STAFF NEWS & ANALYSIS
Gold No Longer a Market?
By - September 30, 2008

Prepare yourself for what you can expect over the next few days. Expect to see the stock market decline day after day so that a panic atmosphere is created so that the pawns will give in and approve the package. This will not necessarily entail any intervention. For the stock market to fall under its own weight it merely has to be left free of the almost daily intervention that has kept zombie companies and the major indices afloat. The small benefit the average US citizen can expect from the bailout is that the financial system will not come undone now but rather slightly later. It is again practically impossible to procure gold and silver in physical form at any where near the manipulated spot prices. Gold and silver companies should refuse to sell the gold and silver they are producing at the artificial prices these "mark its" generate. While many companies must sell much of their production at these illusory prices, they should take steps to find fairer pricing and curtail spending money until true market prices are reached. – Thunder Capital Markets

Dominant Social Theme: Is gold worthy of a market? Perhaps "a barbarous relic," as John Maynard Keynes thought it was.

Free-Market Analysis: We are pleased to present the above excerpt because it dovetails neatly with a point we made recently – that there is probably no question now that precious metals markets are highly manipulated and that this ongoing manipulation will eventually render these markets moot if it continues. Sure, they will retain some credibility but an alternative market will spring up, not because it is planned but because it is necessary.

Along these lines we were intrigued by a comment from the Mogambo Guru, Richard Daughty a humorous and often incisive hard money commentator. In speculating about the trend for central banks to cease their selling of gold (see yesterday's Appenzell issue) Daughty wrote the following:

There was a question about central bank buying "last week, when gold saw a record single-day gain", especially Chinese central bank buying of gold, which is already the ninth-largest holder of gold in the world but which holds only 1% of its foreign-exchange reserves in gold, although it actually said it would like to hold more. And Mark O'Byrne at Gold & Silver Investments says that he would "be surprised if the Chinese hadn't been nibbling at the gold market,", which leads to the news that Asian banks "are seen as keen buyers" of gold, which leads to the news that "other central banks are now far more likely to be holders of gold", which leads us back to the second paragraph that "Turbulence in the financial markets and recent U.S. dollar weakness are helping the precious metal claw back its reputation as the central monetary anchor within the international monetary framework", which leads to the opening paragraph of "Central banks may be starting to turn one of the few assets in which they can invest; gold." In short, those crafty Chinese, a fifth of the world's population, may be getting ready to issue a gold-standard money, which will instantly make their currency the strongest in the world, which is just what a country needs if it wants to import a lot of things cheaply so as to respond to demand for internal economic growth without stoking inflation in prices! And, fortunately for those of us who both love to have large profits handed to us and who also own gold, a Chinese gold-standard may soon make a dream come true as gold would skyrocket when priced in suddenly depreciated dollars.

Now we are not so convinced as Daughty (and is he really?) that the Chinese leadership is going to suddenly turn around and declare the country's currency is gold-based. They may, of course, but it would seem to fly in the face of the kind of control that the modern Chinese government has traditionally demanded. It would be an odd communist government indeed that switched over to a gold standard which, if properly implemented, would fairly handcuff the participating government's monetary policy. Of course, the current Chinese government is certainly unlike most such historically, in that it has tolerated in some ways a nearly full-blown free-market economy. However, taking the leap from what is available in China, marketwise, to a gold-backed currency is a big one indeed. Especially for a country that owns a trillion dollars worth of American Treasurys. Time will tell – and we shall watch with interest.

Of course, if our skepticism is unwarranted, and China does take steps in this direction, we shall be among the first to cheer. But there may be other reasons why China's leadership might not wish to declare a gold-backed currency. Yes, it would instantly make the Chinese currency the strongest in the world, but that might not be looked on as an unalloyed good by those responsible for trying to keep China's massive manufacturing sector growing. It would, in fact, have an impact on the country's ability to export cheaply, a factor apparently of paramount importance to the country's stability.

Yet, the above analysis only points out the attraction of gold and silver these days. It is impossible, by mere price manipulation, to halt a commodity bull market, and we believe that the one in question is no more than half over. Certainly, you can slow it down, but that only prolongs it, a frustrating state of affairs for those who want to diminish the price run up in gold and silver.

It is almost inevitable, if gold and silver continue their rise (with pullbacks major and minor along the way) that some country will declare a gold-backed currency. And yes, we are aware that some seem to have such plans on the boards even now in both the Middle East and Asia. Just as intriguing is the idea that other credible markets will emerge for trading of gold and silver, either in paper or physical form if the current markets cannot do the job. None of this is occurring simply by chance. As the prices of money metals continue to rise, the interest in them does too. Alternatives are considered. And prices become ever harder to manipulate.

After Thoughts

Is the bull market run of money metals nearing its end? Analysts will interpret every rise and fall of gold and silver prices through the prism of the larger Western "economic" crisis. Once the market settles down, we will be told, gold and silver will retreat. People are buying gold and silver simply because they offer a safe haven, not because of any intrinsic belief in the instruments themselves.

But in fact that is just the point. People are buying gold and silver because there are so few other choices. Even today there are articles about the rush to buy American Treasurys. What is left out of the analysis is the question that will be whispered more and more loudly as the days, weeks and months unroll. And that is … What happens when the US government itself becomes stretched by so many bailouts? The evolution of the "crisis" may continue far longer than most people currently expect. And that is why gold and silver will continue to offer an attractive alternative to fiat money.

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