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THE
ROCKET SCHOOL OF ECONOMICS


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 profvonb2@aol.com

Copyright by Professor von Braun. All Rights Reserved. Reprinted at USAGOLD by permission.

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The Rocket School of Economics -- The Lecture Series Index

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  • 28 Mar 2009 -- Problematic Banking Systems!
  • 14 Nov 2008 -- What Exactly is an Asset?
  • 23 Aug 2008 -- Through the Looking Glass?
  • 02 Aug 2008 -- Compounding to the Downside!
  • 26 May 2008 -- Back to Basics Again!
  • 31 Mar 2008 -- The Broken Watch -- Part 2.
  • 27 Mar 2008 -- The Broken Watch -- Part 1.
  • 06 Feb 2008 -- The Financial Equivalent of Faulty Towers.
  • 10 Dec 2007 -- Monetary Systems & Productive Assets.
  • 14 Feb 2007 -- Divorced from Reality
  • 06 Sep 2006 -- Gold, Bankers, the Trade Deficit and Unsettled Transactions
  • 19 Jun 2006 -- When is a Reserve Not a Reserve?
  • 31 May 2006 -- The significance of August 15, 1971.
  • 08 Apr 2006 -- Keep Your Eye on the Ball!
  • 30 Mar 2006 -- What came first?
  • 11 Mar 2006 -- An Unanswered Question.
  • 08 Jan 2006 -- Where have all the projects gone!
  • 11 Dec 2005 -- Gorillas, Rising Gold Prices and Depreciating Paper Currencies!
  • 23 Oct 2005 -- Custodial Risk.
  • 16 Sep 2005 -- An Inherent Flaw.
  • 08 Aug 2005 -- Central Banks and 'Reserves'.
  • 31 Jul 2005 -- Central Bankers, Actors and 'We'.
  • 17 Jul 2005 -- Unintended Consequences! -- Part 3.
  • 07 Jul 2005 -- Unintended Consequences! -- Part 2.
  • 25 Jun 2005 -- Unintended Consequences! -- Part 1.
  • 14 Jun 2005 -- The Two Greater Fools Theory.
  • 03 Jun 2005 -- Real Money, Funny Money and YOU -- Part 4.
  • 30 May 2005 -- Real Money, Funny Money and YOU -- Part 3.
  • 26 May 2005 -- Real Money, Funny Money and YOU -- Part 2.
  • 21 May 2005 -- Real Money, Funny Money and YOU -- Part 1.
  • 09 Nov 2002 -- Carrying a Big Stick.
  • 17 Sep 2002 -- Wishful Thinking!
  • 27 Jul 2002 -- Gold Bugs Beware -- part 2.
  • 10 Jun 2002 -- Gold Bugs Beware!
  • 06 Apr 2002 -- Currencies versus Gold.
  • 26 Jan 2002 -- Bear Market Strategies.
  • 01 Jan 2002 -- 2002 -- A Perspective.
  • 20 Oct 2001 -- The Storm Clouds are Gathering.
  • 30 Sep 2001 -- What to Say?
  • 01 Jul 2001 -- ...Said the Fly to the Spider.
  • 14 Jun 2001 -- Upward and Downward!
  • 28 May 2001 -- Volatility Time, Again!
  • 14 May 2001 -- The Coming Bull Market in Gold Stocks?
  • 24 Feb 2001 -- High Hopes, Wishful Thinking & The Absurd
  • 20 Feb 2001 -- Who Put the Holes in the Swiss Cheese?
  • 22 Jan 2001 -- US Dollar Admits Identity Crisis!
  • 16 Jan 2001 -- Dear George W.
  • 24 Nov 2000 -- The Bubble Has Burst
  • 11 Nov 2000 -- The Media, Bull Markets & the Gold Price
  • 02 Nov 2000 -- Gold Stocks
  • 29 Oct 2000 -- Oh The Tangled Web We Weave ...When We Set Out to Deceive
  • 24 Oct 2000 -- A Mystery!
  • 16 Oct 2000 -- A Peso Here ...and a Few Thousand Pesos There
  • 10 Oct 2000 -- The Unfolding
  • 30 Sep 2000 -- What's Wrong with THIS Picture?
  • 25 Sep 2000 -- Buy Gold Now!!
  • 23 Sep 2000 -- The Times, They Are a' Changing
  • 15 Sep 2000 -- Time WILL Tell!
  • 27 Aug 2000 -- SS "Paper Assets" Begins to Take on Water
  • 06 Aug 2000 -- The Indian Summer
  • 26 Jun 2000 -- A Yellow Brick Wall
  • 22 May 2000 -- The King IS Naked
  • 30 Apr 2000 -- Goodbye Yellow Brick Road
  • 18 Apr 2000 -- Beware the Ides of March, April and May
  • 08 Apr 2000 -- Really, Sir Aldot!
  • 25 Mar 2000 -- Where To From Here?
  • 18 Mar 2000 -- The Gnomes of Zurich
  • 12 Mar 2000 -- The "New" Economy??
  • 06 Mar 2000 -- Two Questions
  • 04 Mar 2000 -- Iceberg Dead Ahead!
  • 28 Feb 2000 -- The Wizard of Oz
  • 06 Feb 2000 -- Here We Go Again!!
  • 15 Jan 2000 -- Comments on the Gold Market
  • 29 Dec 1999 -- No Raw Ingredients Required
  • 28 Dec 1999 -- No Way Out
  • 14 Dec 1999 -- Ho, Ho, Ho!
  • 07 Dec 1999 -- Greenspan's Bubble
  • 03 Dec 1999 -- Early Warning Signs


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