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THE
ROCKET SCHOOL OF ECONOMICS


What's Wrong With THIS Picture?
by Professor von Braun

September 30th, 2000

The Commitment of Traders report for the S&P futures index currently has the largest commercial short position ever, coupled with the largest speculator long position. Remember that the "commercials" are the professionals and the "speculators" are those that speculate. Now why would the professionals, a group that includes fund managers and companies that advertise their fund managing abilities with a very bullish bias be so short? If the bull market was intact, the economy booming, inflation non-existent and "GDP" increasing at some 5% plus, what is the problem? What do the bulls know that we don't. Are they having a gender crisis? Is there a problem on Wall Street? Is there more than one rotten APPLE in the barrel?

Talking about Apples it seems that very few if any analysts (that's the group of people that get paid more for lying better and never visit the Gold Eagle website) had sell recommendations on the apparently over ripe fruit that suddenly fell from the money tree, with an accompanying thud. Don't they know harvest season is upon us?

Meanwhile back in the far distant past, well October of 1997 actually, which for most financial analysts and talking heads is the far distant past, we witnessed what was called the Asian currency debacle, which was smoothed over by the IMF in a very short time and the bull, the American bull, kept on keeping on.

Since October of 1997 most of these currencies have stayed at the levels they fell to or at best have slightly recovered. The Thai Baht fell 53% and today trades 40% off its 1997 high. The Phillipine peso has just made a new 32 month low, the Indonesian rupiah never really recovered although it is now only 75% off its high instead of the 85% level it reached. The Korean won did recover from a 55% fall and now trades at only a 25% discount from its all time high. It does look a tad shaky one must admit but it is still "hanging" in there.

We have been told that Asian and the Pacific Rim countries have recovered and all is well. Apart from a few 20% declines from the so called recovery highs of some Asian stock markets, the Nikkei included, the likes of the IMF & the World Bank continue to pat themselves on the back and somehow justify their existence.

What has happened in the Asian arena is that since late 1997 some other Pacific Rim countries have been suffering from the Asian contagion effect. The New Zealand dollar is now trading at a 43% discount from its peak in 1997 and the Australian dollar is off a mere 33% from its peak of 82 cents to the US dollar, currently 54 cents.

This was not supposed to happen. But it has!

Even the Australian reserve bank has made comment about the decline. They said they had no idea why the currency was so weak. No idea! Well I'm sure that if they spoke with the Malaysian prime minister he could assist them to gain an understanding of what is going on here. After all did not the currency malaise start in Malaysia, the home of the Malay's?

Now both Australia and New Zealand enjoy triple "A" credit ratings, something that has become quite scarce in that part of the world and one must wonder how long can that continue. If your balance of payments is negative and your debt levels are rising as was Thailand's in 1997, and as New Zealand's is now, when is the haircut due? The New Zealand banking industry is 99% Australian controlled and in some ways from a monetary point of view they are a bit like closely connected twins.

At some stage in the not too distant future one should see some hiccups in both the New Zealand and Australian bond markets as some of their more fancier debt issues like a Euro/Kiwi or Euro/Aussie issue begin to succumb to somebody's temptation to make a profit at the expense of the local populace. George Soros where are you?

After all if a credit worthy issuer had issued either Euro/Kiwis or Euro/Aussies in 1997, converted the proceeds to US dollars at the time and was now looking to repay, then a tidy profit is to be had. Providing of course that one can find an entity prepared to sell them the US dollars in what appears to be a falling market.

The buyers of these fancy debt instruments must be wondering what happened. Perhaps some Belgium dentist now has to work four days a week to try to recover the 40% loss on his high yielding Triple A rated piece of depreciating paper.

Gold bugs of course are always happy when they see a country that has sold its gold reserves suffer from a depreciating currency. Selling 2/3rds of its gold reserves is what Australia did in June of 1997. It seemed the attraction for the greenback was way too strong. Now if the Australian Reserve bank was smart they might give the Swiss a call and swap some of the contained profit in the acquired greenbacks for some of that no longer needed bullion the Swiss apparently have.

That might even put some zest back in their falling dullar (that's a new word that describes falling currencies - dull, dullar and dulled) and horror of horrors, some life into their gold mining industry, but they will have to be quick.


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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