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THE
ROCKET SCHOOL OF ECONOMICS


The Unfolding
by Professor von Braun

October 10th, 2000

Now that we are in the month of October, it appears it is running true to form in terms of providing a rough and rocky road immediately ahead. US stocks did not have a good week, neither did several currencies and gold declined further. The Aus "dullar" continued its imitation of a submarine, as did the New Zealand "dullar", the Euro, the British pound and so on. The US dollar continued its display of strength and Morgan Stanley decided to get in the oil business by bidding on the strategic oil reserve so conveniently made available by Sir Slick himself.

Priceline.com got a taste of its own medicine with a name your own price scenario applying to it's stock. Perhaps it's the Klingons striking back. Certainly the dot.com boom is over and now it's the turn of the high techs as slowing demand and the strong US $ begins to take effect.

We need to remember that investing in such things as stocks and bonds, or in anything, with one exception, is dependant upon the strength, or weakness, of the currency within which the investment is denominated. Currencies are what the value of the investment is expressed in. Should the currency decline then so does the value of the investment. Consequently it is the value of the currency that is key, not the performance of a particular stock. Selling widgets at an ever-increasing rate, with increased profits and all the bells and whistles, is quite pointless if the currency they are priced in loses 40% of its value.

Since the mid 80's we have had a floating exchange rate that in theory allows the market to set the value of the currency. Countries that run unacceptable balance sheets tend to be punished accordingly and since mid-1997 several currencies have been trashed. The floating exchange rate also allows large predatory hedge funds to inflict their particular form of piracy upon unsuspecting central banks and their respective governments. George Soros's move on the British pound is perhaps the most well known, but their have been many other successful raids and they continue to this day.

The heads of the various Central and Reserve Banks are beginning to realize that the floating exchange rate does take control of a currency away from the issuer and delivers it to whoever has the most chips on the table at the time. Usually whoever has the most chips has access to more and has the ability to affect the outcome of the game.

Unfortunately the game is all encompassing in the sense that it involves a large number of participants (CNBC refers to these "participants" as individual investors) who are not even aware that they are involved in high stakes game being played at their expense. These participants still believe that the Central Bankers would never let their money be devalued and that they, the Central Bankers, have the power to stop such things as devaluations, especially those bought about as the result of shots fired from a passing gunship.

Eventually this game will come to an end and a new one will begin. What we are witnessing at present is the final stages of the floating exchange rate game, which, while being played with fewer players, has not ended yet.

The dominant player in this game has been, for quite some time now, the US banking system armed with its wonderful dollars, now the most widely circulated and accepted currency on the planet, a fact that has not escaped the attention of the inside runners.

The dominant player has at present an unlimited supply of chips and also has the ability, because everybody seems to want them, to print more. Lots more. Eventually this will change, but at present we still have perhaps another twelve months of increasing demand for the dominant chips, sometimes referred to as IOU's.

Years ago when currencies were backed by gold, that yellow metal now in disgrace, it was difficult to issue chips "willy nilly" as they say, since the Central Bank needed the gold reserves to increase before this could be done.

The Asian currency crisis of 1997 is about to reappear in its year 2000 version and this time the band-aids applied by the IMF and the World Bank will not work. More importantly it is unlikely that they will have enough band-aids to deal with the problem. It is likely that China, now a member of the WTO, will devalue it's currency in the not too distant future, even a possibility that Hong Kong will do the same by lowering the currency peg to a more acceptable level, which in turn will cause problems for the rest of Asia and the Pacific Rim.

Europe is not faring much better at present with the Euro still learning how to swim it seems. Martin Armstrong's prediction about this currency has proved to be correct and his target of the mid 40's, which seemed absurd at the time, bears watching. Armstrong's prediction of a final move up in the US markets bears watching as well. Certainly from the currency perspective; as other currencies begin to tumble and money flows from various sinking ships to the land of perceived safety until it too begins to sink from being overloaded.

Both Armstrong and Bob Prechter of Elliottwave International have called for a final low in the gold price of $200 before the 19 year bear market in gold ends. And while many gold bugs have been extremely vocal, in the sense of a "it will never happen" vocalness, it remains a very real possibility. While gold has been falling in US $ amounts, in nearly all other currencies it has been rising and as these currencies continue to decline against the US $, the local gold price will rise. $200 dollar gold can't happen? I would not bet against it.

The US based gold miners are the ones that will get hit the hardest should this occur, but this is of no concern to the dominant player. The US miners have nowhere to run from a strong final advance in the US $. In an earlier article we spoke about cross contamination via mergers and acquisitions of "tainted" mining companies by those that have relatively clean balance sheets with considerable cash and unhedged production. It is unlikely that the likes of Anglogold will acquire US producers unless they can use "funny" money to do it. The South African Reserve Bank may not be as silly as people think they are when it comes to their decision not to allow the proposed Goldfields merger with Franco Nevada to proceed. They may be watching the antics of the US Treasury and Federal Reserve officials more closely than we think. Who knows?

"Why would you buy gold now if you thought it was going to get cheaper?" is a question I received in an email from a reader the other day. The answer is actually quite simple. Currently you CAN buy it and take delivery. Taking delivery is the key to ownership. I suspect that attempting to take delivery of gold at $200 per ounce, should that event occur, may be a problem.

Owning US gold stocks carries an inherent risk that is not present when you buy physical metal, which is the only alternative to paper currencies, the one notable exception. Understanding this is what this article is all about and in fact is what the USAGOLD website is all about.

We need to remember that the dominant player will attempt to keep this game going until it is the last player and other viable alternatives, including gold will get dealt to. An example of this is the story that appeared in a German newspaper accusing a US hedge fund of taking on the Euro at the same time of a planned Central Bank intervention. That must have come as a shock to the ECB.

The other news of the week is the reports beginning to appear about losses in the junk bond markets. Where there is smoke there is fire. I am surprised that Moody's has not come out and downgraded both New Zealand and Australian debt because the Euro/Kiwi has a problem and holders of its Australian counterpart must be feeling at best challenged. Exchange losses are beginning to mount and overseas holders of Australian paper do have a problem, which is getting worse by the week. There are also concerns being expressed about certain aspects of the hedging programs of several Australian miners including several examples of gold reserves sold forward and no production taking place. Fancy that. Certainly saves on labor and fuel costs.

While the US dollar may be facing a period of weakness in the near term, overseas currencies will continue to weaken and exchange losses will continue to mount. As this continues money will flow into the US. The dilemma for gold stock investors will be where to put their money. Which is why owning physical gold at these levels is preferred, even if the price declines.

The other alternative, given the fact the gold production at these levels is a liability, is companies that have proven reserves and permits in place. It is unlikely, given the decline in share prices, that they will get much cheaper and providing they can hang on for another year they are a good speculative bet when the gold price ends its bear market. Unhedged gold production will be one of the few asset classes that contain excellent upside potential. Commodity based companies in general should be favored, including oil, gas, alternative energy, base metals, coal and selective grains are worth keeping an eye on.


The Prof can be contacted by email at profvonb2@aol.com

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

Return to the The Gilded Opinion Index Page

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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