A Melman Minute — January 27, 2014
| By | Leonard Melman |
|---|---|
| Date | January 27, 2014 |
NOTE: It has been a distinct honour to have received an invitation to address the Financial Conference at the giant PDAC convention, the world's largest annual mining gathering, scheduled for March 2-5 in Toronto. My time slot is set for 9:30 AM, Sunday, March 2. We certainly invite all convention attendees or other readers residing in the Greater Toronto Area (GTA) to attend.
Who can fathom the strangeness of economic data? Just when government economists are stating that good strength is developing - presumably raising the demand for money - and the Fed is going to further reduce its monetary expansion policies - one would assume that rising demand coupled with declining supply should result in higher interest rates. But that is not the case of late.
Please note that since the beginning of the year, despite the trumpeting of data which should normally suggest otherwise, long term interest rates have been in a steady move to the downside.
DR. PICK AND THE IMF AUCTIONS - A LESSON FOR TODAY
Our Melman Minute of January 27, 2014 contained the following extract:
"It is also coincidental that a Melman Report reader sent us an e-mail relating to one of the past's golden gurus, Dr. Franz Pick (1898-1985). In his widely-read book, "The U.S. Dollar: An Advanced Obituary", Dr. Pick discussed a situation which I believe relates - at least obliquely - to the Japanese trade situation and which I also believe could lead to the greatest precious metals bull market in history.
I plan to fully discuss important implications involved in these ideas on Wednesday in a special "Melman Minute" and, if applicable, I will also try to tie those ideas to President Obama's State of the Union Address of Tuesday night."
Well, Wednesday's Melman Minute was taken up primarily with a review of President Obama's State of the Union Address - but now it is time to elaborate on the comments noted above.
In Dr. Pick's book, he spent a significant portion of that manuscript describing the reasons for his long-term faith in gold versus his scorn of fiat currencies. His bias against "paper money" is well illustrated by this quote, "...Currency destruction, generally excused by governments as being a natural event, has been connected with the use of paper money from its first appearance in history."
He then defines governments' role in this process by noting, "...'Monetary policy' has come to mean nothing more than inflating the money supply, while 'fiscal policy' denotes no less than deficit financing of the budget and monetization of the resulting debt."
For these and other reasons, Dr. Pick presumes governments have a natural hostility to the contrasting discipline of gold and would do anything to discredit it in the financial markets - including having government bodies artificially inflate the visible supply of gold by inducing artificial auctions to depress prices - and that is what eventuated as he states, "IMF (International Monetary Fund) gold auctions took place from June 2, 1976 through May 7, 1980."
It is the record of those auctions that forms the basis of the comparison I wish to discuss in comparison with the world's current situation.
At first the auctions would appear to have accomplished their goal to discredit gold as the price received dropped from $126.00 per ounce at the first auction in June 1976 to $109.40 at the September 1976 sale. But then a strange thing happened as the psychology of the gold market began to swing against the previously-presumed results. The gold market began to look at the auctions as a sign of weakness on the part of the IMF and also to interpret those sales as a moving of gold from weak central banker control into the stronger hands of private gold holders.
As a result, the price of gold began to be bid HIGHER in future auctions.
By November 1977, gold broke above the $160 level; rose above $200 by August 1978; $250 by February 1979; $400 by October 1979 and reached over $700 per ounce by February 1980.
In what turned out to be a futile move, the US Treasury tried to suppress these rising prices by holding auctions of their own to add new increments to the supply - but those efforts met the same fate as the price received in the initial Treasury auction of May 1978 was $180.38 but then rose steadily until the Treasury suspended further sales when the price received had reached $372.30 by November 1, 1979.
It is my belief, my opinion if you will, that a comparable era may be approaching when the Federal Reserve Board's - and other worldwide central banks as well - efforts to stimulate economic growth by strategies of accumulation of debt and money creation - originally met with financial market celebration - will meet a fate comparable to the IMF and Treasury gold auctions of the late 1970s.
Please note that since 2008, their efforts have indeed met with almost passionate acceptance by the world's financial markets with the Dow Jones Industrial Average serving as an appropriate barometer.
Clearly, since the bottom of spring 2009, the Dow has been on a virtual rampage, celebrating each announcement of Fed activity with bursts of buying, driving the Dow ultimately to the highest levels in history. However, just as the Fed and Treasury actions of the past ultimately failed in their anti-gold activities, I believe a day is approaching - and perhaps not at all in the DISTANT future - when central bank stimulative activities will be looked upon as a matter of grave concern, not celebration.
The trigger could easily be declining economic performance despite ongoing stimulation. If the general public - and the financial community as well - begin to believe that these acts of stimulation not only are not providing a sound basis for economic expansion but are actually threatening the stability of international currency markets, then it appears reasonable to suspect that each aggressively promotional action by the Fed and others will be met with disenchantment and even growing fear.
Some of the signs may be already appearing. Despite strong government 'stimulation', Japan's ultra-important foreign trade figures have started to decline. Europe is now facing weakening economies instead of strengthening. Emerging countries are suddenly wavering on the edge of dramatic currency devaluations. And, most importantly, doubts are beginning to grow about the future strength of the giant American economy as a parade of negative reports are beginning to appear including rising unemployment claims; declining Durable Goods Orders; slowing New Home Sales and Home Construction numbers and a number of important companies now reporting job layoffs - instead of accelerating hiring.
It is my belief that if the negative trends noted above continue into the future, potential disillusionment could grow - with the problem for monetary authorities being that they believe there is no other course of action to remedy economic weakness but greater stimulation since most Keynesians regard economic austerity with virtual anathema - suggesting a trend could easily develop of ever-greater increments of stimulation into the indefinite future - ultimately resulting in steadily0-accelerating higher precious metals prices.
Unfortunately, my 'crystal ball' also offers the suggestion that once this process gets truly underway, the ultimate end for society at large could be something none of us would wish for.
(Sorry for not including more current items, but I felt this concept was worth a 'special'. I plan to return to our normal format for Monday's Melman Minute.)
As of 8:15 AM PST, financial markets are recovering somewhat from earlier sharp selling with the Dow Industrials now down by 'only' 120 points while Canada's TSX Index is off by about 85. Precious metals have given back earlier gains and are now close to unchanged with gold just above $1,240 and silver near $19.10 per ounce. Both base metals and mining share indexes are also little changed on average.
In other markets, the US$ Index is up 13 basis points to 81.33; Crude Oil is off 33 cents to $97.90 and the TYX Index of rates on US Treasury 30-year bonds is down by 25 basis points to 3.610%.
All quotes US$ unless otherwise indicated.
Next "Melman Minute" scheduled for Monday, February 3, 2014