- In order to comprehend how gold will be utilized to reverse
the present economic down spiral, we need to build our foundation of reasoning
with several fundamental concepts.
-
- First
-
- To understand the key ingredient in this presentation,
the dollar, you need to think of it in its essential role as the common
share of the United States of America. Just as common shares of corporations
fluctuate in the market place, so do currencies as the common shares of
countries. Much like a quarterly or annual report, the reported Budget
Deficit portrays the quality of economic management of this country. The
Trade Surplus or Deficit is akin to the earnings report of the corporation
for the USA. The level of the discount rate is the dividend rate of the
common shares of the USA.
-
- Second
-
- We can track the establishment of the Instant Gratification
Economy in the early '70s to its birth in the Nixon Administration. That
unfortunate birth took place with the reduction of the requirements of
the Gold Cover Clause from 5% to 0%. The function of the Gold Cover is
to assure that the size of the money supply does not exceed a given amount
of gold cover. That cover is a value number that can increase by obtaining
more ounces or a higher quotation when valuing the gold at market, rather
than the absurd $41 that is used now.
-
- The sterilization of the Gold Cover Clause handed the
control of the supply of money in the USA over to quasi-political special
interest control. It was this act that gave birth to the paper economy
of the USA, thereby founding the ensuing three-generation Instant Gratification
Economy. Items that control act as alarms. Gold was a control and an alarm
that rang through its price. Currency parities were alarms in terms of
market fluctuations to or away from parity rates.
-
- Nixon's sterilization of the Gold Cover Clause accelerated
the world economy on a course to a condition devoid of an alarm system.
Today's body economic is much like the human body with the disease; whereby
the body loses its ability to feel pain, thus inadvertently placing itself
in harm's way. We now live in an "Alarmless Casino Society" within
the "Instant Gratification Economy" now in the throws of its
own demise. That is why the markets have become pure casinos in which a
crisis-a-day sounds no alarm.
-
- An interesting question one might ask is: What post-Nixon
Governor of the Federal Reserve has failed to prime the money pump in the
USA during the last two years of an incumbent president's terms in order
to grease the wheels of the economy and equity markets, facilitating the
incumbent's re-election?
-
- Third
-
- Gold has one primary role in its relation to a currency.
That role is not convertibility. Convertibility deals with gold's role
to control Trade Balances. The source of the problem is not trade balances,
i is the freedom to create violent changes in the supply of money. Gold
has only one monetary function; it acts as a control. Gold could control
the very item that stands at the foundation of today's nemesis: the errors
in human judgment resulting in mismanagement of the money supply. It is
a glaring contradiction for an economic society, built on the ability of
free markets to effect economic distribution, to trust a group of 'quasi-political
special interest people with titles' with the management of our economy
via the expansion or contraction of the money supply, primarily. Communism
and socialism are supposedly dead, the USA is in the process of paying
a high price, for it is a socialist principle to allow the titled few to
manage the economy as has been the case since the reduction of the Gold
Cover Clause to Zero.
- Fourth
-
- To determine how a group of people with the ability to
act will perform in a market crisis, we need only examine their reasoning
and action in a previous situation. The recent extreme decline is US equities
has been blamed in part on the Imperialistic Attitude of CEOs acting, in
some cases, above and beyond law. In order to attempt to create a return
of confidence in the paper assets (the common shares of US corporations),
new laws have been passed for mandating corporate management's ethical
behavior. This is what is called a Legislated Enforced Ethic. Therefore,
one can conclude that in an economic crisis, the minds of those empowered
to act will generate towards a solution that includes the utilization of
legislated enforced ethics, especially if the means are already legislated
and in the system.
-
- Fifth
-
- Definition: A spiral is a grouping of cause and effect
that work to accelerate each other towards an event which then empowers
the spiral itself.
-
- There exists a clear downward spiral of events, each
affecting the other, to affect the other with no evidence that this cycle
will end. A downward spiral in markets is not much different from a downward
spiral in the human experience. In that sense, a downward spiral, such
as depression, requires intervention in order to reverse it. Psychotropic
drugs, as an intervention, are often prescribed in order to provide an
intervened window that can prevent the depression down spiral from going
to its predictable end. Should the patient grasp that opportunity provided
by the intervention, taking a more positive look at their circumstance,
real progress may occur in their lives. Similarly, to reverse a downward
economic spiral of today's proportion, great intervention is necessary
to effect a long-term recovery.
-
- Sixth
-
- The most serious potential economic problem is the least
understood of all situations today. That problem is the $72 trillion dollars
worth at notional value for worldwide derivatives that exist on the books
of commercial banks. 69.4% of all that unfunded specific performance paper
is on the books of US financial institutions and 35% of it belongs to JPM.
Those who believe that this is not a problem, because more derivatives
can be written to adjust to circumstances, also have to believe that this
mountain of unfunded specific performance contracts will never be asked
to perform by anyone. The foundation of this assumption is that there will
never be any counterparty risk. This is because when a counterparty risk
occurs, derivative traders are no longer in charge, attorneys and accountants
take over. When the accountants and attorneys arrive, specific performance
will be required, and down comes the unfunded pile of sewage paper. The
long-term destructive potential of such an occurrence is unthinkable. Nobody
who is sane can take any comfort in such a development of this proportion.
-
- Seventh
-
- Who says that the US dollar, once it closes below 104
on the USDX index, cannot at some time in its 21-month future window of
Bear possibilities put on a NASDAQ-type decline? We live in a Casino Market
world affecting all markets, played by sources of money larger than that
of the central bank individually or collectively. Nobody in the established
investment community expected the NASDAQ to do what it did. Nobody in the
established investment community expects the US dollar to do what it will
do. The heart of the Down Spiral is the US dollar. To stop the Down Spiral,
should it get totally out of hand, before a collapse of the $72 trillion
dollar mountain of sewage, unfunded, specific obligation paper, called
derivative, the dollar will have to be rescued long-term by some act to
resuscitate faith in that paper asset, the US Dollar.
-
- Eighth
-
- The Present Economic Spiral, which will cause a significant
rise in the gold price and a significant further drop in the US dollar,
is:
-
- In the Environment of an expanding US Budget Deficit
-
- We are experiencing an expanding US Trade Deficit
-
- Which impacts an expanding US Current Account Deficit
-
- Which, as it arrives at 5% of US Gross Domestic Product,
produces significant currency adjustments in the US dollar. A lower US
Dollar in Forex Market.
-
- As a result of a new decline in the dollar below the
first low of 104 as measured by the USDX index, non-US holders of US Government
Securities will begin to reduce their purchases. The shift in momentum
of purchasing reverses the previous up trend in this market, which will
result in a surprise increase in interest rates in the environment of weak
business conditions internationally.
-
- This economic spiral will continue to push gold higher
and the dollar lower. Each time it impacts upon itself, the factors in
the Down Economic Spiral further impact the holders of US Treasury instruments
producing the 5th Element of a Long-term Bull Market in Gold by creating
the most unexpected Long Term Bear market in US Treasury instrument due
cyclically and fundamentally, as explained above to occur. Historically,
US interest rates are not made by the Federal Reserve. Rather, US interest
rates are a product of the market level of US Treasury instruments. That
is a key concept to keep in mind.
-
- Ninth
-
- As part of the conditioning that has taken place during
the experience of the three-generation "Instant Gratification Economy."
the majority of market participants, even those akin to gold, believe that
governments are more powerful than markets. This is a fallacy about to
be proven wrong. Markets are the most powerful economic forces in a world
awash in paper money.
-
- Conclusion
-
- I see no solution on the horizon that can reverse the
course of the long-term down spiral in the US economy, therefore I must
conclude that at some point before June of 2004 and possibly much sooner,
the US dollar will take a most unexpected decline in value. This will be
seen internationally as a loss of confidence in the common shares of the
United State and the ability and ethics of its corporate managers, specifically
the sitting administration and the Federal Reserve System.
-
- To reinstitute faith in the US dollar, which is now in
a decline similar to the common shares of a tech company, there will be
a move toward a Legislated Enforced Ethics in the same manner as was utilized
for US corporate common shares recently. These ethics already exist as
procedural law governing the USD Treasury tools. The name of it is the
Gold Cover Clause. The percentage will be raised from Zero, as it now stands,
to whatever is required to show a guaranteed ethical control over the free
creation of too many dollars, the root cause of today's problems. It is
the case of "too many dollars" that is at the heart of all the
problems and is the death rattle of the Instant Gratification Economy in
existence from Nixon's administration to the present.
-
- If the Gold Cover Clause is revitalized before gold trades
above $529, or before a significant shaking of the $72 trillion dollar
mountain of unfunded specific performance contracts known as derivatives
by the surprise of increasing interest rates, then severe long-term damage
to the system will not occur. The down spiral will be reversed and a new
general equities market will take birth. Economies worldwide will recover.
The incentive for central banks to see gold lower will be extinguished.
Gold will trade above and below the price at which the Gold Cover Clause
is revitalized probably by $50, determined by economic condition. We will
not have a return to the recent past in a market sense, but rather an economic
environment will exist where growth has to be earned by good management
because monetary aggregates will not rise and fall like they have since
Nixon gave birth to the deification of paper.
-
- A Warning
-
- If gold trades above $529, without a meaningful intervention
that cures the down spiral, then technically gold is destined to play its
role as the final market solution to balance the balance sheet of the USA
by trading at $1459 to $1700.This will only occur if there is a meltdown
in the derivative market with attendant, unthinkable economic implications.
The reason gold will perform like that will be the short cover of massive
proportions resulting from the unfunded, specific obligation contracts,
called gold derivatives melting down. Once that short cover is completed,
who will pay those prices for gold? No one. Gold will decline from those
levels with a vengeance only witnessed in its rise.
-
- © 2002 This is a FMU copyright article. Permission
to reproduce is hereby granted, provided phrases are not quoted out of
context and provided full by-line credit is given with web address:
www.tanrange.com
-
- http://www.financialsense.com/metals/sinclair/editorials/092602.htm
|
