Gold will recover stronger
and faster than ever
By John Embry
Investor's Digest of Canada
The six-week period following the Bear Stearns bailout in mid-March offered a graphic example of why it is so difficult for all but the most sophisticated investors to make money in the gold market.
For no fundamental reason, aside from the essentially irrational hope that the financial system was somehow miraculously going to be rescued by the central banks, gold dropped US$125 per ounce in just two weeks. It reached a closing low of US$887.50 on April 1, which not coincidentally marked a month end, before recovering to US$946 in the succeeding 12 trading days. It was then subjected to another vicious assault going into a key option expiry and yet another month end, falling nearly US$100 to close at US$853 on May 1.
While all this turmoil was occurring in the gold market, the oil price actually rose by US$8 per barrel, and the U.S. dollar firmed slightly with the euro falling by roughly one per cent. The lack of significant price movement in what are widely recognized as key metrics in influencing the gold price, at a time when the gold price was getting crushed, I believe once again demonstrates the central banks' exceedingly heavy hand in the process.
In my opinion, anyone who isn't prepared to acknowledge this increasingly apparent reality of market manipulation isn't qualified to comment on the gold price.
This most recent obvious takedown of the gold price mirrored the one that occurred two years ago when gold fell from US$725 per ounce in mid-May to US$567 barely a month later. However, the current episode is infinitely more egregious because the speculative long positions on Comex were much less extreme than in 2006.
More importantly, the financial and economic backdrop has deteriorated alarmingly in the interim. Two years ago, structured products, subprime loans, SIVs and other financial exotica were not viewed as catastrophic, inflation was barely an issue and the economy wasn't headed for a very difficult recession.
Ironically, it is for those very reasons that the central banks and their cronies orchestrated this violent takedown. It represents yet another attempt to protect a purely fiat monetary system, which is giving every indication of entering its terminal phase.
At times like this, it is important to recall the historic words of the French philosopher Voltaire, who over 200 years ago observed that "Paper money always seeks its intrinsic value-zero." The central banks realize that gold can't be viewed as a much more attractive alternative to paper money, so they go to great lengths to dissuade individuals from owning it.
Vicious, counterintuitive price moves, aided and abetted by nonsensical mainstream commentary that purports to explain the unexplainable is a key part of the drill. Unfortunately, judging from the public's reaction, it appears to be working. As the gold price was in the final throes of its recent swoon, I was approached in the gym where I work out by a seasoned investment professional who was in a state of extreme agitation. He informed me that he wanted to sell all of his and his clients' gold exposure. If professionals such as this individual are spooked to that extent by bogus price action, what chance do less experienced investors stand?
In many instances, they have just recognized and appreciated the compelling merits of gold, only to get blown out of their positions by another, unwarranted collapse in the price. This same condition existed in the 1970s. Due to the extreme volatility, surprisingly few people made any money in what turned out to be a historic gold bull market.
However, it is essential that people remember that following the gold-price mugging in 2006, the price reversed and rose inexorably for the following 21 months, reaching a closing high of US$1,011 in mid-March of this year. That price represented a stunning gain of 78 per cent from the June 2006 low and was achieved in a time of escalating financial distress, which saw investors suffer crippling losses in other areas of their portfolios.
In the current instance, I expect a repeat performance with the only differences being that the price may appreciate even more in a shorter period of time, an outcome that would recognize both gold's current undervaluation and its remarkably positive fundamentals.
On an altogether different subject, I have noted recently that several of the luminaries who I strongly believe were very instrumental in getting us into the present financial mess are now attempting to climb to higher ground and distance themselves from the unfolding disaster.
Robert Rubin, Treasury Secretary in the Clinton administration and architect of the U.S. "Strong Dollar Policy," basically the gold-suppression scheme accompanied by considerable rhetoric, appears to be trying to avoid blame for some of the problems now affecting Citigroup. He left government service in the late '90s and landed a role as elder statesman, the so-called "Wise Man" of Citigroup.
His attempt to deny accountability was challenged in a fascinating article in a recent edition of the New York Sunday Times where an unnamed Citigroup banker compared him to the Wizard of Oz and stated that he was the individual pulling all the strings at the organization. It was further suggested in the article that Rubin pushed for the bank to increase its activities in high-growth areas like structured credit and encouraged the CEO to raise the bank's tolerance for risk. Thus, I find his effort's to deny responsibility for Citigroup's problems to be somewhat disingenuous. However, I believe that his image problem on this front may be dwarfed by how history will judge his "Strong Dollar Policy" and the damage it ultimately inflicted on the U.S. economy.
Nevertheless, his efforts to protect his reputation pale beside those of former Fed chairman Alan Greenspan, who has been going to great lengths to defend his legacy.
To his many admirers, Greenspan was known as "the Maestro," a sobriquet bestowed on him by the noted author Bob Woodward before the true effects of his monetary regime became evident. Yet to a prescient few, he was always seen for what he really was: The Great Inflationist.
When one closely examines his record, it becomes readily apparent that all he ever did was print as much money as was necessary to deal with whatever crisis had been created by his previous profligacy. These activities are revealed in a new book by Bill Fleckenstein and Frederick Sheehan entitled Greenspan's Bubble's: The Age of Ignorance at the Federal Reserve.
He always justified his position by pointing out how well conventional CPI inflation was contained and how robust productivity was. In reality, the sad truth was that reported inflation appears to have been intentionally understated by hedonic accounting and substitution, to name but two methods. Accordingly, as inflation was being understated, growth de facto was being overstated and that overstatement was a very significant contributor to the so-called productivity miracle.
However, one of the most disingenuous things he did was spin the whole notion of a global savings glut. Doug Noland of the Prudent Bear, a man who had done truly remarkable work analyzing the ins and outs of this credit cycle, summed this up best recently when he wrote that there never was a Global Savings Glut, "but instead a Global Liquidity Glut that was foremost a product of the massive Credit Bubble-induced dollar outflows."
These dollars accumulated in foreign central banks and were then recycled into the U.S. Noland notes this massive dollar recycling exerted significant pressure on U.S. long-term interest rates, and "proved a major impetus for overheated domestic credit systems the world over - creating even greater liquidity excess in the process."
This was a phenomenon that, in my opinion, was spawned largely by Greenspan's very loose monetary policy, which permitted the U.S. to live well beyond its means. To be fair, it couldn't have happened unless the other countries were prepared to accept the dollars in ever-increasing amounts, but it needn't have become the destabilizing factor it is today, if Greenspan had recognized what was happening and taken appropriate action.
Be that as it may, I believe Greenspan has been totally exposed by a series of public utterances during his extended tenure as the head U.S. monetary honcho. In 1998, he vehemently opposed the regulation of over-the-counter derivatives, the unchecked proliferation of which I believe now threatens the entire world financial system.
A the same time, he inadvertently acknowledged the gold suppression scheme when he told a Congressional hearing: "Nor can private counterparties restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise."
However, Greenspan really outdid himself on the housing front when he advised the unsuspecting public to aggressively shift into adjustable-rate mortgages just as he was preparing to introduce a series of interest-rate hikes. He followed this up by extolling subprime lending in 2005, stating:
"Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending..."
For an individual who was in a position to know what was really going on, his statements and actions seem almost surreal. His monetary policy has now left his successor, Ben Bernanke, in a very compromised position, and it appears his only course of action is unlimited money printing; essentially whatever amount it takes to save the system.
Therefore, I believe there is rich irony in the fact that Alan Greenspan, a former champion of gold when he was an Ayn Rand acolyte in the 1960s, has virtually ensured that gold will finally be the asset of choice as we move forward. The very strength that Greenspan saw in gold in 1966, when he wrote that it "protects savings from confiscation through inflation," will be what soon drives investors worldwide into the yellow metal.
Editor's Note: John Embry is chief investment strategist at Sprott Asset Management. Views expressed are those solely of the author and should not be considered an indication of trading intent of any investment funds managed by Sprott Asset Management Inc.
Mr. Embry is a regular contributor to INVESTOR'S DIGEST of Canada, 133 Richmond St. W., Toronto, Ontario M5H 3M8, 1 year, 24 issues, $137.
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