December 21, 1998 - We live in crazy times. Who would have thought that Sadam Hussein would outlast another US president? Or that Bill Clinton, a master of deceit who could be investigated for any number of allegations of dishonesty or worse, would be brought down by the blue dress of a 22-year old White House intern? Or that European politicians would be foolish enough to try to launch the Euro, believing their own theories about money as well as their own hollow rhetoric that ignores the fragility of their Union of disparate cultures and nationalities? Or who'd believe that programmers would be so short-sighted to create the Y2K problem, or that the businessmen who hired them would be so short-term oriented they allowed the programmers to create the problem? Or perhaps the craziest notion of all, who would have believed only ten years ago, perhaps even a few years ago, that Gold today would be trading under $300 per ounce?
Many of these notions not too long ago would be laughable by most people, but here we are nonetheless. Many years ago an old and respected Wall Street pro told me that he had been around long enough to know better than to laugh at anything because he had learned from his many years of experience that any notion, no matter how strange it may have seemed to him at the time he first heard it, may actually in the end be proven true. In other words, anything can happen. Fortunately, I took his words to heart, and therefore have remained open minded about everything, and resisted any temptation to laugh at someone's notion, no matter how absurd or loopy it may appear to be. Truth sometimes really is stranger than fiction, but even this truism does not make the crazy state of today's Gold market any easier to accept.
A number of observers have characterized today's market as two-tiered, but that moniker is more a description than an explanation. On one tier, the physical demand for Gold remains exceptionally strong, as evidenced by the demand for fabricated products ranging from high-karat jewelry in Asia to bullion coins in the United States.
On the other tier, the price of Gold refuses to budge in the face of this demand, even though no obvious sources of supply have emerged. No new central bank dishoarding has been reported. Nor have we seen any major forward sales from the mining companies. To the contrary - there have been more reports of buybacks by the mining companies, rather than new forward sales. These companies seem to sense, as many of us do, that the Gold price is too low, that the price is exceptionally cheap. So what is keeping the Gold price from climbing upward?
I am leaning more and more to the view that the central banks are actively keeping a lid on the Gold price. This opinion should not come as a big surprise to the readers of these letters. I've been focusing on this point increasingly in recent months, and wrote a lot about it in October in Letter #233, Grist for the Conspiracy Theorists.
I don't have any hard evidence to support this conclusion.
But there is a growing mountain of anecdotal evidence that someone out there wants to keep the Gold price from rising, and central banks are the likely culprit. Why? For many reasons.
First, a rising Gold price is a vote of no confidence in their stewardship of the currencies under their responsibility and control. Central bankers don't like being told that they are doing a lousy job, so it seems natural that they may want to kill the messenger - a rising Gold price. Then again, they want to kill the messenger for another reason. Central bankers have said that Gold has been demonetized, so they will do everything in their power to prove their point. Of course, in the end, they cannot suppress the truth forever, and the Gold price must rise. But central bankers today can narrowly reason and justify to themselves that the inevitability of a rising Gold price will be the problem of their successors, not those in power today.
Central bankers also fear Gold. They know that their influence on Gold is limited and that they cannot control it.
The reality is that central bankers don't like to be told by the marketplace that markets are more powerful than them. Consequently, central bankers are tinkering constantly in some market or another, fooling with interest rates or perhaps fiddling with exchange rates. So are we to believe that central bankers are not intervening in the Gold market just because they don't talk about it? I don't think so.
If we look with logic at the world of central banking, it might be made more clear why the central banks want to keep a lid on the Gold price. The world's monetary system faces many serious problems, and these problems have already been acknowledged by most central bankers.
The Japanese banking system is insolvent, and a thundering collapse of one or more banks could happen at any moment. Untold derivatives written on a seemingly endless array of esoteric risks threaten to bring down one or more banks over-exposed to these risky contracts. Central banks around the world are pumping up the quantity of currency in circulation, making real the possibility of much higher inflation rates. Economic activity is moribund in most of the world, putting the loans of many banks at risk. Y2K problems put many banks at the risk of losing valuable deposits. And I could go on, such is the huge number of risks today that threaten the banks and the national currencies that comprise today's monetary system.
However, regardless of the number and size of these risks, perhaps central bankers think these problems will be tolerable and controllable if at the same time they do not have to contend with a rising Gold price. After all, a rising Gold price would signal to the world that all is not well with national currencies and the system of central banking. A rising Gold price would therefore lead to a flood of bank depositors seeking the safety of Gold, which is the only money that is no one's liability.
As a result, if the Gold price could be made stable, the central bankers may be thinking, all the risks of the international monetary system may not be so apparent. A stable Gold price may lead most people to think that these serious risks threatening the international monetary system are non-existent, or at least, controllable. But I expect that the risks are more serious than most believe, and consequently, in my view it is clear that the current low Gold price is painting a false and misleading picture. The risks are real, so Gold offers exceptional value.
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