 |
What really happened to gold?Craig Harris People around the world are scratching their heads trying to figure out what happened to gold last week. During a week when most people would have expected strong gains in gold, it crashed. I'm going to offer an explanation in the essay below. I'm going to pretend I'm Alan Greenspan. I'm concerned about the possibility of a global market meltdown. I have an economy that seemed to be doing well, but it was doing "well" in the midst of the biggest investment mania in history. I know bubbles burst much more quickly than they are created, and with more of the American public participating in the equity markets than ever before, I have to prevent panic. I have created an environment where my currency no longer has intrinsic value. I rely on trust and confidence to keep the system working. If I lose the trust and confidence, so goes the system. In an era where there is competitive devaluation of the worlds currencies, I can't let people figure out that if these currencies are in a competitive devaluation war, that they must be being devalued against real things. I want to assure the investing public that there is no reason to panic. I want to prevent them from taking more money out of the equity and financial markets. With all the global markets going down together, I want the USD to go up. I want the US stock market to go up. I want to keep long term interest rates down. I want to create the illusion that everything is ok while I figure out how to get us out of this mess. I don't want money to leave my realm. I want to drive it into the US treasury market to create the illusion that is the only safe haven. I want to make sure that the big money center banks don't have trouble. I'm particularly concerned about banks with large derivative positions. What am I going to do? First, I'm going to let you get inside my head. I'm going to do that by encouraging you to read an essay I wrote way back in 1966. It's important you read it, because until you do, you won't have enough background to understand the complexity of my scheme. Gold and Economic Freedom,
by Alan Greenspan Now, I'm going to tell you what I'm going to do to restore order, to prevent panic, and to eliminate any viable alternatives for the storage of wealth besides the fiat paper markets I have created. What am I going to do? Actually, if you read my essay you probably already know what I'm going to do. Simple... I'm going to sell gold, and I'm going to sell it until the price is where I want it. Through the derivatives market, I can sell as much of it as I want, and by using agents like the big money center banks to do my dirty work, no one will even suspect that I'm behind it. I have 7 other countries all willing to do the same thing if I need their help. Even if I'm selling gold I don't own, it won't matter... it won't matter unless more buyers want the real thing than I have of the real thing to deliver. If that happens, then I'm in trouble... deep trouble. So, I will keep it where I need it at all costs. It's my number one priority because if gold takes off, people will panic. they will lose faith in my fiat money system. They will take their money out of my banks. Long term interest rates will go higher as capital flees the once-perceived safety of my bonds, the USD will go lower as capital flies out of my paper asset markets. They will liquidate their equity holdings. they may begin to question the creditworthiness of my Treasury notes and bonds... so I won't let that happen. While I'm selling gold, I'm having an agent execute program buys in the DJ. I'm also buying S&P futures. I want to give the market what the participants want to see. I want to create a bottom... At least the illusion of one. Anyway, I hope that story helps... it's all pure speculation on my part, but informed speculation. It's the only way.... the only way I can explain what happened last week. I'll tell you something else... If I was Alan Greenspan and I got myself into this predicament, I'd be doing exactly the same things. I also have to say that if I was Alan Greenspan I wouldn't have gotten into this predicament because I wouldn't have let the bubble build to such extreme levels. I would have let gold run up in the late 90's to kill the bull before it became manic. Will it work? Well, look at Japan. Intervention hasn't worked there. The basic number one most fundamental problem is that the value isn't there. If stocks were reasonably valued here I'd say with conviction that a bottom could be created. The problem however is that as the bubble bursts... it's not going to end until value appears. That's my big problem. We have serious strains developing in the financial system, and an equity market that could still be as much as 50% overvalued depending on who you talk to. So, I didn't sell any gold on Friday. I didn't sell because this is my long term insurance policy. If gold starts going through the roof, it's a really bad sign because it means that Mr. G has failed. The position isn't big enough for me to worry about one day moves or one week moves. I'm in this for the long haul. I'll sell some when it gets to Alan's danger zone level, and I'll buy back into selloffs. I didn't buy either... I didn't buy because I don't know how low they're going to take this market. I thought 314 was a good buy. I want to wait and see for a few sessions. I don't think they want to make it go too low, because then people are going to start talking about deflation... that's bad. The problem is that when a market gets whacked like gold and silver has in the past few sessions, it can spawn technically-based selling that takes the market lower than you want it to be. I think the financial engineers are happy with gold around current levels, but that doesn't mean it can't continue lower. While most people are scratching their heads over gold's action in the last few weeks, I think they're mostly ignorant... like children trying to understand particle physics... t least I feel like I have made sense out of it... although I don't like what I see at all. I smell desperation. July 29, 2002 Mr Harris offers a free 30 day trial subscription to his daily market letter. For a free trial please contact bcharris@gate.net. The risk of trading commodity futures contracts can be substantial. You should therefore, carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. If you choose to open an account with Harris Capital Management, a Risk Disclosure will be sent to you. Please read it carefully before you invest. ### Harris Capital Management, Inc. CTA is a futures broker and registered Commodity Trading Advisor, meeting the needs of futures traders worldwide. They provide a high level of personal service to discriminating clients around the world, while offering commission rates comparable to discount brokers. All clients are handled directly by Mr. Harris. Copyright ©1995-2004
Harris Capital Management Inc. All Rights Reserved. |
