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THE
ROCKET SCHOOL OF ECONOMICS


Wishful Thinking!
by Professor von Braun

September 17th, 2002

A new bull market in gold? Well wouldn't that be nice! After all we seem to have all the ingredients, what with collapsing stock markets, rising commodity prices, a real estate bubble ready to burst, a nation at war, rising unemployment and rapidly looming corporate debt problems.

So what's missing? There's no shortage of gold for sale, that's what's missing! The Swiss Central Bank has at least 800 ton to sell and the German Central Bank has been making ongoing noises about selling gold and buying bonds and equities. Gold producers have been unwinding their hedges but this activity has slowed and the resultant demand for physical metal has dropped off. The hedges that have been unwound have also resulted in borrowed gold being returned to the CB's, thereby increasing the availability of gold from the CB's.

The supply and demand numbers are still showing that demand exceeds supply, but that supply is defined as newly mined gold and recycled gold and does not include excess CB gold that is the wild card.

Now in case we forget Central Banks are in charge of paper currencies and coincidently have been in charge of the gold price for a very long period of time. It was only after the US went off the gold standard in 1971 and legal individual gold ownership in the US followed several years later, that gold was allowed to "trade" freely. Prior to that the metal's price was fixed in US dollars, prior to that it was in British pounds.

After 1971 gold skyrocketed from $35 to over $800 per ounce, interest rates on government debt went up to 18% and inflation was rampant. This period ended in the early 1980's and the great bull market in stocks is recognized as having begun in 1982.

Twenty-two years ago the Central Bankers were very surprised by the move in the price of gold, which was the result of "freeing" up the gold market, an event that had never occurred before. Lets not forget the IMF (also sitting on 1300 ton) was a seller of gold in the late 70's.

Does one really expect the Central Bankers, the purveyors of funny fiat money to allow this to happen again, given the problems they were faced with in the late 1970's? If the CB's had no gold at all, then I would say they had no choice, but the point here is that they do still have gold and are prepared to use it. Use it, that is, as a means of controlling the only truly independent alternative there is to their funny fiat money.

Once again this independent alternative, private gold ownership, is a very young concept, not more than 28 years of age, and in its adolescent years was very troublesome, something its previous masters, the Central Banks have not forgotten.

And there are not a lot of Central Banks who are meaningful!

The other problem with the new bull market in gold concept is that every body seems to know about it and rarely do bull markets begin with bells ringing, flags waving and the band playing. This just does not happen.

Did everybody know that the top was in the Nasdaq market in March 2000? Certainly not CNBC! Did everybody know that the great bull market in stocks had begun in 1982? Certainly not the "average" investor! Did the "average" Japanese investor know that their market topped in 1989? Then how come the gold bugs, having been consistently wrong for 22 years, now have it right?

Have they asked the Central Banks? After all their permission will be required, whether given voluntarily (yes we will stop selling gold) or involuntarily (whoops- we have too little gold left to sell).

But at present the chances of the often-touted runaway bull market in gold are slim to none. Perhaps the opposite is more likely, as in a watershed decline.

The gold bugs continue to point to the issue of derivatives and all the paper contracts written on the gold market as further evidence of a potential gold rally. But the bottom line is that these contracts, which are bets on which way the gold price will go, if push comes to shove, will not be settled in gold, but settled in cash. Should the Comex come under pressure it is more likely that they would simply settle contracts for delivery in cash, or in the case of an overheated market simply raise margin requirements to 100% as they did in 1980 with silver. As for the Over-the-Counter market well good luck, just don't expect to take delivery and find a lawyer to try to get your cash.

Should a crisis appear in the gold market, one involving a substantial bullion bank that has the potential for serious repercussions, and it becomes a toss up between either collapse the financial system or dump some gold, what's the more likely outcome?

Silver, which has led precious metals rallies in the past, is not currently a metal the CB's are as inclined to control. However in the past few years silver has lagged nearly every gold rally and appears to be lagging badly in this new bull market "rally" as well.

The only thing that can be said about the gold market at present is that it is a very messy market with no clear fundamentals other than buyer beware, especially buyers of gold mining shares.

To assume that the Central Banks, who have the most to lose in a rising gold market, are about to let their illegitimate child upset their applecart is a mistake.

However the day will come when the Central Banks will lose control of the currency markets, when inflation will be obvious to all, when owning bullion is the investment of choice and when gold moves up sharply. But for now expect them to continue to exercise control over that which they have largely controlled for over 200 years.

Do not expect the Central Banks to either announce their potential demise or throw you a lifeline when this event happens. Consider accumulating gold, whether one buys bullion or coins, whenever you can afford it rather than wait for bullion to become the investment of choice. After all, it is a great opportunity to swap potentially worthless paper for something that makes a great potentially worthless paper weight.


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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