Ambrose Evans-Pritchard, writing on Oct. 1 in London's Telegraph, has an item titled "Dollar crunch puts gold center stage."
Most perceptively, the article says, "The dominoes are toppling. What began as a credit crunch turned into a dollar crunch. We are witnessing a run on the world's paramount reserve currency."
In the face of this potentially catastrophic event, which we have long forecast, the stock markets roar.
At the time of this writing, the Dow has broken 14,046 — a new record — nominally, of course!
We see the Dow's "high" as both a potentially serious value trap, particularly in financials, and a great, possibly final opportunity for our conservative readers to reduce their holdings, taking money off the table — money that we feel is about to become extremely valuable!
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Meanwhile, Bloomberg reports today that "Citigroup, the biggest U.S. bank, said third-quarter profit fell about 60 percent."
Bloomberg then reported that UBS, Europe's biggest bank, had written down, "the value of fixed-income securities by more than…$3.4 billion." It was the first loss, "reported by any of the world's largest banks …"
And yet the stock markets roared!
Following the bailout of a bank involved in the first British bank run in 150 years, Bloomberg reported that the Internet bank, NetBank filed for bankruptcy.
Indeed, "Credit turmoil is still simmering beneath the surface," warns Mish Shedlock, co-editor of the Survival Report, "even if one does not see it in the equity markets right now."
Shedlock goes on, "the Fed executed a whopping $38 billion in repos [on September 28], agreeing to take $22 billion in mortgages as collateral. Traditionally, the Fed accepts only Treasuries as collateral. This is a sign of continued panic by the Fed."
We agree, it is a sign of panic by the Fed and, as we said on April 18, "All Americans will suffer."
And yet, still, the markets roared!
All of this market roaring — in the face of a crisis in credit markets and housing and despite stealth inflation, falling consumer confidence and a falling outlook for corporate earnings — begs a very serious question. What part of crisis do the stock markets not understand?
[Editor's Note:Four Digit Gold Prices a Reality - Find Out How]
While stock markets roar, the price of gold continues to rise. That is unusual.
So, what is gold telling us?
In any case, why does gold matter any more?
We believe that gold is telling us that a very serious financial crisis lays ahead — a crisis that could threaten the entire international monetary system.
To understand this answer, we must examine the price of gold for a minute. At the time of this writing it stands at $753.60 an ounce.
That looks strong and near a high. Well, it's not quite so clear and simple.
There are two important things to remember in looking at the price of gold.
First, gold reached $850 an ounce on January 23, 1980. That's nearly 28 years ago! So why do people buy gold as a safe haven?
In fact, it's worse than that. If you discount the 1980 price of gold for the average inflation rate (a rough measure), today's equivalent price should be a whopping $1,415 an ounce!
So gold has actually fallen in real terms by some 40 percent in the past quarter century.
How can this possibly be? Do you feel maybe something is wrong? After all, the gold price is a "free," international market price, not set by government. It's not something the government is able to cook — or is it?
Not exactly. That leads us to our second point!
We all know that the U.S. dollar has lost almost half of its value, when measured on a trade-weighted basis against other currencies over the past 22 years.
It is staggering to think that after taxing us our government has robbed every single man woman and child in America and all non-U.S.-resident holders of Eurodollars of roughly half their money over the past two decades.
But even that is not the entire picture. It is worse, possibly far worse, when measured against the true, free-market price of gold.
But what is the true free market price of gold, if it is not the international market price?
Let me explain.
There are two main types of demand for gold: industrial uses, including jewelry, and investment.
There is a natural supply-demand price to gold. But, like the oil price, it is distorted by politics.
But, you say, "I thought gold was above politics?" Not so!
[Editor's Note:Free Report: The 5 Five Best ETFs You Can Buy Today.]
In order to "disguise" a reliable and embarrassing measure of the depreciation of their paper currencies, a number of large governments, under the leadership of the United States, has colluded to demonetarize the yellow metal, both by creating volatility in the price and distorting that price to the downside.
An agreement was reached, called the Central Bank Gold Agreement (CBGA), under which certain major central banks agreed to sell off portions of their gold holdings to depress the international, so-called "free" market price.
These sales were coordinated through the International Monetary Fund (IMF) so as to cause maximum volatility and downward selling pressure.
Some people have been skeptical of this covert "plan" and have asked to see copies of the CBGA.
Even to ask such a question displays a fundamental misunderstanding of how central banks operate.
The whole nature of international central banking is low-profile and stealthy.
Albeit widely discussed in "gold circles", the CBGA is a covert agreement.
However, the Sept. 15 edition of The Economist contains a fascinating article in which it hints at the CBGA and maintains that, by 1999, the central banks realized that the indiscriminate selling of gold to push the price down, "was not clever and got together to hammer out an agreement to limit central bank sales to 400 tons a year. That amount has since been increased by 100 ton, but the agreement holds until 2009."
Note that makes the total 500 tons, or an approximate offset to the estimated annual 4,500 tons of annual, non-industrial investment demand for gold.
In addition, two Citigroup analysts, John D. Hill and Graham Wark, wrote on September 21, 2007 a long report titled, "Gold: Riding the Reflationary Rescue." They referred to the fact that "gold undoubtedly faced headwinds this year from resurgent central bank selling, which was clearly timed to cap the gold price. Our sense is that central banks have been forced to choose between global recession and sacrificing control of gold and have chosen the perceived lesser of two evils."
As our readers will remember, our Sept.18 article, "Fed Capitulates — All Americans Will Suffer," shows that we entirely agree with the Citigroup analysts.
As such, we see continued upward investor pressure on the price of gold. When this investment pressure will overcome the political, downward pressure applied by central banks, only time will tell, but we feel it is possible in 2008.
If the two Citigroup analysts are correct, the expected rise in the price of gold could come much earlier and be far more dramatic than many are expecting.
[Editor's Note:Cash and Banks at Risk? Protect Your Wealth Now.]
We say this because certain central banks are becoming politically wary of the continued selling off of their gold reserves. On the other hand, certain other, increasingly powerful central banks, like those of India and Russia and in the Middle and Far East are increasingly prone to hoard the metal.
Eyes are now focused on China in an effort to detect any early moves from dollars into gold.
As our readers watch the financial press for signs of the above mentioned struggle playing out, we feel they will see why we have suggested the accumulation of gold in our asset allocations.
Editor's note:
Four Digit Gold Prices a Reality - Find Out How
Cash and Banks at Risk? Protect Your Wealth Now.
Free Report: The 5 Five Best ETFs You Can Buy Today.
