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May 11, 2005

Won't Get My Gold for $200
by Bruce Culver

This is a response to Gold to $200, Silver $3.50 by Steve Moyer. While I think Mr. Moyer almost hits on some important points, he has confused a lot of effects with their causes, and I whole-heartedly disagree with his targets for the prices of gold and silver. I will address his points one by one. I have omitted some small and trivial parts from his comments, indicated by ellipsis. Parentheses indicate my comments inserted into Moyer's writing.

Moyer: As soon as gold and silver prices drop, as they continue to do as we speak, the conspiracy theories begin. Enter the court jesters, the jugglers, the monkey grinders and the clowns with the pants that fall down (GATA and gold bugs in general, I guess). You fellows really should take a step back and read your own stuff. It's downright vaudevillian.

Culver: Well, gold is down from highs that it hasn't seen for many a blue moon, but it is holding up pretty well in my opinion, especially given the gloomy investor sentiment in the sector. Commercial short interest is a little troubling, but has backed off slightly. Technically, the picture is mixed but not particularly bearish for bullion, so right off I disagree with his characterization of the gold price situation.

As far as conspiracy theories, how does Mr. Moyer explain Greenspan's testimony before Congress in 1998 that "...central banks stand ready to lease gold in increasing quantities should the price rise." The Gold Antitrust Action Committee (GATA)'s rhetoric may indeed be over the top at times, but they do have facts such as the just mentioned Greenspan testimony to back up their allegations. Anybody who hasn't made up their mind one way or the other should check out GATA's website, www.gata.org.

Moyer: IF "they" ... are so hell-bent on controlling the price of gold and silver; IF ...They...are willing to use all of these underhanded and illegal market means to shoot your precious metals investments in the foot; IF these markets are so easily manipulated... WHY ON EARTH WOULD YOU SIT HERE TELLING US DAY AFTER DAY THAT WE SHOULD PUT OUR HARD-EARNED MONEY INTO THESE INVESTMENTS?...

Culver: There is no telling when exactly the paper game in precious metals will end very badly for the manipulators, when actual physical demand will overwhelm false paper supply. But certainly the near doubling of the gold price in the last four years proves that the manipulators' control of the market is not absolute. Furthermore, no gold bugs I know of have said that the princes of fiat can permanently slay the dragon of market forces. All of us must believe that one day honest money will prevail or why would be gold bugs?

Moyer: If the conspiracy theorists would take a valium and relax for a minute, they might learn that Robert Prechter, Jr., Steve Hochberg, Pete Kendall and everyone else at Elliottt Wave International (E.W.I.) have been quietly, steadily tracking the price action of the metals during the recent, lovely metals run. Fact is, they've pretty much nailed it thus far.

Culver: Hmmmmm. I remember hearing Robert Prechter -- no doubt a brilliant man -- on Financial Sense Newshour some time back -- I believe it was the fall of '03-- and when asked what it would take for him to change his mind on gold eventually breaking previous lows, he said that a sustained rise over $400 might do it. Presumably he didn't think that was in the cards. Well, it has now been over $400 for the better part of the time from then until now. So much for him nailing that one.

Moyer: They (E.W.I.) are calling for a significant downturn... the Elliottt boys have been calling for the metals to take the same hit other assets will in the coming credit contraction and liquidity crisis (gold to just over $200, silver to $3.50 or below), which type of credit crunch/liquidity crisis deflation is consistent with what has occurred post-investment-mania each and every time over the past, oh, 500 years or so.

Like clockwork.

Culver: That's only part right. Looking at the most recent example of what he is talking about, after the collapse of the margin credit induced stock market bubble in '29 there WAS serious deflation, but since paper money was gold backed at that time, that means the value of gold certainly increased not decreased. Supposedly being off the gold standard will make it different this time. Yes, I agree, but in my opinion the difference will be that while gold gains in value, paper money will get trashed as I will explain later.

Moyer: The sluggishness in the world economy is representative of a coming, slow-moving deflationary elephant, not hyperinflation. Money supply contraction points to deflation.

Culver: Money supply contraction? What planet does this guy live on? From what I know the money supply has more than doubled in the past ten years alone. Sure, there has been some small contraction recently, but that already appears to be turning around.

Moyer: The flattening of the bond yield curve points to recession and deflation. The Alan Greenspan "Conundrum," as to why interest rates are not following the Fed's 200 basis point-raised lead, points to deflation.

Culver: Not necessarily, it could simply be that the bond market is the only one big enough to absorb the huge quantities of money that have been created in recent years as foreign central banks have to have somewhere to put the excess dollars they have been accumulating due to the huge trade surpluses with the U.S.

As for "The Conundrum", quite simply the Fed has more control over the short end than the long end of the yield curve, hence the flattening curve. This doesn't change the fact that a bond bubble is the result of inflation, NOT deflation; i.e, INFLATED prices equal low yields.

Moyer: Lack of pricing power for producers, squeezed by a rise in commodity prices, is a symptom of deflation.

Culver: No, that is not a symptom of deflation; it is symptom of overcapacity. This can also be attributed to inflation; that is, as the flood of liquidity from the U.S. Fed went overseas in the form of trade deficits and investment to take advantage of cheap labor, it led to manufacturing supply overcapacity.

Moyer: The breakdowns in the HUI and XAU anticipate metals price drops, which would be indicative of deflation.

Culver: It could also indicate that the manipulated prices of precious metals have simply not kept pace with the inflating costs of production combined with the rise in the currencies of commodity countries. Gold production not being particularly profitable at present prices can only lead to more upward pressure and higher, not lower prices in the long run.

Moyer: Even rising oil and gas prices point to deflation, as producers and consumers get squeezed and the economy bears the brunt of it. (Interestingly enough, however, now even the energy markets are taking their hits as deflationary forces show even broader signs of taking hold).

Culver: It remains to be seen whether recent reversals in commodity prices represent them having made long-term, short-term or intermediate term tops. I reckon they are short to medium, not long-term.

Moyer: If deflation is soon to be upon us, ... there is little to no chance the metals will avoid taking the same hit all other asset classes will. That's what a post-bubble shakeout does, my friends.

So sell your metals. Sell your metals stocks. Put those chips in your pocket for the time being, then whip them out in a few years when few others have much cash to buy much of anything. The good news is, when the time comes, those same Elliottt boys are calling for gold and silver to go through the roof.

I'm looking forward to it.

Culver: Well, in my opinion he will be waiting all the way through one of the most spectacular gold bull markets in history.

Perhaps Mr. Moyer should consider that those following Prechter's advice missed a good part of the 90's stock bull market. To be fair they missed the ensuing crash also, but...

All that being said and despite the fact that Mr. Moyer seems to confuse cause and effect quite a bit in his piece, he nevertheless, as I mentioned before gets near to revealing a very interesting phenomenon, i.e., the way in which monetary inflation, which I deem to be still quite alive, actually IS spawning deflationary pressures.

For example trade deficits fund the building of production overcapacity in developing countries; that low cost production in turn kills pricing power for U.S. producers and laborers; lack of pricing power combined with materials price inflation squeezes manufacturing profit margins, and higher oil prices pinch consumers spending power.

For in depth analysis of this phenomenon see Jim Willie's excellent work at www.goldenjackass.com

The fact that the most aggressive reflationary effort in history has lead to the weakest recovery in the post depression era IS powerful testimony that Kondratieff was on to something and that we are now in the winter phase of his proposed cycle. Nevertheless, I am not sure that things will play out completely according to script, as being in a pure fiat money regime puts us in uncharted waters that Kondratieff, as far as I know, did not predict.

For this reason, I would take likely Greenspan successor, Ben Bernake, at his word and suspect that at least one more round of monetary inflation is just around the corner. Of course I don't believe it will save the real economy from a world of pain, but I do believe it will cause another round of asset inflation. Only this time I believe it will be precious metals and possibly other hard assets that will blow through the roof as the paper markets crash and the fiat dollar standard is shocked.

Sorry Mr. Moyer, you won't be getting my gold at $200, nor my silver at $3.50. Even if I am wrong and they somehow inexplicably end up at those prices, I'll simply hold and wait for the new "golden age" for precious metals that even the "Elliott Boys" are predicting.

Bruce Culver

Bruce Culver is an English teacher, small-time private investor and a gold bug.

His writings are for entertainment and the provocation of thought and should in no way be construed as investment advice.

Copyright © 2005 - 2006 Bruce Culver

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