope that "Amerikan" monetary officials
will some day dispense similarly profound and truthful advice
to their own subjects.
By officially acknowledging that the Chinese
regime is encouraging its people to save gold bullion to hedge
against currency risks, he points to the nature of the emerging
world financial order (of which the creation of the euro was
only the first step):
Fiat will be earned and spent
- while gold will be saved.
Even the world's central banks will eventually join this trend,
because the dollar as a reserve-asset is now largely history
- and the euro is not really set up to take over its function
in that regard. The euro's cornerstone is "price-stability,
i.e., limited printing! A currency so limited cannot assume
the dollar's "print on demand" character that is
so necessary for fulfilling its sole-reserve currency objective
Any current movements from dollar into euro-reserves are temporary.
The world's future reserve asset is gold, make no mistake
(Does this mean that free markets will return
and gold investors can breathe easier? Unfortunately, no.
Markets can only really be free if they have a true free-market
currency to operate on. It is still necessary to establish
a private, parallel bullion currency to achieve that.)
So, does it make more sense to bet on gold shares
to start bucking this trend again - or is it better to jump
on the bandwagon and do as the Chinese do?
Personally, I'd go with the latter.
Does this mean that gold shares are "finished"?
Not by any means. But it pays to be discriminating.
There are only a handful of shares that managed to follow
bullion in finishing 2004 higher than they started, and there
are only one or two gold mutual funds that repeated that feat.
More details on that, plus forecasts on where gold, the dollar,
rates, oil, and the yuan are headed are available to subscribers
of the EURO VS DOLLAR CURRENCY WAR
vs DOLLAR CURRENCY WAR MONITOR
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