Parting You From Your Money

September 15, 2003 – Back in January 1993 The Economist magazine published an article entitled “Fool’s Gold”. It was so full of inaccuracies and blatant anti-gold propaganda that I felt compelled to respond, and did so in Letter #120 (“No Fool’s Gold”, published March 1, 1993). There is no need to go into details, but I noted thatThe Economist article was “filled with such vitriolic disdain for gold that one can only wonder what the author was trying to prove by writing it.” Was it to part you from your money? To keep you out of gold as it soared higher?

The Economist’s article was, needless to say, bearish, while I was bullish and positioning subscribers for a big move in gold. You may recall that gold had a spectacular rally that began in March of that year.

I was therefore wondering whether history was about to repeat when I read a September 11^th article entitled, “Rising gold price outshines its world economic influence”, which appeared in the Financial Times – the owner and publisher of The Economist. I think we can learn a lot from this article, so I have reprinted it below in italics, interjected with my comments in brackets.

Gold has traditionally been regarded as a safe haven in times of global uncertainty. [Here’s the predictable description of gold by anti-gold propagandists. Left unsaid is the reason people seek gold out in uncertain times. Namely, gold is sound money.] The approach of today’s second anniversary of the September 11 attacks on the US has triggered a rally in the gold price as fears of more terror attacks take hold. Bullion’s price closed at a seven-year high of $381.05 in London earlier this week. [Is the writer oblivious to the fact that gold has been rising since its July 1999 low, two years before 9/11? Or is he purposely disinforming us, in order to get us to subscribe to his newly concocted theory that gold goes up not because of financial and monetary uncertainty, but because of the fear of terrorism?]

Gold’s role in the world economy has been in decline over the past two decades. [It is typical for anti-gold propagandists to start in 1980 when gold reached $850. The thousands of years of prior history count for nothing in their view. Besides, gold’s role has not been in a decline for two decades. It is as important today as it was back then. The only ‘decline’ is gold’s rate of exchange to the dollar and the currency of other industrialized countries, but gold has actually been rising during this period against many currencies like the South African rand and countless South American currencies.] The gold standard was abolished as a currency peg in 1968. [It was 1971, but the important point is that even though currencies are no longer defined in terms of gold, gold remains the standard for measuring value. For example, crude oil costs no more today than it did in the 1950’s, when measured in terms of gold.]Its biggest user, the jewellery market, has remained static for years [Wrong on two counts. First, by labeling demand from jewellery, he makes it appear that gold is not money. But more than 80% of the so-called jewellery is purchased for monetary reasons, not for adornment. Second, this demand has been growing for two decades.] and there has been no new industrial use for the metal in decades. [True, but gold has essentially no industrial demand, and never did. It has always been demanded for its use as money.] Central banks have also been reducing their holdings. [Left unsaid is how rapidly they have been reducing their hoard in order to keep gold from rising. A rising gold price reflects badly on central bankers and their fiat currency, so they will do everything in their power to maintain the illusion that the dollar is worthy of being the world’s reserve currency when in fact it is not. What we are seeing today is no different from the dishoarding seen in the 1960’s and 70’s.]

The financial importance of the metal has fallen with the growth of fixed interest, equities and derivative products. [Wrong, its importance has not declined. Instead, gold has simply become undervalued in the financial bubble central bankers have created.] Annual gold production is worth about $24bn (£15bn) a year, which is dwarfed by the money changing hands in the foreign exchange, bond and equity markets. [Why does he look only at gold’s annual production rather than annual trading volume? Is it a deliberate attempt to make gold look less important?] But changes to the structure of the gold market are helping to fuel price rises. [Curious, what changes is he referring to?]

Many view the gold price as a barometer of international confidence. [True, but he neglects to mention the important part. Confidence in what? The answer is confidence – or lack thereof – in the dollar and other fiat currencies, which explains the role of my Fear Index.] It rises in times of war: it hit its highest level in more than six years in February just ahead of the war in Iraq and has held its ground in the run-up to the anniversary of the terror attacks. [Gold responds to war only if the war has an impact on the money of the warring powers, in which case gold then rises in terms of the currency of the warring nation.]

Gold mining shares are likewise enjoying a revival. A benchmark gold share indicator, the Gold Bugs index on the American Stock Exchange, hit its highest point since June 1996 this week. But even though gold shares are doing well, they have still been outperformed this year by the technology-laden Nasdaq index. [The HUI through September 10^th was up 38.1%, while the Nasdaq was up 38.9%, hardly enough to make any difference. It speaks volumes though that he didn’t make this comparison from March 2000.]

The gold price has risen 10 per cent since the start of August, outperforming other commodities [By associating gold with other commodities, we are to believe that gold trades like soybeans and pork bellies, but in reality, gold is money because is it produced for accumulation. All “other commodities” are produced for consumption.] such as oil, the price of which also reflects geopolitical fears.

Analysts are pointing to market fundamentals. One reason for gold’s gain is the 41 per cent fall in the US dollar against the euro since mid-2001. The dollar’s fall was counterbalanced by a similar rise in the gold price. [Gold has been rising against all the world’s major currencies, but is doing best against the weakest of them, namely, the US dollar.] But the relationship between the dollar and gold has diverged over the past three months. Gold was about $40 lower from its current level when the dollar hit its record low against the single currency in June. [In other words, gold’s strength against other currencies is building, which is a very bullish observation about gold.]

Another reason is the buoying effect of large investment inflows into gold futures and options traded on the New York Mercantile Exchange, the world’s biggest commodities futures exchange. Investors have bought gold derivatives that account for more than a quarter of the world’s annual production. [Who is taking the other side of that trade? Is it intentional that he ignores the huge build up of gold derivatives by certain bullion banks that apparently are acting under the direction of central banks?]

Inflation may play a part in the current rise. [Now there’s an understatement for you.] Alan Greenspan, the Federal Reserve chairman, signalled that the pruning of US central bank rates was near an end when the Fed cut rates to 1 per cent on June 25. Since then metals prices have risen strongly. Platinum touched a fresh 23-year high this week. Silver hit a three-year peak on Tuesday, copper last week reached its highest point since March 2001 and nickel has not been higher since May 2000. [The point is that people are beginning to understand that the dollar is being rapidly – and probably irreversibly – trashed by a federal government determined to spend money like drunken sailors, and a compliant Fed that is more concerned about creating dollars to fund these resulting soaring federal deficits than maintaining any semblance of preserving the dollar’s purchasing power.]

Central bank gold sales were until four years ago viewed as a big threat to the gold market. [They are best recognized for what they are – an attempt to keep a lid on gold.] When Gordon Brown, the British finance minister, announced the proposed sale of more than half of the Bank of England’s 715-tonne holding in 1999, he provoked outcry among gold producing countries. The gold price fell to a 20-year low of $252. [This event was a selling climax, which enabled all of us who understand gold to pick it up at bargain basement prices, thank you very much. But how many billions have the British people lost because of Mr. Brown’s blunder?] Mr Brown’s move led to the Central Bank Gold Agreement in September 1999 under which 15 European central banks agreed to conduct orderly sales of 400 tonnes a year for four years. This agreement expires in a year’s time and a new pact is expected to be signed before the September 2004 deadline. [This comment is made to overstate the importance of central banks, to make it appear that they can continue to manage the gold price through dishoarding and other means. They of course can’t, and whatever influence central banks have is waning as currencies become increasingly suspect. Gold is in a primary bull market, and no force on earth can stop a primary bull market.]

But one of the biggest influences on lifting the gold price is the move by gold producers to buy back long-term gold sale contracts, which is akin to miners buying gold. This is in response to the demands of institutional investors who are averse to the price-warping effect of gold hedging. [And for good reason, and not just by institutions. We individual investors want to own mining companies with full exposure to gold’s primary bull market.] Hedging typically takes the form of forward sales that enable the producer to lock in a price in the future. The effect is unlikely to be enough to bring back the golden days of the late 1970s when the price soared to $800 an ounce. [The buy-backs by producers has little, if anything, to do with bringing back the 1970’s. History is destined to repeat because governments and their lap-dog central bankers have so brutally damaged the fiat currencies they manage.]

“Producers have been the biggest single buyers of gold in the past 18 months, [Wrong. Investors have taken down 2500 tonnes of production during this period, while producers bought back only 1250 tonnes.] this cannot go on for ever,” says Andy Smith, [It’s impossible for any newspaper to print a bearish article about gold without some bearish comment from Andy Smith, an old acquaintance whose friendship I actually very much enjoy. Andy’s only problems are that he graduated from the London School of Economics, and worse, that he still believes what he learned there is good economics.] an analyst at Mitsui Global Precious Metals. “Soon the price will have to adjust to reflect the underlying supply and customer demand.” [Interesting he didn’t say adjust upward or downward. That way he can claim victory regardless which way gold moves.]

When you see in a major financial publication any article about gold like this one, my advice is to simply ignore it. View it as their blatant attempt to part you from your money, which no doubt will occur if you believe and make decisions based upon their anti-gold propaganda.