Gold Stocks Threaten The Financial Order
Alex Wallenwein

... So They Had to 'Bleed'

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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Alex Wallenwein writes the Euro vs Dollar Currency War Monitor. He is helping thousands avoid the pitfalls of dollar-asset investing in a falling-dollar world, exposing how 'euro vs dollar' secretly shapes world finance, economics, politics - and your pocketbook. To sign up for the Monitor, please click here.