- Dear Friend of GATA and Gold...
- RBC Global Investment Management Inc., a division of
Royal Bank of Canada, whose gold mutual fund is among the best performing
in the world, has issued a report to private clients that fully endorses
GATA's analysis of the gold market and the world economy.
- Don't worry -- GATA hasn't gone establishment. To the
contrary, the establishment in the gold world is coming around to our
central premise: that central banks and particularly the U.S. Treasury
Department have been colluding surreptitiously and desperately to suppress
the gold price and manipulate the gold market.
- The RBC Global Investment Management report seems to
have been written by someone who has been following GATA's work closely,
taking notes, and checking out our assertions. It's more evidence that,
because of your support, we're making a big difference for the gold cause.
- The report was sent to GATA this week by an intermediary
and is appended here.
- CHRIS POWELL, Secretary/Treasurer Gold Anti-Trust Action
- RBC GLOBAL INVESTMENT MANAGEMENT INC. Report on Gold
- Clearly, with gold stocks on a tear as the gold price
moves laboriously forward battling the fervent attempts to suppress it,
one must be comfortable with the notion that the gold price is going to
overcome the forces that are aligned against it. What is happening today
is no different than what was happening in the late '60s and the very
early '70s, when the Gold Pool was in existence and the gold price was
contained at $35 per oz. by a consortium of central banks that dumped
a considerable amount of gold to keep prices down. Today, instead of the
overt action of yesteryear, it is covert because the market is allegedly
free, and it has entailed a different mechanism, which has resulted in
a humongous physical short position. In addition, there has been an enormous
amount of derivatives piled on top, which could make the ultimate upside
explosion all the more spectacular.
- So the question obviously is: "Will the gold rally
ever begin?" The following arguments emphatically suggest that it
will more than rally; it will explode to the upside.
- 1.Unsustainable Supply/Demand Imbalance
- Mine production has flattened out at 2,600 tonnes and
is beginning to fall due to a lack of exploration, falling grade at many
mines due to previous high-grading, and the closing of older mines as
they run out of ore. It has been estimated by Beacon & Associates
in an exhaustive study that if gold prices were to remain under $300/oz.,
production will fall in the neighborhood of 25% over the next 5 to 7 years.
Scrap supply tends to average about 600 tonnes annually. Demand is currently
estimated to be roughly 4800 tons (primarily jewelry) without any investment
demand from the Western world. The present deficit has been met by direct
central bank sales (roughly 400 tonnes per year) and central bank leasing
for mining hedges and financial speculation.
- 2) Unsustainable Short Position
- Central banks have ostensibly lent increasing amounts
of gold to earn interest on their reserves. However, when one lends at
an rate (less than 1% generally), the question arises as to whether there
may be another motivation. As a rising gold price stands as a direct repudiation
of their alleged responsible monetary policy, perhaps this is the real
reason they have been so aggressive in this area. Bullion banks have borrowed
gold from the central banks for their own accounts and those of various
speculators, such as hedge funds and financial institutions (the carry
trade) and for producers (mine hedging) and have used derivatives to limit
their risks and generate additional income. The loaned gold has been sold
into the physical market and is now in jewelry, primarily in the Middle
East, India, and other parts of the Far East. The size of the short position,
officially acknowledged to be more than 5,000 tonness by the bullion bank
apologists, is thought to be well over 10,000 tonnes and may exceed 15,000
tonnes. To put this in context, this constitutes between one-third and
one-half of all central bank gold, and the vast majority of it is no longer
- 3) Unsustainable Low Inflation
- The gold price has a tendency to rise at the first whiff
of accelerating inflation. CPI inflation has been unrealistically low
due to the very strong dollar, which has underwritten vicious foreign
competition and removed pricing power in many sectors. However, in the
final analysis, inflation is a monetary phenomenon and the aggressive
interest rate cuts and monetary expansion to avoid recession/deflation
is expected to result in re-inflation. Year-to-date, the liquidity injection
is more than $1 trillion and MZM has grown by 16.5% in the past year.
To avoid debt default, the Fed must err on the side of ease, virtually
ensuring upside pressure on the CPI. In addition, the "war on terror"
superimposed on Bush's mammoth tax cuts and a four-year government real
rate of spending increases that is the greatest since the '60s portends
large U.S. government deficits, yet another recipe for inflation.
- 4) Unsustainable U.S. Dollar
- The U.S. dollar has been levitating for a long time,
but the underlying fundamentals continue to erode. The U.S. current account
deficit exceeds $400 billion annually, and the continuation of this chronic
deficit turned the U.S. into the world's largest debtor as most of these
deficits are being recycled into U.S. debt instruments. However, foreign
appetite for U.S. securities appears to be ebbing and the chart on the
U.S. dollar looks very toppy . Gold is already in a bull market in U.S.
dollars, and an established bull market in every other currency. If the
reserve currency, the U.S. dollar, falters, gold could well be launched
on the upside as people recognize its status as the only "true currency."
- 5) Unsustainable Prices for Financial Assets
- Western world investment demand will be the true fundamental
that drives gold much higher. Gold tends to be counter-cyclical and investors
buy it when financial assets begin to lose credibility. Ownership and
pricing (P/E) of financial assets are at historic highs and if inflation
accelerates, the U.S. stock market is extremely vulnerable. The ratio
of the S & P 500 Index to the price of gold reached an all-time high,
by a considerable margin, in 2000, but this parabola have been broken
and a downward trend is in effect. At the margin, if a small amount of
money is moved from financial assets into gold, the price effect on gold
will be dramatic and the ratio will continue to move in gold's favor.
- 6) Increasing Evidence of Unsustainable Gold Price Manipulation
- a. Aggressive gold lending, which from an economic perspective
is indefensible, has filled the supply/demand gap.
- b. NY Fed gold has been mobilized when the gold price
- c. Timing of Exchange Stabilization Fund gains/losses
corresponds to gold price movements.
- d. Audited reports of U.S. gold reserves show unexplained
- e. Minutes of Fed meetings confirm officially denied
- f. Rules on gold swaps revised but subsequently denied.
However, individual central banks have repudiated the denial.
- g. U.S. gold reserves have recently been re-designated
twice, initially to "custodial gold" and latterly to "deep
- h. Statistical analysis of unusual gold price movements
since 1994 indicate high probability of price suppression. The invalidation
since 1995 of Gibson's Paradox -- that gold prices rise when real interest
rates fall -- suggests that the real manipulation began then.
- i. NY gold price movements versus London trading defy
- j. Timing of huge increases in bullion bank gold derivatives
is consistent with gold price declines.
- k. Rapid decline in U.S. Treasury holdings of gold-backed
SDR certificates is not explained.
- One or two of these factors could be viewed as random,
but the full body of evidence is overwhelming.
- It would appear that gold is beginning to be viewed as
money again. Gold is the only monetary asset that doesn't represent somebody
else's liability, and with U.S. real short-term interest rates now in
negative territory, there is no disadvantage in holding gold. Those with
a vested interest in containing the price of gold -- central banks, bullion
banks, heavily hedged gold companies -- will not die easily, but the tide
is moving strongly against them and the embedded short positions could
catapult the gold price higher while imperiling the future of those holding
the short positions.
- The great rallying cry of the bears is the mobilization
of even more central bank gold to the tide. Recently, Ernst Welteke of
the Bundesbank has spoken publicly of the Germans selling gold after the
initial Washington Agreement limiting European central bank gold sales
to 400 tonnes per year expires in late 2004 with the intention of redeploying
into stocks and bonds. Formerly, commentary and action of this sort by
central banks (the announcement of Swiss sales, the initiation of English
gold auctions, etc.) devastated the gold market but this elicited little
more than a yawn. An astute gold analyst in South Africa postulated the
reason why, perhaps. There are strong rumors that Deutschebank has borrowed
an enormous amount of gold (more than $10 billion worth) from the Bundesbank
over the years to facilitate the carry trade, producer hedging, etc. and
it is becoming apparent that there is no way they will be able to pay
it back. Perhaps, to make good on their gold loans, they will reimburse
the Bundesbank with stocks and bonds and Mr. Welteke is readying the German
public for with his statements.
- In addition, there are enormous dollar reserves building
up in the Far East, particularly in China, and the Far East has acknowledged
being significant buyers of gold. So the flow of central bank gold is
not only one-way. Even the Russian Central Bank is on the buy side. The
shibboleth of central bank sales will undoubtedly be trotted out again,
but it is losing its sting, particularly if the possibility that as much
as half of all the central bank gold may already be in the market starts
to become more widely recognized.
- In addition, in the '70s, when gold was rising sharply
in price, central banks, after having been heavy sellers at $35/oz., sold
little or none at higher prices. Central bankers are no different than
the momentum players; if the price is rising, they are more likely to
be buyers than sellers.
- One last observation concerns the gold share price action
prior to the explosion of gold prices in the '70s. Then, as now, gold
stocks rose to prices that made no sense to observers who had a static
view on gold prices, but the stock buyers knew that sharply higher gold
prices were inevitable. I suspect that is the case today, particularly
when one examines the foregoing evidence.
- 7) Gold Stocks
- Gold stocks are perceived by many to expensive, but,
in fact, they are considerably cheaper than they were in the late '90s.
The central banks' overt attempts to bring the gold price down (Swiss
sales, British auctions, etc.) at that time removed the premium in gold
shares and it is now gradually being restored as confidence returns to
the sector. In fact, if the gold prices were to rise sharply, I would
not be surprised if the price to NAV continued to rise due to a shortage
of viable gold stocks.