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THE
ROCKET SCHOOL OF ECONOMICS


Goodbye Yellow Brick Road
by Professor von Braun

April 30th, 2000

Owning gold and gold stocks has been, over the last several years, the investing equivalent of eating something that is about a year past its user date. The gold bulls are fighting a losing battle, as the price of gold once again appears poised to make a serious move to the downside. Allegations about conspiracy, manipulation and "rigged" markets abound. Evidence is in short supply.

Central bank selling has been blamed in part for the decline and there is no doubt that the consensus among these fine upstanding members of the banking community is that they need to get away from the concept of gold as money. Certainly it seems, one does not need to hold gold as part of ones reserves.

The Australian Reserve Bank appeared to lead the way with its announcement late June of 1997, that it had sold two thirds of its gold. This announcement began the pattern that has continued to repeat to this day. Next we had the Bank of England announcing that it would reduce its holdings over time, auctioning 25 ton's every 8 weeks. Then we had an announcement called the Washington Agreement that described limitations on the amounts that would be sold in the future. What is surprising about this announcement is that, apart from people believing it, is that it stated that gold lending would be reduced. Yet today we hear reports out of New York that some U.S. investment banks have 40% more gold to lend out now than they did last year. Well that's interesting. How do you curtail something and increase it at the same time?

Now we have the Swiss joining the fray. That land of neutrality, the bastion of banking, numbered bank accounts, precision watches and cows with large bells around their necks, is now selling its gold. According to the chairman of the Swiss National Bank, they have too much of the yellow metal and will simply sell it, as quickly as possible, and figure out what to do with the proceeds afterwards.

Well, well, well! What a turnaround from 60 years ago. Then, the Swiss would only accept gold, certainly from the Germans, who were terrorizing the local communities at the time. The Germans also during that period had a minor currency problem, perhaps best described as a reluctance on the part of other central bankers to voluntarily accept it. But how times change. Now we are in the new millennium.

Now we have the EURO, a currency that will unite all of Europe with a common currency (something the Germans failed to do in the 40's), which has of course continued to decline since it was introduced. And it does have a gold component to its reserves so we have been told. With the sleight of hand that has been and still is going on in the gold market we suspect that double accounting standards may apply to the ECB's gold reserves. It's that curtailing and expanding game we mentioned before.

It seems that the Swiss gnomes have finally decided that they too need a weaker currency and that the best way to achieve this is to sell the very thing that gave it is soundness to begin with. Gold. Surrounded once again by a hostile force, the new Euro, and unable to compete with their higher priced currency, they have decided to surrender. If you can't beat them, join them.

So once again we have a gold sale going on, a "surplus to requirements" type of deal. Like one of those army surplus stores, where you can buy 15 year old ration packs at a "very good" price.

Now what does it all mean to the astute investor, those not of the bargain hunting variety that CNBC continually refers to? Should we all join in the great gold sale of the new millennium? Sell our remaining gold holdings and join the hi-tech re-boom?

Perhaps we should buy the Swiss Franc before it too loses value?

The gold market has been in a twenty-year decline and has not bottomed yet. Meanwhile stocks have enjoyed their greatest run ever. Even with the last few weeks of volatile markets there is no certainty that the Dow Jones index has reached it's peak. Just don't hold your breath.

Central banks seem determined to bring about the perception that gold is not a requirement of today's reserves when it comes to asset backing. Given their track record this itself is certainly grounds for suspicion. What have they suddenly learnt that we are not privy to? Why all the publicity about gold sales? Why do "official" supply and demand numbers have no effect on the market price? Why the rush via an orchestrated attempt by CB's to demonitize gold?

Have the CB's come to the conclusion that just as internet stocks don't need earnings, they don't need reserves, that if they collectively all hold hands together, all will be well?

Do they still believe that the unsuspecting public will subscribe to the new economy era and buy into a currency that does not actually exist? Certainly it is not in circulation yet.

Or is there a plan afoot that we are not aware of? A plan that sees the number of currencies reduced to perhaps three or four, all tied together by a common agreement, including a small percentage with a gold component, thereby removing the fluctuation we see in the floating exchange rate. Certainly hedge funds are a CB's worst nightmare when it comes to things that float and have the ability to sink. A rising gold price is another.

Whatever the reasoning behind this worldwide urge to dramatically reduce gold holdings on the part of Central Banks is, they need to be aware of the possibility that they may inadvertently create the very conditions they are trying to avoid. It would not be the first time.


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

  • 22 May 2009 -- An Often Overlooked Issue!
  • 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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