The second doubleGold Finally Doubles
The next doubling of its price
will be a lot easier and faster
By John Embry
Investor's Digest of Canada
Gold enjoyed a robust rally entering December as mounting demand around the world thwarted the antigold cartel's increasingly desperate attempts to control the price. With gold moving decisively through US$500 per ounce and establishing a 23-year high, it finally achieved a double off its ultimate bottom of US$252 an ounce reached in mid-1999.
The first double is often the hardest and is generally met with pervasive skepticism. This certainly describes gold's laborious journey over the past six years. It has climbed a "wall of worry" in an environment characterized by considerable misinformation and overall indifference.
I strongly suspect that the next doubling will occur more quickly and will be accompanied by growing public enthusiasm. I noted with great interest that Pierre Lassonde, Newmont's president, while being interviewed on Australian television recently, projected a price of US$1000 an ounce within five to seven years. My only rejoinder is that I would be very surprised if it took that long.
There were two particularly instructive developments in the gold world over the past month. The first concerned the Fed's cavalier announcement that it would no longer be providing M3 data after March, 2006.
While dismissed by some establishment types as irrelevant because M3 doesn't really convey any truly worthwhile information, I view it as ominous because M3 has been exploding recently and it represents the most inclusive definition of money. With the authorities going to great lengths to hide the true state of inflation in the U.S., this represents just another red flag. James Turk, a very savvy observer of the gold scene, may have summed it up best by stating:
"Why does the Fed no longer want to report the total quantity of dollars in circulation. They know what's coming - massive amounts of dollar creation to fund the worsening trade and federal government budget deficits."
I don't think that it was coincidence that gold's rally picked up steam after the Fed's announcement.
Russia Raises Reserves
Perhaps equally important was the Russian central bank's declaration that it intends to double its gold reserves to 1,000 tonnes. This was reinforced when Vladimir Putin, Russia's president, endorsed the plan at a Russian mineral conference while expressing support for increasing his country's gold production.
However, the increase in reserves will not be confined to purchasing gold from Russian producers. The first deputy chairman of the central bank, Alexei Ulyukayev, emphasized that they would be purchasing gold across all markets.
I don't think this development can be overemphasized because Russia is an emerging financial power due to its dominant position in oil and gas. Its plans echo similar intentions announced by the South Korean, Chinese and South African central banks.
It should not be forgotten that central-bank buying helped to break the back of the London Gold Pool which suppressed the gold price in the late 60's and early 70's. This aided in launching the twenty-fold move in the gold price which occurred in that era.
When pressures in the gold market are building, and they are becoming particularly intense at this time, you can always count on an establishment news outlet to issue an anti-gold article.
'Alarming Prophesies'
The Economist magazine, an otherwise commendable publication, obliged and published one of the lamest articles disparaging gold that I had ever had the misfortune to read. Entitled, "The Little Yellow God," it could only be described as patronizing and riddled with inaccuracies.
In a classic case of putting the cart before the horse, the article states: "The resurgence in gold has brought forth all manner of alarming prophecies. The price is an omen of rampant inflation; bonds are doomed; the dollar is about to fall prey to the United States' ruthless deficit; the euro will shortly be revealed as a worthless creation of bureaucrats."
It then suggests that with the exception of a possible fall in the dollar, the rest are unlikely. The reality is that gold is rising because thoughtful people with considerable wealth recognize that all of the above are entirely possible, perhaps likely, and are attempting to protect their purchasing power by acquiring an asset with eternal value. A rising gold price is not bringing about the alarming prophecies, but rather, it is a reaction to their existence and the overall deterioration in the macro-financial picture.
However, that isn't the article's most egregious assertion. It trotted out the old canards that gold yields nothing and central banks have vaultfuls of gold that they want to sell. With many financial instruments now carrying negative yields as inflation accelerates and, with money and credit expanding at a rapid rate, gold possesses enormous attraction as an alternate investment.
The suggestion that central banks have ample supplies of gold is totally bogus. By virtue of aggressive leasing to fund producer hedging and carry-trade activities, they may well have emptied their vaults of over half their alleged reserves of 31,000 tonnes and their chances of getting much back diminishes with each passing day.
Nevertheless, it was the summary paragraph of the article which took the prize for hubris. It concluded:
"Gold is still cheap compared with its peak of $850 in 1980. Today, adjusting for changes in American prices, it is worth only a quarter as much. Gold bugs might see that as a chance to buy; others as a reminder of gold's enduring capacity to disappoint."
If gold has disappointed, it is only because the central banks and their bullion-bank cronies have made a concerted effort to suppress the price by surreptitiously dumping thousands of tones of gold into the market over the past 10 years while further holding back the price with the extensive use of derivatives. Now that they are finally getting stuffed, they are reduced to petulant, essentially incorrect articles intended to mislead the public.
As Alan Greenspan is preparing to take his leave as Fed chairman, it might be worthwhile to recall his words in a commentary he wrote in 1967. In an article called Gold and Economic Freedom, he said:
"The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. Deficit spending is simply a scheme for the 'hidden' confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard."
When asked recently by the maverick congressman Ron Paul whether he still believed in what he had written then, Mr. Greenspan apparently replied: "I wouldn't change a word."
That has to be a rather unnerving comment when one considers that he oversaw the greatest debt buildup in the history of the U.S. and facilitated a growth in total money supply during his tenure that comfortably exceeded the amount that was created by all his predecessors combined. Adieu Alan, your legacy awaits."
Editor's Note: John Embry is chief investment strategist for Sprott Asset Management. Mr. Embry's comments on gold are featured regularly in Investor's Digest of Canada, 133 Richmond ST W., Toronto, ON M5H 3M8, 1 year, 24 issues, $137.