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The intention of The
Golden Chalkboard is to feature a focused selection of data
or rare commentary that I think will be useful to enhance your
insights into the gold market and the monetary system.
With the official scrapping (between 1971-73) of the last vestiges of the Bretton Woods "gold standard", the long-time price level of $35 promptly reached a temporary new plateau at nearly triple the old price to $100.
Four years later (1977) it began a spectacular new rise, reaching what appeared to be a (temporary) new plateau of triple the old price to $300.
About ten years later (1987) began what appeared would be a decisive new rise that, instead of heading to a higher plateau, was remarkably killed in its tracks. Remarkable for several coincidental reasons that should have propelled gold higher squared off against elements that would manage to contain the rise in price. This was the time of the stock market crash of 1987, and Alan Greenspan was newly appointed as chairman of the Federal Reserve Board of Governors. S&L's were hitting the skids, and use of commodity derivatives were just then coming into vogue in ever-more widespread use for financial "engineering".
It may be helpful in this context to recall a couple short years earlier, on Friday September 29,1984, the financial implosion of Johnson Matthey Bankers precipitated a hasty weekend meeting called by Rothschild's bullion director Robert Guy between representatives of bullion peers Sharps Pixley, Samuel Montagu, Mocatta and Goldsmid. Kleinwort Benson chairman Michael Hawkes (on behalf of Kleinwort's bullion subordinate Sharps Pixley) and Evelyn Rothschild feverously pitched their terrible plight to the Bank of England in the person of Kit McMahon, Governor Leigh-Pemberton's right hand. If JMB were not bailed out in time for Monday's business, the thusly enwisened market would surely commence an unsatisfiable bullion run that would topple the bullion banks like dominoes, spreading onward to owners like Kleinworts, Standard Chartered and Midland Bank to threaten the whole commercial banking system. In this instance The Bank was moved into agreement that the interests were too vital to let JMB fail, and to save the wider institution it bought from Johnson Matthey plc (for a price of one pound) the isolated arm of JMB that was insolvent, effectively nationalizing the underwater bank to preserve market confidence, thus preventing that first domino from falling. Perhaps most notably, the LBMA was formed a short time later, in December of 1987, bringing to the bullion clearing market expectations for a level of coordination and "efficiency" that arguably had been the role abandoned by central banks in 1971-73 with the dissolution of the Bretton Woods agreements -- through which the CBs had effectively kept gold capped at $35/ounce for nearly three decades following WWII. [For the uninitiated: LBMA = London Bullion Market Association, an otherwise respectible(?) group of institutions involved in bullion banking, daily price fixing, market making, and clearing of simple and exotic gold derivative instruments.]
Had the "free" floating/adjusting trends been allowed to continue, by the time of the 1991 Persian Gulf War, (and the European signing of the economically important Maastrict treaty soon after), the price of gold might normally have been reaching its initial spiking phase, traveling upward through its new plateau at triple the old level to perhaps its new temporary level of $900. I say "free" in that special way because the structure of political will in this new monetary period (post Bretton Woods) did not completely embrace a free float for gold. Prevailing thought was that rising gold was a sign that the national currency was failing, and official monetary institutions would lean against the market until pent-up pressures pressed gold suddenly higher in recurring step-wise adjustments.
Nearly 25 years have now passed since that 1987 anomaly of events and prices might have lifted gold (but didn't) to my theoretically projected $900 plateau. [An aside: The duration of each plateau in this examination of trends seems to be about 2.5 times the duration of the previous level in the floating (post Bretton Woods) regime. i.e., Four >> Ten >> Twenty-five; perhaps no more should be made of this than a passing curiosity.]
A look at current events reveals the following sparks to light a fire under gold. The 1997 Asian contagion currency crisis reminded everyone of the distinction between depreciating paper currency and real gold wealth. The collapse of Long Term Capital Management (a single hedge fund) after the Russian debt default was said (only safely afterward) by Fed officials to have risked collapsing the world financial system. The 1999-2004 European Central Bank Agreement on Gold putting a curb on their participation in gold leasing, and we see LBMA clearing statistics at record lows (half the volume) since first going public with its 1,000 tonne-per-day info in 1997. Mining companies are weening themselves off gold derivatives/hedging. To challenge U.S. dollar as a reserve asset we now have a fully launched euro under Maastrict's designs for European Monetary Union, notably sympathetic to gold's value with quarterly mark-to-market revaluations. We have had the recent bursting of arguably the largest stock market bubble of all times, and Fed officials speaking openly of printing copious quantities of money and buying long-term bonds while lowering interest rates to 50-year lows. Bolstering gold itself, within the last year we now have a near fully liberalized physical-gold-only market in China. The World Trade Center was destroyed by terrorists, temporarily shutting down financial markets in 2001. The U.S. acted (nearly-)unilaterally to bring about a regime changes in Afghanistan followed by Iraq (which was done under protest of the world community), followed by a little verbal sabre rattling to test the waters toward a similar fate for Iran. The price of oil tripled from recent lows.
When gold shakes itself from
current MANAGEMENT, reaching its long-overdue plateau of $900
is simply a no-brainer, and beyond that we seem now to be quite
due to begin the upswing for yet the next tripling
past that $900 level to the following one at $2,700.
But wait...
Frankly, I find even that estimate to be a rather modest (low)
one in light of the dollar's current depreciating state and its
utter
risk of losing reserve status
-- something that wasn't
at stake at any previous stage of this step-wise rising price trend. This difference,
with the pro-gold euro system in the wing, is where events of
the future need not resemble any price behavior we've seen in
the past. With the official price-capping of Bretton Woods now
an ancient and bad memory for most national institutions, it is
possible that a paradigm shift out of the key international reserve
role for the U.S. dollar will, with the help of the euro architecture,
recognize a wholly new (ancient<=>modern) use for gold that
places its fair market value at levels far higher than our recent
experiences (with gold markets managed through derivative-dominated
methods of price discovery) would even allow us to initially comprehend.
When the definitive shift in financial orientation happens, the
price adjustment could occur virtually overnight, leaving the
gold derivative markets locked down, paralyzed in a sudden realization
that it was the physical aspect of gold in which all value
was present.
Just a few quick thoughts off the top of my head that may be worthy
of your fuller consideration.
Randy S.
June 2003
sitemaster@usagold.com
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