The Battle for $700
The Daily Reckoning PRESENTS: There are lessons from the past that can be heartening at times like this when gold gets repeatedly repelled from $700. James Turk believes that it is important to recognize that every time gold and the cartel have battled in the past, gold eventually won. Read on…
THE BATTLE FOR $700
We have a battle on our hands. It’s the Battle for $700, and it is just the latest clash in a long war being fought between gold and its perennial antagonist – the gold cartel.
I feel like an old soldier, having already endured so many of these battles. They happen because gold is undervalued, which means that it is being exchanged for dollars at too cheap a price. So gold tries to correct this imbalance in a normal market response by climbing higher, but is prevented from doing so by the gold cartel. It is these confrontations that have led to the recurring battles.
I think we can learn from these head-to-head clashes. There are lessons from the past that can be disheartening at times like this when gold gets repeatedly repelled from $700. It is important to recognize that every time gold and the cartel have battled in the past, gold eventually won.
For example, back in March 2001, I wrote the following about the Battle for $272:
“Open interest on Comex calls in the last few days has risen by 16,000 contracts. That’s 1.6 million ounces, or nearly 50 tonnes. Who would be willing to take the risk of selling these calls with gold so cheap? Probably the same central banks who have been manipulating the price. They are still trying to keep the gold price under their thumb. Will they succeed yet again? There’s the rub. No one knows. The markets may be getting ready to ‘throw away the key’, but maybe not. While we know that gold is unbelievably cheap and eventually going higher, we just don’t know when.
“Watch the $272 level. Gold probed that level today, but backed off, though still closed up over $5 on the day. If $272 is hurdled, the long awaited rally may be finally underway. And it also may be the rally in which those who have been manipulating the gold price are finally forced to throw in the towel, just as they were forced to do so the last time the price of gold was being manipulated, which was in 1971.”
Gold eventually broke through the lines the gold cartel had mobilized at $272, and climbed higher. But the gold cartel staged a retreat, and eventually we got the War for $325. So significant was $325 that I wrote the following in March 2002
“If you are old enough to remember when President Nixon closed the ‘Gold Window’ on August 15, 1971, you have an advantage over those who did not experience that event and the subsequent rise in the gold price. We are at, I believe. a similar moment in time. Maybe we are only at the equivalent of January 1971, or perhaps as close as August 1, 1971. We just don’t know for sure how close we are to the launch date, but the important point is that the launch date is indeed coming.”
It took another 6 months, but $325 was indeed hurdled, on December 6, 2002. So important was that battle that I continued to write about $325 for months. For example, I penned the following in February 2003:
“For the past six years of this 20-plus-year consolidation, gold traded under $325. During this period gold moved out from weak hands into the strong hands that were accumulating it at those bargain basement levels. To make that base even more convincing and technically significant, we had a selling climax in the middle of that base when gold was dumped after the Bank of England announcement, causing it to reach a low of $252 in July 1999. As the BoE began its dishoarding, those who recognized that gold was undervalued (us included) were buying while the BoE was selling.
“Then with the breakout above $325, gold’s base was firmly in place. This base defines the bottom in gold. Time will tell of course, but I don’t think we’ll ever see those prices again. Just as gold never looked back when it started its final break away from $35 in the early 1970’s, gold is again not looking back. $325, $330, $340 and probably even $350 – those prices are history and won’t be seen again. Again, only time will tell, but my scenario from here is quite clear.
“Because gold is moving higher from such historically undervalued levels and because so many people have been left standing on the platform when the gold-train started pulling away from the station with the break above $325, it is onward and upward for gold from here.”
And so it was. But then came the battles for $420, $450, $500, and since last May, we have been fighting the Battle for $700. Gold will win this time too, but again, we are frustrated and irritated that there is even a battle at all.
Who is the gold cartel? And what are they trying to accomplish? The gold cartel is an alliance of governments and a few bullion banks. This group is led by the U.S. government. Though their aims are different, their congruent interests put them on the same side. Here’s what they are trying to do.
The US government wants the US dollar to continue as the world’s reserve currency. But the dollar is no longer worthy of holding this privileged position. It is not sound money that can be used reliably in international commerce. It is being inflated and debased, which are actions that erode its usefulness as currency. It is also being used as a political tool, which again makes it unreliable money for cross-border commerce.
So the US government has a problem. Gold has always held the position of international money, and currencies only became reserve currencies because they were “as good as gold”, which is what the dollar used to be. Now, however, gold and the dollar are competitors, with the result that a rising gold price shows how badly the dollar is being managed. This reality decreases the demand for the dollar, making it more difficult for it to remain unchallenged as the world’s reserve currency.
Consequently, the US government wants a low gold price to make the dollar look good. Its strategists believe that a low gold price will make people think the dollar is being well managed, which obviously is a necessary precondition for anyone to continue using it. After all, if people truly understood how vulnerable the dollar is to a collapse, the demand for the dollar would decline even more rapidly than it is already declining.
Most other governments within the US orbit work toward the same objective. Though they may be envious of the dollar’s privileged position, in the end they accept it because these other governments are also fiat money advocates. By keeping the dollar-monetary system functioning, they can also perpetuate the myth of fiat money by creating their own currencies ‘out of thin air’, thereby enabling these governments to do what all governments want, namely, to use newly created fiat currency to preserve their own position of privilege and power.
Their aims are clear, but governments don’t directly trade in the gold market. They enlist the help of the bullion banks, but not all of them of course, just the 2 or 3 largest ones in order to keep the cabal as small as possible. After all, the bullion banks stand to make fortunes by working with the government, and they obviously don’t want to spread this profit around needlessly to other banks that are not needed in the price manipulation scheme.
The bullion banks make money in two ways. First, they earn the contango. In other words, by being short at all times, they earn the interest income available from gold. It works like this.
Because gold is money, its future contracts always trade at a higher price than the spot price. This is called contango, and is the opposite of every other commodity. Because they are not money, other commodities trade in backwardation, meaning their future contracts always trade below the spot price, except in abnormal circumstances, for example, where supply is disrupted by an unforeseen event.
So by being short the contango, bullion banks are always selling gold for future delivery above the spot price. If the spot price is unchanged or lower when those future commitments come due, the bullion banks make money on the difference between the price at which they sold and the spot price on the due date. But if the spot price is higher, they lose money, so clearly the bullion banks do not want a rising gold price.
The second way bullion banks make money is by what I call “picking the market’s pockets”. There are a number of ways they do this. For example, because they execute the government’s trades, they know when large amounts of gold are going to be dumped into the market as part of the gold’s cabal’s price manipulation scheme. So the bullion banks “front run” those trades by selling first, and then profit from the price slide that occurs when the big government order is dumped on the market. So in essence the bullion banks are strapping on a feed-bag by working with the government.
It can be discouraging when viewing this state of affairs. However, we should instead focus on the important parts, which are that gold is in a bull market that is now more than six years old and that notwithstanding this fact, gold remains undervalued. Or to put it another way, the dollar is overvalued.
Sell the dollar and buy gold because the Battle for $700 will end the same way the other battles have ended; gold will win the battle. The gold cartel is losing the war. In the end, the market is bigger than the government.
for The Daily Reckoning
May 15, 2007
Editor’s Note: James Turk has specialized in international banking, finance and investments since graduating in 1969 from George Washington University with a B.A. degree in International Economics.
He is the author of two books and several monographs and articles on money and banking. He is the co-author of “The Coming Collapse of the Dollar” (Doubleday, December 2004).
In addition, James Turk is the Founder and Chairman of GoldMoney.com. Since 2001, thousands of individuals and companies have used GoldMoney® to buy gold to protect their wealth from today’s financial uncertainties. Many of them have also found GoldMoney’s patented process of digital gold currency payments to be an ideal payment solution for online commerce.
Hot, hot, hot. When the markets are hot enough, money flows. And now, the whole world is coated with molasses. Sweet, gooey…we can’t seem to get enough.
From the United States comes news that auto giant Chrysler (NYSE:DCX) has been bought – by a private equity fund! Isn’t that great? You don’t have to know anything about making cars to play this game. You just have to have enough of that sugary, sticky cash.
And Bloomberg reports – from Moscow:
“Within a mile of the tomb of Vladimir Lenin, who vowed to destroy capitalists, investment bankers in Moscow are now earning double the pay of their counterparts anywhere else.
“Dealmakers such as Ed Kaufman, who left UBS AG in March for Alfa Bank, and Nicholas Jordan, who will run Lehman Brothers Holdings Inc.’s new Moscow office, are offered $7 million and more a year, industry recruiters said. In New York, managing directors who arrange corporate mergers and stock and bond sales typically get $2 million to $3 million, according to estimates from headhunters at Options Group and Napier Scott Executive Search Ltd.
“‘This market is hot, hot, hot, and if you want to keep top talent, you have to pay big,’ said Peter Necarsulmer, chief executive officer of PBN Co., which advises foreign companies investing in Russia including BP Plc and Merrill Lynch & Co.”
Deals…deals…deals. Where does the money come from to fund all these deals?
China’s money supply is growing at a 17% rate, says the latest report. Japan’s trade surplus is growing at a 37% rate.
And here, Reuters connects the dots:
“It may sound like a precarious state of affairs, but the fate of the global economy rests squarely on whether or not Americans keep shopping.
“They don’t call it an imbalance for nothing. For better or worse, highly indebted U.S. consumers have been the primary engine of world economic growth for some time.
“Even the success of Asian giants like China and India, touted as model globalizers, has been predicated on exporting goods that end up on the bountiful shelves of U.S. retailers.”
America’s consumers spend more than they can afford…which puts dollars in the hands of Chinese and Japanese businessmen. Then, the dollars are turned into the Central Bank for local currency…forcing the Bank of China and Bank of Japan to increase their own money supplies in order to buy the dollars. Liquidity…liquidity…now the whole world is drenched in it.
Get out the hip boots. The tide of molasses is rising.
The San Diego Union-Tribune tells us that Chinese investors are practically drowning in it:
“After watching Chinese stock prices gallop upward for months, Ding Xiurui wanted a piece of the action.
“The 45-year-old office worker stood in line at a bustling brokerage Friday to open her first trading account. She brought her sister, who opened an account too. They joined millions of other novice investors who are jumping into a market that has soared to dizzying heights, with prices up nearly 50 percent this year.
“China is in the grip of stock market fever. Shares are changing hands in record numbers as first-timers pour in new money. Some are mortgaging their homes or dipping into retirement savings to finance a frenzy of trading known as ‘chao gu,’ or ‘stir-frying stocks.’
“On Wednesday, the Shanghai index passed the 4,000-point mark.”
What could go wrong? Well, the Chinese stock market could blow up. Or, the source of this big flush of cash and credit could piddle out. Either way, investors that aren’t properly positioned could lose their shirts.
Attend this year’s Agora Financial Investment Symposium in Vancouver to learn about the ins and outs of global investing – including how to be positioned for profit in this booming market. The theme is “Rim of Fire: Crisis and Opportunity in the New Asian Era” and will feature all of your favorite DR experts – as well as some special guests.
Addison Wiggin, reporting from The Land of Pleasant Living…
“What do you suppose bismuth is used for? If you know the answer, you could possibly be up more than 160% this year. Relative unknowns like bismuth, iridium, ruthenium, rhodium, cobalt, and silicon have risen in value tremendously over the last five years – and many have really hit their stride in 2007.
“‘Those who have been paying attention to specialty metals recently have made themselves a pretty penny,’ Capital & Crisis’ Chris Mayer told The 5 in an exclusive email.”
To find out where to find these specialty metals – and more – see today’s issue of The 5 Min. Forecast
And more views:
*** “You wouldn’t believe the amount of construction going on over there,” our friend Patrick said, upon his return from China. Pat’s the director of our still yet-to-be titled documentary and had traveled to the Far East for some fodder for the film.
Last year, Chinese steelmakers had the fastest growth rate among all Asian steel producers – producing nearly 20% more steel than the year before.
“Everywhere you looked, there were construction cranes – they literally crowded every block,” continued Pat.
What are they building? Skyscrapers. Our own Christopher Hancock has been closely watching the Chinese market for most of the decade, and believes that the Chinese construction boom is nowhere near over. By 2011, Christopher asserts, China will add another 1,000 skyscrapers to the skyline in Shanghai – and will double its demand for steel by 2031.
Think about it this way: 60,000 tons of steel was used to build the Empire State Building – imagine how much these new, bigger skyscrapers will use. In fact, seven out of the world’s 10 tallest skyscrapers have appeared in Asia…and they are still building like crazy…and demanding massive amounts of steel to make it happen.
The Asian love affair with skyscrapers – and steel – is about to really begin, which means enormous profits for the entire steel industry.
“There is one company that virtually dominates this market,” Christopher told us. “Some call it the most perfect steel company in the world, producing the greatest volume of quality steel at the world’s most efficient price. Just like Carnegie did when he built his American fortune well over a century ago.”
Check out Christopher’s inaugural issue of Free Market Investor…in it, he details this stock that is selling for dirt-cheap, and is perfectly positioned for savvy investors to make a fortune as this boom unfolds.
*** “Signs are already emerging that the seemingly unstoppable consumer is running out of steam, not to mention cash. Many believe it is only a matter of time before the confluence of high gasoline costs, falling home prices and rising debt loads take their toll,” reports Reuters.
We’ve heard that before. Some day it will be true; someday the markets will cool and the molasses will turn hard as rock, leaving investors stuck. Years from now, financial archeologists will dig through the ruins and find them, petrified, like corpses at Pompeii.
But now? Who knows? This is a speculators’ market. It’s a speculators’ world. How high will it go…how mad will it get…before it all comes to an end? If anyone knows, they doesn’t work here at The Daily Reckoning headquarters.
*** We’re attending/teaching at a professional conference for our little niche of the publishing industry.
“Words…words…words,” we told attendees, “that’s all we have. Every word is a precious idea…or an idiotic one. Choose them carefully. Respect them.
“It is not given to man to know his fate. We can never know what will happen; we can’t know the future. But that’s what investors want to know about. They want the words that will tell them what to expect. And not only words…they want numbers. ‘This stock will go up 50%,’ they want to hear. ‘Housing will go down 10%.’ ‘Gold will sell for $800 an ounce by December 30, 2007.'”
We like words. We like the sound of them. ‘Bankruptcy’ for example. What a wonderful word – bank-rupt-cy; all you have to do is say it and you know what it means. Three curt syllables…and the first two of them come out of your mouth like bricks. Hard sounds, with sharp edges. You know this is something you want to avoid.
Or ‘quarrel’ – a mess of a word. Notice how hard that is to say in a delicate, graceful way? Instead, the second syllable doubles back in your mouth…and then comes out on the side. It practically picks a fight with your tongue.
Or ‘lovely’ – doesn’t that word sound like something you want? Smooth. Nice. Sweet.
We like words. But numbers? They are frauds. They pretend to be so honest…so definite…so straight.
“Economists expect 3.5% GDP growth this year.” “Wall Street analysts call for 14,000 on the Dow by end of the year.” “Buy this stock…it’s trading at only 18 times forward earnings.”
Numbers are a dime a dozen. There are only 10 primary numbers – eight…six…two – choose any of them you want. Put them together. Mix and match them. Take them; do what you want with them.
The Washington fat cats see numbers as silly putty – they can bend, twist and contort the data to suit their needs…anything they can do to keep the American consumer ready and willing to pull out their wallet. But this economic disinformation is destroying your current and future wealth.
Forget numbers. Give us words. Give us ideas. Give us stories.