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An Educational Series on Gold and Money


by Bill Buckler / The Privateer

Overview

Money - An "Assay"
What Is Money?
The Evolution Of Money
The Case For Gold
Money - The REAL Thing

History

A History Of U.S. Paper Money
The Early Gold Wars
The Hidden Gold Wars
Paper Gold?

Gold 1994-2001

The Trading Range  1994-1996
"Annus Horribilus"  1997
Below The Floor  1998-2001


The Trading Range  1994-96

With the exception of a short-lived sojourn above the $US 400 level in February 1996, the $US Gold price was "trapped in amber" for two years, from the beginning of 1994 to the beginning of 1996. For all but about a month of those two years it was caught in an extraordinarily tight $US 20 trading range between $US375 - 395. By late 1995, the volatility on the Gold market had reached its lowest level since the late 1960s, when the Gold price was officially capped at $US 35 an ounce.

Consider what had happened during this three-year trading range:

A debt crisis in Mexico.
A debt crisis in the State of California.
A global bond market bloodbath - in 1994.
A trade war between the U.S. and Japan averted at the last second.
A huge boom on the U.S. stock market - in 1995-96.
The U.S. Dollar plummeting to record lows against the Yen and multi-year lows against the D-Mark.
Debt collapse and actual deflation in Japan.
The near total dependence by the U.S. Treasury on foreign buyers to buy newly-issued U.S. government debt. Foreign Central Bank holdings of U.S. Treasury debt expanded rapidly throughout the period.
A "balanced budget" debate in the U.S. which led to two government shut downs in October 1995 and January 1996.
A $US 600 Billion increase (to $US 5.5 TRILLION) in the U.S. debt ceiling.

Even more interesting, this Gold "trading range" against the U.S. Dollar has not been reflected in the Gold price of other major currencies. The high and low spot Gold prices against the world's three major currencies over the three year period 1994-96 were as follows

Currency High Low Range Change
U.S. Dollar $US 416 $US 369 $US 47 12.74%
German Mark DM 689 DM 528 DM 161 30.49%
Japanese Yen YEN 44,660 YEN 31,870 YEN 12,790 40.13%

"Change" is the percentage difference between the high and low prices

Yes, the U.S. Dollar did some spectacular swoops and dives against the other two currencies over these two years, but that's not the point. The point is that the U.S. Dollar Gold price stayed so stable, despite all these swoops and dives.

How was Gold kept in such a narrow trading range against the Dollar? Through the use of the markets for "derivative" paper instruments based on Gold; through unprecedented "forward selling" programs undertaken by Gold producers; through "Gold leasing" undertaken by Central Banks. And, in a pinch, by the actual sale of Gold by Central Banks.

In the U.S., the other main feature of this period, especially in 1996, was a huge boom on the stock market, relentlessly falling unemployment, and price increases in the economy which slowed to a crawl and, in many cases, actually went into reverse.

The Purpose of the "Trading Range"

There were actually several purposes served:

To encourage the attitude that Gold had lost its former use as a "hedge" against price inflation and political and economic crises. This was done very successfully. The last time that Gold reacted to political events was the lead up to the Gulf War way back in late 1990.

To encourage the attitude that (price) inflation was "dead".

To foster the attitude that all the financial crises of late 1994 to early 1996 were under control. After all, the Gold price was not reacting to them.

To give added credence to the much-ballyhooed (especially in the 1996 election campaign), claim that U.S. debt was under control and that the U.S. was smoothly working its way towards a balanced budget.

The most important purpose by far.

To re-reinforce the notion -- still held by millions of people throughout the world -- that there was still a "link" between Gold and the U.S. Dollar.


"Annus Horribilus"- Gold In 1997

1997 was the third worst year for $US Gold since the price became subject to market forces in 1971. The worst year was 1981, when Gold was coming off an $US 850 blow off high the previous year and battling 20% plus interest rates. The second worst year was 1975, the year when Americans regained their "right" to own Gold for the first time since 1934.

1997 has to be broken up into two halves. In the first half of 1997, stock markets everywhere - including Asia - were booming and Gold was sliding very slowly in terms of most currencies.

The second half of 1997 was when the Asia "flu" hit the world's markets. What started as a currency crisis in Thailand in July had, by the end of the year, expanded into a global financial crisis of unprecedented proportions.

The dividing line between these two six-month periods can be neatly drawn by the hand over of Hong Kong back to China on July 1, 1997. Hong Kong was the last Asian "nation" to be governed by a foreign power. Within weeks of this hand over, the 30-year era of the Asian "Tiger Economies" was over.

Here are the signal events of 1997 - especially the second half of 1997:

  • March 25 - US Fed raises rates by 0.25% to 5.5%. This is the only rise for 1997
  • Mid June - Denver G-7 meeting. US boasts its economic "management" to the annoyance of Asian and European guests.
  • Late June - Japan's Hashimoto threatens to sell US bonds and buy Gold
  • July 2 - Aussie Reserve banks announces (already completed) sale of 167 Tonnes of Gold.
  • Early July - Thai Currency crisis hits stock market and spreads quickly throughout S.E. Asia
  • Aug. 6 - Dow hits what proves to be the high for the year - 8259 points.
  • October - Asian crisis hits Hong Kong, Korea and Japan. Plummeting currencies and markets. In the U.S., the Dow falls 1000 points in less than a week before recovering.
  • Nov. - Dec. - IMF moves in to offer bail-outs. Gold sell of steepens. U.S. Dollar, universally regarded as THE safe haven, surges. Gold falls almost $US 60 to its lowest level since 1979.
  • End of year - Korea within days of bankruptcy. Japanese market in free fall. Asian currencies crashing. Gold anchored firmly below $US 300.

In 1981, Gold's worst year, the world was locked in recession. In 1975, Gold's second worst year, the world was locked at what was described as "stagflation" -- rising (price) inflation and rising unemployment. This was an economic phenomenon held to be "impossible".

In 1997, Asia went into an economic and financial death spiral which can only be compared to what happened to the world in the Great Depression of the 1930s. But this was not a worldwide phenomenon. In Europe, markets boomed all year. In the U.S. markets boomed, the economy boomed, unemployment hit 30 year lows, and the Dollar became the most sought after investment in the world.

On November 26, 1997, the spot future Gold price closed below $US 300 (at $US 296) for the first time since March 15, 1985. Gold ended 1997 at $US 289.90. The $US 300 "floor" which had supported Gold ever since it first rose above that level in July 1979 had now become a "ceiling".


Gold 1998-2001: "Below The Floor"

Take a long-term look at most types of investment, especially most types of investment "class", and highly significant support and resistance levels will become apparent. Two excellent examples of this phenomenon are the 1000 level on the Dow Jones Industrial Average and the $US 300 level on Gold.

Dow - The 1000 Level

Until mid-1954, the all time high for the Dow was 381.17, set on Tuesday, September 3, 1929. That's right, the 1929 high was not breached for 24 years. By 1966, however, the Dow had left that 1929 high far behind it. In February 1966, the index reached a high of 995. That was the Dow's first trip to the 1000 level.

The Dow made many more trips to that 1000 level. It reached it in late 1968, and it actually broke through it (barely) in early 1973, mid 1976, and mid 1981. But the Dow did not decisively breach that 1000 level until the beginning of 1983. For seventeen years (1966-1982) the 1000 level on the dow remained a formidable resistance point.

Gold - The $US 300 Level

Up until 1934, the "official" Gold price was set at $US 20.67. From 1934 until 1971, the "official" price was $US 35.00. Gold did not reach $US 300 an ounce until July 1979. But once Gold breached that $US 300 level, it never went back below it for long. Between July 1979 and November 1997, Gold only traded below $US 300 twice -- for one day in June 1982 and for three weeks in Feb/March 1985.

Just as the 1000 level had stopped the Dow for 17 years (1966-'82, the $US 300 level supported Gold for 18 years (1979-'97). For nearly two decades, $US 300 was the FLOOR for Gold.

Below The Floor

Gold below $US 300

On November 26, 1997, Gold (spot future) closed at $US 296.00. That was the first Gold close below $US 300 since March 15, 1985. It was only Gold's third trip below $US 300 since it had first breached that level (on its way up) in July 1979. For all but a few weeks of the last three years -- see the chart above (as of July 2001; current chart available through The Privateer) -- Gold has traded below $US 300, a phenomenon unprecedented in almost two decades.

The beginning of Gold's sojourn "below the floor" coincided with the transformation of the Asian Crisis from a "glitch in the road" to a "Global Crisis". Those were President Clinton's descriptions of events, the first in July 1997, the second in early December 1997.

1998 was the year that the Asian Crisis did indeed become global, culminating with the Russian debt default in August and the Fed lowering U.S. interest rates three times in seven weeks in Sept. - Nov. 1998 to save the world.

1999 began with yet another currency meltdown, this time in Latin America in general and Brazil in particular. It continued with a war in Kosovo, and a landmark on U.S. stock markets as the Dow broke above the 10000 level for the first time.

This was the point at which the War against Gold reached a crescendo. For nearly a year, the IMF had been announcing plans to sell Gold. In early May, with the Kosovo air war over a month old, all the G-7 nations, one after the other, came out with statements approving these plans. But despite this, Gold was moving up towards the $US 290 level and even worse, Gold stocks in North America, South Africa, and Australia, spurted upwards. By May 6, the XAU (Gold index) showed a rise of 46.4% since the beginning of the Balkans war. That was more than three times the rise on the Dow over the same period.

Then, on Friday, May 7, 1999, the Bank of England (BoE) announced a plan to auction Gold. This is what The Privateer had to say about this development at the time: quote from our Early May 1999 issue - published on May 9, 1999.

The significance of this move was clear. To get the Gold price down to its level of the late 1970s, the Central Banks returned to the methods of the late 1970s - namely Gold auctions. All the Gold suppression moves since that time had been done "covertly", by means of Gold leasing, forward sales, Central Bank lending etc. Now, that was deemed insufficient by itself, and the BoE announced right out in the open that it was going to auction Gold. The result was predictable enough. By the time the first auction was actually held in July 1999, Gold had retreated to 20 year lows of just above $US 250.

Gold finally broke loose on September 26, 1999 when the European Central Banks announced a five-year "freeze" on their Gold leasing and lending activities. On September 20, 1999 spot future Gold closed at $US 255. Just over a week later, on September 28, it closed at $US 308. Gold then went on to post a high (on a spot future closing basis) of $US 324 by October 5. The downward momentum had been broken.

But, as you undoubtedly know, the $US 300 level had not turned from a "ceiling" back into the "floor" it had been between 1979 and 1997. Gold fell back below $US 300 by the end of October, and stayed there until February 4, 2000. On that day, an announcement from Placer Dome about curtailing their Gold hedging strategies coincided with a $US 23.20 surge from $US 287 to $US 310. These announcements were claimed to be the cause of Gold's second surge above the $US 300 level in just over four months.

The real reason could be seen right on the market for U.S. Treasury debt paper. The yield curve had "inverted" with short-term yields moving above longer-term yields. This phenomenon is always a sign of strained liquidity within the system, and that is just what had occurred as the Fed backed off its credit-creation in the wake of Y2K.

Still Below The Floor

Just as it did in October 1999, Gold has also backed off from its early February 2000 surge above $US 300. There can and will be no resolution of this struggle and no new bull market in Gold until the $US 300 level, which has been the "ceiling" for Gold since late 1997, once again becomes the "floor".


Overview / History / Gold 1994-2001
(click for other sections of this three-part series)


by Bill Buckler / The Privateer -- The Private Market Letter for the Individual Capitalist
Summer 2001

The Privateer market letter
Publisher: William (Bill) Buckler
capt@the-privateer.com
P.O. Box 2004, Noosa Heads, Queensland, 4567 Australia
Phone +61 7 5471 1960 - Fax +61 7 5471 1959
Australian Business Number (ABN): 99 805 118 934

This overview series was excerpted from The Privateer's Gold Pages, providing an excellent context for Bill Buckler's weekly gold comentaries as described below.

Gold This Week -- Bill Buckler says of this service: "Our premier Gold commentary. We don't confine ourselves to just the Gold price or the Gold market, we analyse Gold in the context of the entire economic, financial, and (not least) political situation. Includes a daily chart of the Comex spot future Gold price and details on the course of trading and open interest for all futures contracts. This page also includes complete daily price data on spot future Gold (available for download and updated weekly) going back to January 1996 - the start of the current bear market.

"For more than five years (January 1996 - March 2001), "Gold This Week" (our weekly Gold Commentaries) was freely available to all who visited The Privateer website. On March 3, 2001 (March 2 in North America), Gold This Week (GTW), was upgraded, daily updates were included, and the whole was made part of The Privateer market letter. All Privateer subscribers have complete access to GTW at no extra cost as part of their subscription."

There are two ways to access Gold This Week (GTW):

Copyright ©2001 The Privateer Market Letter. All Rights Reserved.

Reprinted by USAGOLD with permission of The Privateer and Bill Buckler. No further reproduction without permission.

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