 Gold
Stocks Threaten The Financial Order
... So They Had to 'Bleed'
Alex Wallenwein
May 12, 2004
Phew, what a horrible week, wasn't it?
Yes it was - but for whom?
Was it just bad for gold investors, or was it bad for Nasdaq
jockeys as well? How about bond investors, or even financial
policy makers?
Take your pick. Everybody lost these last two weeks - except
those who were long on dollars and for people who own physical
but don't depend on it for their living expenses.
Is the gold-bull dead, then? Have the shorts won yet again? The
gold-shorts surely won a battle - but the war don't look so good
for them.
Looked at from the strategic macro-picture instead of the tactical
micro-view, what has really happened in the last few weeks?
The answer: not much - and nothing unexpected, really. Only the
rhetoric and disinformation was ratcheted up somewhat. There
is worse to come in that department, but that does not change
the strategic picture.
The US government is still lying about its economic "recovery."
As the Hoisington Report indicated, a full 270,000 of the reported
288,000 non-farm jobs supposedly gained were simply "extrapolations"
instead of real, actually counted jobs. The reported number is
still suspiciously close to the 300,000 per month jobs-growth
numbers Bush promised he will "create." Well, he created
the numbers alright. Where the actual jobs are to back them up
is anyone's guess.
What's the Real Problem?
But why did all of this happen?
What kind of danger does a higher gold price pose to the US economy?
Is it really a derivatives problem, or is the problem much simpler
than that?
Although the derivatives numbers certainly look dangerous, every
single once-predicted "Maginot line" after another
has been breached by the gold price without any visible pain
coming from the world's bullion banks. At first, it was supposed
to be $300 gold when the derivatives crisis would hit, then $325,
then $350, then $400, and nothing happened - except that (paper)
gold got pounded into the ground again.
The real problem may lie in the very simple fact that "the
powers" know the jig is up for the broader stock market
- as has been amply demonstrated in the last couple of weeks.
On May 10, 2004, after all this "great economic news"
that got people so euphoric about the dollar, the Dow went decisively
below the 10,000 line for the first time since mid-December 2003,
international indices suffered far worse, and US Treasuries almost
bled to death...
On what?
On rate-hike fears and US inflationary expectations.
Let me get this straight: we are at 46-year lows on interest
rates. We have been there for over 11 months now. Finally Greenspan
get enough backbone to talk about raising them again, maybe just
a weeny bit, and possibly it will be quite a while until he does
- and stock investors get bent all out of shape over it? How
come?
An Economy on Crack
What we have here is a case
of drug addiction in its last stages. The US economy and the
US consumer simultaneously are literally running on crack. The
drug is called "cheap money." Extremely cheap money!
And the fact that it is so cheap, and that it was so cheap for
such a long time, is the only thing that has prevented a total
economic breakdown. It is also the only thing that has fueled
this recent economic "recovery."
Under normal circumstances, rates that low for that long would
lead to exploding demand-pull wage-price pressures all across
the board, but all it brought us is the ability to just barely
hang on by the skin of our teeth. We even had to lie about the
employment numbers to bring the dollar back into vogue, and now
that very fact - a dollar "in vogue" - is biting us
in the tail.
As of now, rates haven't even been hiked yet. Nobody has even
said that they inevitably will be hiked, and when. All we have
are intimations that they may be hiked again some day, and if
so then only modestly - and the entire world's stock market falls
out of bed - instead of getting up for a nice cup of coffee...
What does this tell us about the strength of the economic recovery?
Not much. It could be strong, and it could all be lies. But there
is one thing this tells us that is beyond any doubt. It tells
us that the ubiquitous US "consumer" - yes, Atlas himself
- the giant who is carrying the world economy on his shoulders
- is getting wobbly in the knees.
"Atlas" Failed to Shrug
"Atlas" is in debt
up to his eyeballs. He carries ARM financed home equity debt.
He has loaded his ARM and other debt-plate up to the hilt, and
now the very thing he bargained for - the risk of higher rates
in the future in return for lower rates right now - is merely
threatening to add another teaspoon full of food to his plate.
So far he has just the idea in his mind that this additional
teaspoon full of stuff will hit his plate some day - and he begins
to totter.
Without the cheap and cheaper money of the past two and one-half
years, Atlas' plate would be far lighter - and the economy his
ill-calculated expenditures have fueled would be going through
the inevitable readjustment cycle. But cheap money - low interest-rate
crack - has taken over his life functions. He has to have his
daily "hit" of home equity debt, or his entire wealth
and life-style illusion will come tumbling down.
The problem is that every "hit" adds weight to his
plate, and his plate is way too full for him to ever eat it.
So, will Atlas "shrug" any time soon?
Doesn't look that way. It seems he has been watching to much
financial news on TV for the last few decades. He has been "educated"
in government schools for too many generations. He knows it is
his duty to carry that plate, no matter what. Besides, it makes
him feel better. It makes him feel like he can afford his lifestyle,
and so far it all has worked, for as long as he can think back.
But now he watches in disbelief as his knees start giving way.
He is no longer piling debt onto his plate, but the type of debt
he chose is starting to mushroom all by itself, and the plate
gets heavier and heavier - just as the effect of all that cheap-money
crack is receding from his brain and he is waking up to the full
hopelessness of his situation.
That's where we are right now.
Back in the nineties, as crazy as they were, at least one thing
held true about normal economic thought: the fact that good news
for the economy was good news for the stock market. But look
at things the way they stand now: supposedly "great"
economic news (all those fictitious job gains) caused a huge
stock-market sell-off.
Why?
Because this "great" news inevitably means higher short-term
interest rates. It is nothing but this (as yet unrealized) expectation
of higher Fed rates (or lower ECB rates) that has fueled the
dollar's current bear-market rally. So far nothing but talk has
halted the euro's advance against the dollar, and has helped
the buck stage an impressive - though ultimately doomed - rebound.
Higher rates mean lower company profits. Lower company profits
mean lower potential stock valuations. Lower stock valuations
mean lower prices, and lower prices mean people will feel rather
inclined to keep selling their stocks - especially if there is
nothing else left to finance their lifestyles. Their homes are
already mortgaged to the hilt.
The Threat of Gold Stocks
Now imagine a situation where
the only viable alternative in an ordinary investor's mind would
be a major asset-shift into gold stocks because those are the
only ones left rising in a falling stock market.
Absolute pandemonium!
Right now, it is not so much gold itself, but gold stocks that
pose the biggest threat to the established financial order. Why?
The paper-trained investors of the world are far less likely
to shift major portions of their assets into physical gold than
into gold stocks. After all, gold stocks are still paper, and
the process of buying and selling them is the same as buying
and selling regular stocks. A call to their broker, or a click
of their mouse, and the deed is done.
To get physical, on the other hand, you must leave your house
and actually "go shopping," and then you have all of
that heavy stuff lying around your house. Most people are not
willing to stray that far from their ingrained investment habits.
And what better way is there for the powers to hit gold stocks
than to hit the underlying commodity via its paper exchanges?
If the COMEX paper-old price had been left intact in the current
environment, gold (and silver) stocks would now be the only alternative
to normal equities during a time when equities are severely threatened.
The supply-demand picture would look like that of a severely
understocked game of "musical chairs" with only an
handful of "chairs" for millions of fleeing stock-investors
seeking refuge from the Dow and Nasdaq carnage.
There would be no alternatives.
Bonds are "out" as an alternative. They are dropping
like flies on inflation fears. (If investors had any understanding
how little current dollars will be worth five or ten years out,
they would demand far higher yields than they demand even now!)
Real estate is "out." Mortgage rates are on the rise,
and asset values will drop by that alone.
If gold stocks were still rising, cash would be "out."
Price-Inflation has raised its ugly countenance.
How about oil stocks? Maybe, but oil companies themselves have
to buy a major portion of what they process and sell from others,
so their costs are going up as well in a rising oil price environment.
But now, thanks to the combined effect of the Rothschilds, Bank
of France, ECB and Fed announcements of recent weeks, gold is
down, and so are its mining stocks. The alternative is gone -
for now. As long as money stays in cash, it at least stays "in
the system." Allowing gold stocks to look profitable during
such times, on the other hand, would have been a sure-fire recipe
for disaster in the eyes of the financial order.
And then, of course, you still have the "rats leaving the
ship" phenomenon. What better opportunity for those who
are cash-rich and well connected enough to know what the bell
is tolling to get out of cash and into physical gold than a time
during which the "plebs" are moving out of gold and
into cash? If you are one of those elite types, what better way
to make sure that you will always keep the upper hand in matters
economic than to cause a selling panic so you can load up on
that yellow stuff at bargain basement prices? Witness the Rothschild
announcement and its effect.
Combine all of these, and you know why gold had to be beaten
down.
Does that change anything about either gold's or the current
dollar-system's long-term outlook? Not at all.
As severe and punishing as this latest gold correction appears
to be, it is still part of the world-wide policy of "managing"
a slow, continuously rising gold price. The powers' current "attack"
on gold was simply a result of their realization that we are
witnessing the end of a year-long stock bull run, and are possibly
facing an outright equities-crash. The long-term policy of allowing
gold to slowly rise must in the short term give way to making
sure that stocks don't fall too fast in order to avoid a looming
equities implosion.
There is no way that gold will stay down for any length of time
while Atlas is wobbling under his load in this way. With the
one-two punch of rising rates and rising prices, and only fictitious
jobs gains to cushion those blows, the US economy just doesn't
have that many options open when Atlas finally quits.
That's where we are right now. If, instead of piling debt onto
his back he had piled up some gold bars to sit on and rest, things
might be different now, but here we are - and there we go.
Got
gold?
May 11, 2004
Alex Wallenwein
Editor, Publisher
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