 Why
gold shares are limping
Alex
Wallenwein
December 29, 2004
The
name of the game has changed. Completely.
While
during the nineties gold-control was designed to support the
dollar, since 2003 it has actually allowed the dollar to fall
faster and further - but without doing damage to the number-one
symbol of "Amerikan" economic power: the mighty Dow.
In
fact, the Dow was the main beneficiary of this recent dollar-drop,
as you can see here:
(Focus
mainly on the last two months of action here. The red boxes refer
to points made in an earlier essay).
The
interesting part here is that, since mid-2003, whenever the dollar
even stabilized the Dow has resumed a downward movement.
The last two months should convince anyone that there is a definite
negative correlation in effect.
At
first blush, this makes no sense at all.
How
could a rapidly deteriorating dollar be good for US stocks? A
falling dollar makes US assets less attractive to foreigners
because repatriated profits are worth less when changed to the
home currency. It also makes foreign goods more expensive at
home, so Americans have less money left over to invest in stocks,
one would think, right?
Welcome
to the brave new world of terminal fiat-decay.
In
this "new economy" nothing makes sense anymore. Formerly
predictable relationships between economic parameters are turned
on their head: (1) Gold and the Dow are moving up and down in
sync. (2) During the most serious recent phase of dollar-decay
from September to December 2004, US treasuries have remained
largely stable. (3) Gold bullion outpaces the mining shares.
(4) During the recent 2001 recession and subsequent flip-flop
recovery, US consumers have loaded up on debt like never before
- instead of saving like their forebears did. (4) Official CPI
numbers are slightly up but still benign as could be, but the
Fed is raising rates every chance it gets - and that even though
the official stance on the dollar is down and rising rates tend
to support the dollar.
What
gives? And now, gold control is supposed to enable the dollar
to fall rather than support it, as one would normally
expect??
Yep.
How
does that work?
It
works because gold is no longer the real threat, and that's because
an artificially high dollar is no longer desirable. The US needs
a drastically lower dollar to (hopefully) start getting the mounting
current account deficit to reverse course.
It
also needs a low greenback because the euro needs to be torpedoed
if the dollar-reserve system is to have any chance at survival.
The US regime further needs its currency to fall to attract foreign
manufacturing to the US to make up for the jobs lost to China
- a brand new trend that most people are not even aware of. And
the recently inverse dollar-Dow relationship is now amply documented
by the charts above.
What
the US cannot tolerate, however, is a powerful rising
trend in gold shares.
Gold
shares are the only thing that can attract mainstream US investors
away from the mainstream stocks and so lead to a gold blow-off
and a Dow collapse. Americans don't invest much in bullion. Having
been 'paper-trained' for several generations now, they consider
it "too cumbersome." You can't sell bullion in your
basement by calling your broker or making a few clicks online
- but with gold shares, you can do it.
The
New Face of Gold Manipulation?
Apparently
the bullion banks that are so short gold have either cleaned
up their act somehow or have otherwise insulated themselves against
rising bullion prices. As previously observed, all the several
alleged "Maginot Lines" were crossed without any apparent
hickups in the financial system. (Or maybe the gold camp's estimate
of the bullion banks' resources were wrong, and the real line
is $500 gold? Who knows.)
The
point is, rising gold no longer appears to be the number one
enemy. As long as the Dow is rising along with gold, a rising
POG now seems tolerable to the system.
If
you were in the "gold-price management" business and
wanted to keep US investors from getting too hyped up about gold,
what would you do? Would you keep shorting gold when everybody
and their brother is already on to your game, or would you shift
it to the shares, where nobody expects you to be active - yet?
Would
you do it in the price of bullion, into which you know few investors
are actually putting their money - or would you do it in the
market segment they all are piling into when gold starts looking
good?
That's
one way of explaining the lagging share prices. So far, it's
pure speculation and extrapolation from a few know factors. Maybe
someone with a stronger motive to prove this will look into it
and find the evidence, but the point is that bullion is the clear
winner in this new era.
What
is Driving Bullion Prices?
Another
way to explain this consists of looking into who and what is
pushing the price of "physical", and whether those
factors lie sufficiently within the US government/banking sector's
control to do anything about them. It's more than "just"
the falling dollar. The dollar has fallen about 40% since its
early 2002 peak - but gold has risen about 70% since its mid-2001
bottom!
Here
is what may explain bullion's rise:
- Muslims,
Chinese, Indians, and Russians have no intention of enriching
companies of countries like South Africa, Australia, Canada -
and especially the US - by investing in their mining shares.
They understand the value of the metal itself (maybe with the
exception of private Russian investors), so that's what they
go for. As far as these countries and areas' official policies
go, they don't mind destabilizing the dollar at all, as along
as it doesn't hurt them too much. Pumping money into US company
stocks - and therefore into the US economy - isn't these groups'
top priority, really. (When it comes to US productive assets,
however, China doesn't seem to mind. Gives it some nice leverage
for the future, rather than potential stock-loss risks).
.
- In
the long term, gold miners, though they profit from higher prices
in their own currencies, still have to operate in their own economies.
As far as US miners go, only those holding metal instead of cash
as their assets will be able to post serious profits when inflation
goes from tame to hyper as the world-wide dollar-drubbing continues.
.
- India
may be setting itself up to becoming the major bullion player
in the world. That only makes sense - because it already is.
India's official gold reserves are far below those of the major
financial powers of the world, but look at how much the population
is estimated to own according to India's Commerce and Industry
Minister, Khamal Nath: Currently 9,000 tons, and soon expected
to become 15,000 tons. That's about what GATA and many others
estimate all of the world's central banks to have left
in terms of actual, unencumbered gold reserves. (Which country
do you think is better prepared to weather the coming storm:
the US - or India?).
.
- Chinese
and Japanese official gold buying is gaining momentum. At the
same time China intends to align its now spot-oriented domestic
trading to the world wide futures trading system, intending to
become a major player in the international gold trading arena.
Yet, despite this official trend toward derivatives and hedging
practices, individual Chinese savers are expected and officially
encouraged by their government to buy and hold physical to hedge
against financial and currency risks. More on that in the next
section.
None
of these factors lie within the sphere of US legislative or Fed
control.
China's
Role
It
is by now almost unanimously accepted that China will succeed
the US in being the world's economic locomotive at
some point in time. It is only reasonable to conclude
that China is also slated to dominate the world's future financial
order, just as the US has since Bretton-Woods.
In
the light of that, the following takes on a humongous significance
for the future of gold and its role in any future world monetary
system: Zhou Xiaochuan, the governor of the Peoples Bank of China,
stated his vision of how gold will figure into China's future
monetary policy on September 6, 2004 at the London Bullion Market
Association's Annual Precious Metals Conference in Shanghai.
In his statement, he observed that:
"From
the micro-economic perspective, allowing people to hold assets
in gold can improve social welfare benefitting both the country
and its people. Also, the dual characters of being an ordinary
commodity and a currency allow gold to well hedge against risks.
So it is practical to develop individual gold trading business."
One
can only hope that "Amerikan" monetary officials will
some day dispense similarly profound and truthful advice to their
own subjects.
By
officially acknowledging that the Chinese regime is encouraging
its people to save gold bullion to hedge against currency risks,
he points to the nature of the emerging world financial order
(of which the creation of the euro was only the first step):
Fiat
will be earned and spent
- while gold will be saved Even
the world's central banks will eventually join this trend, because
the dollar as a reserve-asset is now largely history - and the
euro is not really set up to take over its function in that regard.
The euro's cornerstone is "price-stability, i.e., limited
printing! A currency so limited cannot assume the dollar's "print
on demand" character that is so necessary for fulfilling
its sole-reserve currency objective. Any current movements
from dollar into euro-reserves are temporary. The world's future
reserve asset is gold, make no mistake about it.
(Does
this mean that free markets will return and gold investors can
breathe easier? Unfortunately, no. Markets can only really be
free if they have a true free-market currency to operate on.
It is still necessary to establish a private, parallel bullion currency to achieve
that.)
So,
does it make more sense to bet on gold shares to start bucking
this trend again - or is it better to jump on the bandwagon and
do as the Chinese do?
Personally,
I'd go with the latter.
Does
this mean that gold shares are "finished?"
Not
by any means. But it pays to be discriminating. There are only
a handful of shares that managed to follow bullion in finishing
2004 higher than they started, and there are only one or two
gold mutual funds that repeated that feat. More details on that,
plus forecasts on where gold, the dollar, rates, oil, and the
yuan are headed are available to subscribers of the EURO VS
DOLLAR CURRENCY WAR MONITOR.
Got
gold?
Alex Wallenwein
Editor, Publisher
subscribe to The
EURO VS DOLLAR CURRENCY WAR MONITOR
Email: awallenwein@houston.rr.com
321gold Inc
Miami USA
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