Everything Has Changed

October 4, 1999 – Inarguably no tree grows to the sky. By the same logic, all bull markets eventually come to an end. And more to the important point that I would like to make, so do bear markets eventually end. As the Gold price moves higher – with each passing day leaving the $253 low further and further behind – the odds improve that Gold’s bear market has ended.

We have known for some time that the underlying fundamental factors affecting Gold have been positive. These include: excessive monetary and credit expansion around the globe that is debasing national currencies; rising commodity prices, including a more than doubling of the crude oil price in the last nine months; a weakening Dollar, which is being driven lower by a growing trade deficit – I could go on, but I think that I’ve made my point.

These factors and the low Gold price together have made Gold exceptional value. Consequently, the amount of Gold being fabricated into bars, coins and high-karat jewelry has for years dwarfed the new supply of Gold being mined. This gap between demand and supply was filled mainly by one source – the Gold flowing from the vaults of central banks. This Gold was both dishoarded into the market by outright sales (e.g., by the Belgians, Dutch, Australians, and the British), and Gold was also put into the market in unknown quantities by the so-called practice of leasing.

Clearly, the only thing driving down the Gold price was the perception that central banks wanted a lower Gold price and were prepared to act to keep the price heading lower. Therefore, because few wanted to fight ‘city hall’, the Gold price languished. But no more. Everything has changed.

Last Sunday at the conclusion of the annual IMF meeting, 15 European central banks made history. These banks included the European Central Bank as well as countries outside of the Euro currency zone, such as Switzerland and Britain. Their joint communiqué contained only 120 words, but clearly, it was more than enough for the Gold market. In particular, there were two important points that grabbed the market’s attention:

First, the central banks began with a bombshell.“;Gold will remain an important element of global monetary reserves”;. That’s central banker-speak for saying that Gold is money

The US and IMF, which together hold more than one-third of the Gold in central banks, were not signatories to the communiqué. But it is significant that ECB President Wim Duisenberg said they were part of the discussion group that led up to the announcement.

The second part of the announcement was what really attracted the attention of the market (and particularly everyone short). “;The signatories to this agreement have agreed not to expand their gold leasings and their use of gold futures and options”; over the 5-year period of the agreement. In other words, the huge gap between the weight of Gold being fabricated and newly mined each year will no longer be met by Gold leased from central bank vaults.

The implication of this statement by the 15 European central banks is very clear. The price of Gold must rise. There is no other alternative.

The price of Gold must rise because central banks are no longer a factor in the gap between what is being fabricated and what is being mined each year. The price of Gold must rise because only a rising price will dampen today’s robust demand for Gold. The price of Gold will rise because only then will the strong hands that have been accumulating Gold at these bargain basement levels be induced to part with their Gold in exchange for some national currency.

In other words, the price of Gold must rise because only arising Gold price will dampen demand and increase supply, thetwo ingredients needed to eliminate the gap up to now being filled by Gold from the vaults of central banks. And while the price of Gold has risen, it has not risen nearly far enough. Gold is headed much higher in the weeks ahead. Probably over $400 per ounce; maybe over $500 per ounce. Possibly more. In Letter #243 I suggested that the equilibrium price was $608. Using the same method of analysis with my Fear Index, the equilibrium price today is $632. And as I asked in Letter #243, who’s to say the market won’t over-shoot on the upside?

The recent $253 price was $379 below the equilibrium level. An overshoot of the same magnitude on the upside would put Gold at $1011 per ounce. Can it happen? When it comes to markets, it is always best to remember thatanything is possible.