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December 09, 2005

Of Golden Dreams - and Royal Hangovers
by Alex Wallenwein

Gold has passed the $500 test, and so far it looks like it will graduate from currency school summa cum laude.

But Monitor subscribers have just received a warning not to get too giddy about it. There is some indication that the fiat powers are working hard on overextending gold's current run, getting all who are ogling it for investment reasons swept up in the rousing emotion of it all, and then bashing their hopes for good with a devastating blow below the belt line.

Well, at least they're trying. You have to give them credit for that. But their success is condemned to mediocrity. Succeed they probably will - but only for a time...

... as always.

They blew their big cannons back in the nineties when hedging was "in" and everybody in the gold mining world and their brother was falling all over themselves, beating a path to the bullion banks' doors in order to sell their own production short - just to "protect" themselves from falling gold prices.

Can you imagine Microsoft taking bets against its "Windows" program back in the nineties - and paying for those bets through the nose? That kinda like what the mining execs did to their shareholders back in those days.

But those days came - and they went.

Then came the Washington Agreement in late 1999, and they and their paper-dope dealing banker friends were "staring into the abyss" as one source close to them is said to have reported. Soon after that came - the bottom.

And then the miners suddenly weren't so keen on betting against their product anymore. The Washington Agreement, of course, was a purely European invention. It shook the bullion banker world. It shook the fiat world, too, needless to say.

Was it really a gold-friendly move? Or was it a head-fake?

The answer is: It makes no difference.

The WA succeeded in two important areas and maybe in a third as well. It succeeded first of all in convincing a bunch of other central banks to join the Europeans and the ECB in limiting their gold sales. It then succeeded in putting an absolute floor under the fiat-gold ratio (what is usually called the "price" of gold). It succeeded in lifting gold out of its doldrums under a purely dollar-based world currency regime, and finally its crowning achievement was in controlling and managing the subsequent inexorable rise of that self-same gold-fiat ratio.

Okay, that's four, but so what? You get the point.

So, was it then a move to free gold from its dollar-shackles - or was it a central bankers' ploy to control gold and prevent a catastrophic blow-off?

The answer is - yes.

Central bankers do hate gold, but there is one thing they hate even more: losing control for good.

Faking a low gold-fiat ratio gives them a lot of control - but it puts them at risk, because history has shown that gold isn't easily controlled for long. Some of them are obviously smarter than others, so they foresaw that and convinced the others to follow along.

Better to give up some control than to lose all of it, forever.

So, here we are now. Gold seems to have passed the $500 hurdle most successfully, but what is happening?

When gold was nearing the $300 level there was a lot of excitement in the gold world. When it surpassed the $400 level the excitement got even bigger, but then came the big slump of 2004 when it went back below that level again for the better part of the first half of the year. Back then everybody thought that "the big five-oh-oh" would completely blow the top off of this thing, and we would shoot straight up to a thousand or so.

Possible - but not likely.

From a psychological standpoint alone, passing $500 per ounce has begun a process of slowly "legitimizing" gold in the minds of many who formerly used to laugh at those of us who tried to tell them to invest in it. The length of the process of getting gold from "there" to "here" has also taken some of the edge off many old-time gold bugs expectations of a super blow-off that will make them rich for all time to come. (Some of the newbies may still be sucked into that mind set - but life will soon cut them and their expectations back down to size.) In short, we have gotten used to the fact that gold is moving up, and continues to move up, at a steady pace (perhaps too slowly for the tastes of some) but up, nevertheless.

How do you train an elephant? (Sorry for the switch of pace, but there's a point, here. maybe two).

How do you get an elephant to lie down and get up for you?

The answer is: Very, very slowly.

You can't beat it over the head, kick its shins, and yell at it to make it do that for you. You need to take your time and get it used to the idea that following your orders isn't really such a bad thing.

Especially if your elephant happens to be located inside a china store and it decides to get up and move around a bit, trying to wrestle it back down doesn't work too well. If it decides to move, you want it to move slowly and preferably to go only where you want it to go - to minimize the damage!

The same thing is happening - and has been happening - with gold.

The golden elephant has decided to move, and it happens to be inside a china store of sorts. It's a china store chock full of very fragile fiat currencies that we have carefully built around it over the past few decades - while the elephant slept.

So far, our central-banker mahouts have done an admirable job of keeping the elephant away from all the shelves laden with fragile fiats - but the problem is that we have turned our entire world into a china store. We cannot safely lead the elephant out of the store. There is no "out." There is only the world - and sooner or later this golden tachyderm will make up its own mind about where to go.

Okay, enough of this elephant stuff, already. When is gold going over $600? That's what you really want to know, isn't it?

And the answer to that one is: The longer it takes, the better.

If gold goes over $600 before New Year's Eve, that orgy will be followed by a serious hangover. And that's where certain elements are currently trying to push it. They want to make it go so high that it will fall really, really low after that.

An old Chinese saying goes: If you want to push someone down, lift them up first. If you want to lift someone up, push them down first. That's what's being played right now. When characters like Jessica Cross are getting bullish on gold, you know there's something cooking.

But all hangovers eventually clear up, and life goes on. And all who solemnly foreswear alcohol while they are puking their guts out eventually reach for that glass full of "Jack" again when they feel better and another party gets going. And so it will be with gold.

In the end, it doesn't matter whether gold gets hyped up only to be pushed down again. The effects will be temporary, only. Soon, investors will have no choice but to buy gold (and silver) - because everything else will flat-out suck.

But you can probably save yourself a serious headache by being careful right now.

More specific pointers are reserved for Monitor subscribers.

Got gold?

Alex Wallenwein
Editor, Publisher
The Euro vs Dollar Monitor

Just like driving your car, investing only makes sense if you can see where you are going. The Euro vs Dollar Monitor is your golden windshield wiper that removes the media's greasy film of financial misinformation from your investment outlook. Don't drive your investment vehicle without it!

Copyright © 2003-2008 Alex Wallenwein

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