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As Good as Gold
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By Greg Nyquist

As one financial tremor after another shakes the economy and threatens to bring down the Wall Street house of cards into an ignominious heap of rubble, goldbugs are beginning to rub their hands in glee.  After years of depressed gold values, it appears that gold may be on the verge of a major breakout. 

In the last month the dollar, the world’s leading currency and only serious rival to gold as a source of “stable” value, has fallen 8.8 percent against the Euro.  The weakening of the dollar has fueled fears that foreign investors will pull out of U.S financial markets.  Foreigners have heavily invested in America.  In the American corporate bond market alone, foreign ownership has risen from 14 percent to 23 percent in just the last five years.  And foreigners also own about 35 percent of the outstanding Treasury bonds. 

One of the main reasons why foreigners have been so eager to invest in the U.S. is because of the strong dollar, which made it expensive to buy American consumer products abroad but provided great investment opportunities for foreigners who found themselves with a lot of dollars on their hands.  But as the dollar weakens, investments in the U.S. suddenly don’t look so promising to foreigners.  If they should begin pulling their money out of U.S. financial markets, this would almost certainly lead to a catastrophic collapse in American securities.  Investors would begin pulling their money out of Wall Street and looking for a safe place to put their money.  There is no safer place right now than gold. 

The price of gold has been so low in recent years that it no longer pays to mine all the gold that is annually consumed in the market.  According to the Gold Anti-Trust Action Committee (GATA), annual gold demand exceeds mine and scrap supply by more than 1,500 tonnes.  In the late nineties, European central banks provided the lion’s share of the deficit between the supply and demand of gold through massive lending and sales.  But in 1999, when these banks announced that they would begin limiting their gold loans and sales, the price of gold remained around $250 an ounce, despite a further increase in demand.  This continuation of depressed prices, despite supply shortages on the production end and increased demand on the consumption end, pointed to large “undisclosed” gold lending and sales which were, in effect, keeping the price of gold down.  But where were these “undisclosed” lending and sales coming from?  No one really knows, though speculation has been rife. 

Conspiracy theorists have pointed to the U.S. and the IMF as the principle source of undisclosed sales, although it is not clear how plausible this theory really is.  Reports have also surfaced indicating that the Chinese, who were buying gold through most of the nineties and may have more gold than they are admitting in the official statistics, might have turned seller in 1998.  But even so, this would only account for part of the undisclosed amount.  Where is the rest coming from?

The most plausible explanation is that there has been more borrowed gold than previously reported—levels which, when combined with the unsound derivative positions of mining companies and of the gold market generally, could be seen as evidence that the price of gold has been severely suppressed through dubious financial practices.  Once this suppression reaches unsustainable levels, the price of gold could rise to heights never dreamt of by today's gold-averse investors. “Someday there will be an explosive bull market in gold that virtually no one today can imagine,” contends GATA. 

The gold market is so unstable right now that any serious drop in asset values in the stock or bond markets could trigger a massive “flight” into gold, sending gold values to giddy heights.  Right now, the main point of danger is the weakening dollar.  Since concerns about the strength of the dollar were first raised at the beginning of August, the price of gold has risen nearly 6 percent.  This modest surge could pale in comparison to the heights gold may scale in the next year or so.  As all the other economic bubbles burst in its midst, gold may prove the most extraordinary bubble market of them all.