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Here We Go Again!!
by Professor von Braun
February 6th, 2000
We believe that the recent rise in the gold price will be as short-lived as the last one. Comments to the effect that "this time it's different" won't change the facts. As we have stated before, this is a paper market that has very little to do with fundamentals and supply/demand numbers. Whether it's blatant manipulation or not, this "paper" market still exists and it won't go away overnight. Needless to say caution is required when it comes to gold stocks. As we have said before not all gold stocks are created equal. Anybody rushing in and not being very selective in what stocks they purchase could end up owning the next Ashanti.
It seems that we are witnessing the final stages of a spectacular bull-market in stocks that has gone on for several years. These final stages could include one more blow off to the upside.
One of the key ingredients that have propelled this market to these record highs is derivatives. Very few markets today do not have a derivative contract written on them. From gold to bonds, to silver, to oil, currencies, stocks, commodities, etc.
Another key ingredient is the suspension of the belief in fundamentals, including the concept of profitability, and we have certainly seen that. Amazon.com is a perfect example of a company that gets rewarded for losing money. The talking heads have to support it as it is the perceived leader in terms of the internet e-commerce concept. Real recognition of Amazon.com's inability to turn a profit would flow to other players in this market as well. E-commerce certainly seems to have its limitations including an apparent inability to make profits.
What is interesting is the recent activity in bonds. Greenspan raises interest rates and the 30 year bond rate tumbles. The US Treasury announces it will buy back some 30 year bonds and the market goes ballistic. It seems that the Federal Reserve and the Treasury did not coordinate their activities. Larry Summers is no Robert Rubin. He lacks both Rubin's trading experience and his ability to read markets. This type of activity is a sure sign that those who think they are in control are beginning to stumble.
We believe that the gold market will be one of the first to suffer from a serious bout of "contract credibility" when that day finally arrives and it is discovered that the ability of certain market players to deliver the goods, as in physical metal, is seriously impaired.
Central bankers have allowed the derivatives game to get out of hand, partially because they have failed to understand it and partially because they have involved themselves in it. This involvement will eventually come back to haunt them. What would the "plunge protection team" do if it were facing a regulated derivatives market? Report its actions?
But first we need a few "stumbles" and the activity in the bond market certainly fits that category. There will be more. The rising oil price is another. That too is a market that neither Mr. Greenspan or Mr. Summers can control and yet the ongoing "good health" of the US economy is dependant upon it.
Let's see, we have rising oil prices (OPEC manipulation?), over valued stock markets (did not the Hong Kong government prop up their stock market?), a volatile gold market, funny business in the bond markets, real concerns about the health of Japan's banking system, rising commodity prices (the Russians seem to have perfected the technique of manipulating the platinum group metals), no inflation (so we are told), a boy in charge of the US Treasury, central banks involved in the derivatives markets and a commercial world awash with US paper, most of which has very little (other than a dubious liability) to back it up. That should make for an interesting year.
As we have pointed out before, certain gold mining companies are perhaps better described as hedge funds. They too are heavily involved in the "paper market". The idea that these companies can simply "unwind" their hedge positions is in itself ludicrous. These are contracts that have counter parties that we are talking about. Where would the gold come from, the gold that they would be required to purchase in the market so they could deliver the goods, as in unwind their hedge positions? Just as ludicrous is a belief in the "Washington Agreement" holding together. Central Banks cannot cease leasing gold, certainly not without destroying the paper market in the process. Eventually they will cease these activities because they have to, but that day has not yet arrived.
Market manipulation via derivative contracts is the name of the game at present. Most markets are being manipulated. Greenspan's problem is twofold. He knows that certain market activities have worked in the past but unfortunately for him Wall Street knows this as well. How he slows the economy down and provides a cushion at the same time will be interesting to observe, especially if Mr. Summers is providing assistance. Assistance we might add that may have a distinct democrat flavor attached to it.
Once again, while the necessary ingredients for some type of correction are beginning to appear, things are not out of control yet. We need to remember that the last rally in gold was capped in short order and it is unlikely that this time will be different. This current rally may even see higher prices than the last. But given the complexities of this market one can expect to see gold stocks being sold into any rally, especially by some nervous gold fund managers who have over the last few months, been doing their homework.
The Prof can be contacted by email at firstname.lastname@example.org
Copyright by Professor von Braun. All Rights Reserved. Reprinted at USAGOLD by permission.
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