Gold Market Q&A

Adam Hamilton    March 30, 2001    4290 Words


One of the great privileges of writing publicly is the wonderful feedback received from you who generously spend your valuable and finite time reading the essays we publish at Zeal Research. 


I have been a contrarian investor since I was old enough to comprehend enough financial stuff to put a little money in the equity markets, which was junior high school.  (Yes, I was/am a nerd!)  Although I have been fascinated with the markets my entire life, as a contrarian it always seemed like other more conventional investors never wanted to talk about the areas of the markets that fascinated me.  I suspect many of you contrarians out there share a similar experience.  You love investing and growing your capital, but you steadfastly refuse to jump on the popular bandwagon of momentum investing that the thundering herd obediently follows.  You want to be in an investment BEFORE the shoe-shine boy at the airport knows about it!  You have no interest in buying a vastly overvalued stock just because it has been bid up to lofty new heights. 


Being a contrarian is always challenging as we are few and far between and conventional investors love to ignore or ridicule us.  There were times in my life when I felt that I was the only person on the planet interested in true value, cashflow, and bargain-priced depressed markets.  Thankfully those days will never happen again!  The Information Age has been a huge blessing as it allows like thinkers to virtually congregate to leverage each others’ knowledge and ideas.  We on the investment cutting-edge now realize we are no longer alone!


Writing publicly, I have been particularly blessed as I receive e-mail feedback from six continents constantly.  (If anyone is reading this from a research station in Antarctica, please write and grant me the elusive seventh continent!)  An average week sees 300 or so e-mails these days, and some single days alone exceed 60 new messages.  While it is usually difficult to stay on the saddle of the e-mail beast and keep up with it all, it is really exciting to learn shared thoughts.  There have been literally hundreds of times in the last year when one of you sent a fabulous e-mail that really caused a lightbulb to flash on in my twisted mind!  Feedback is often a catalyst that sparks new understanding for me.  MANY of the essays I have penned in the last year have grown from an insidious seed planted in my skull from a single e-mail from one of you.


Lately, as in last November 2000, I have received many discouraged messages about the global gold markets.  Some questions and comments flashed into my inbox at the speed of light over and over again in March.  I have collated some of the most often articulated comments/questions on the gold markets that I have received in recent weeks.  In lieu of an essay, I thought that I would simply share my opinions on a few of these this week.


Now please realize that all my answers are simply my opinions, nothing more and nothing less.  I am shooting from the hip, using the same imperfect and incomplete information which we all have access to, and I could certainly be proven wrong on any or all of these topics.  So, dear reader, if you continue reading, PLEASE take all these thoughts with a grain of salt, do your own research, and reach your own conclusions.


Thank you again for all your wonderful feedback and support of Zeal Research!


What is the evidence for a manipulated gold market?


In my opinion, the primary evidence is the price behavior of gold over the last five to ten years in light of known supply and demand data.  In a free market, the science of economics dictates that the market price of a given good or service will be attained where supply exactly equals demand. 


For example, if ten widget factories collectively make 1 million widgets each year, but consumers eagerly scamper to buy 2 million widgets, the price of widgets will be bid up until there is no surplus or shortfall in widgets.  As the price of widgets rises, widget factories will ramp up production to reap the higher profits and widget consumers will demand fewer widgets in the aggregate as the higher price pushes low-end widget consumers out of the market.  Eventually, Adam Smith’s famous “invisible hand” pushes supply up and demand down until they meet, and a new market clearing equilibrium price is reached where the exact number of widgets demanded each year by consumers are produced each year by producers.


In the global gold markets, estimated gold mined each year is less than 2,500 metric tonnes, yet gold demanded approaches 4,000 tonnes.  There is a 1,500 tonne annual shortfall in gold mined, and there has been a similarly large deficit for many years.  In a free market, the price of gold would rise until fresh gold supplied equaled gold demanded each year.  We attempted to illustrate this in classical economic supply and demand graphs in our “Gold Shorts Doomed” series of essays.


Since the gold price has not risen to a market clearing equilibrium price, but continued to fall greatly exacerbating the deficit situation, the only logical conclusion that can be drawn is that entities with lots of gold are selling enough of their hordes each year to actually exceed the supply/demand shortfall, as the gold price keeps falling.  The only players on the planet with the vast quantities of gold necessary to make the gold market economic picture balance out are global central banks.


As in any willful act that is outside of or at least pushing the edge of national and international laws, this idea is much easier to digest if there is motive.  Provocatively, the central banks do have strong motives to sell gold! 


First, they have been commissioned to actively manage totally paper fiat currencies that are inherently worthless.  Gold has always been the ultimate inflation barometer and mortal enemy of fiat currency, and many central banks fear the consequences if gold signals to the world how inflated and devalued their currencies have truly become.  Second, the central banks and governments involved have BIG problems in their respective financial systems.  Many of their largest and most important money-center banks have borrowed gold, sold it, and used the money to invest in other financial markets.  These “bullion” banks owe thousands of tonnes of gold that they do not have.  If they faced a rapidly rising gold price, they could go bankrupt and endanger the whole fragile financial house of cards. 


Recall that a SINGLE private hedge fund, Long Term Capital Management, almost brought down the entire US financial system in 1998 because it had made bad bets.  Imagine the terror and havoc in our modern economy if three or four of the most prominent NY banks went bankrupt at the same time as they could not pay back their gold debts…  Governments and central banks believe they must protect elite speculators when their downfall could cause devastating cascading cross defaults.


What do you say to people who scoff at the manipulation hypothesis?


I say “more power to you!”  I had to study the gold markets for years and research intensely before I myself came to the conclusion that the only explanation for the behavior of gold is the manipulation hypothesis.  It is the last option, and the only one left after slicing away all other possibilities with Occam’s Razor.  I have searched and searched but have yet to find any other idea that adequately explains the past gold market behavior in light of fundamental economic realities.  This doesn’t necessarily mean I am right, but this is always where our research leads me.


The wonderful thing about America, and most western democracies, is that we can agree to disagree.  There is no one telling us “you will believe this” or “you will believe that”.  I don’t feel at all threatened by dissenting opinions, and actually seek them out as they help me refine my thought processes.  If someone has researched the facts, looked into all possibilities, and still discounts the manipulation hypothesis, I have tremendous respect for them.  Intelligent people looking at the same imperfect and incomplete information can easily come to different conclusions in any endeavor.  On the other hand, if someone chooses to not research the actual issue, yet emphatically and publicly makes bold assertions about it, I question their true sincerity and find myself doubting whether they are worth listening to if they have not allocated the time and effort to investigate.


As a sidenote, last January (2000), VERY few investors believed we were in a classic mania financial bubble blow-off in the NASDAQ.  Even fewer believed that mutual fund managers were illegally manipulating certain stocks to “paint the tape” and pad their quarterly results to maximize their personal bonuses.  Today, slightly more than one short year later, only fools still deny the NASDAQ phenomenon was a bubble, and the United States Securities and Exchange Commission is investigating mutual funds that, possibly acting in concert, boosted market darlings through strategically timed purchases designed expressly to manipulate stock prices. 


Attempted manipulation happens ALL THE TIME in the capital markets folks!  It is nothing new, and has existed for as long as human beings have gathered together to trade.  Each week, there are new episodes exposed of individuals and groups trying to artificially influence prices to enrich themselves.  The group hammering down gold will ultimately be exposed to the harsh sunlight just like other manipulators in the last century of the equity markets.


If gold is being suppressed, will it ever be freed?


Absolutely.  I say this with complete certainty.  As immutably as day follows night or the sun rises in the east, the gold market will not be suppressed forever.  Period. 


As a student of history, I have read hundreds of books on the financial and economic history of nations and I have never found a SINGLE instance of the immutable laws of supply and demand being broken on a long-term macro scale.  They have been bent many times, by many entities, for many reasons, but they have never ever been overcome.  The laws of supply and demand are like gravity in the physical world.  Humans keep finding bigger and more powerful ways to defy gravity, but always, 100% of the time, an object hurtled into the Earth’s atmosphere eventually succumbs to gravity and plummets to the ground.  Granted, some highly specialized spacecraft can leave Earth’s gravity well, but there is no analogy to that in economics.  As long as free men exist, and they wish to profit, the laws of supply and demand are iron-clad and ultimately unbreakable.


In the past, every single effort to suppress the gold price has failed.  Rome debased its currency, and attempted to persuade its citizens that gold was worth less than it really was.  The greatest empire in history fell soon after it embraced dishonest weights and measures.  Innumerable European and Asian governments, some small and some large, have attempted to locally suppress gold throughout history, and all these efforts have been shattered by fundamental supply and demand forces.  Even the same governments involved in dumping gold today tried the same scheme, except quasi-publicly, in the 1960s.  It was called the London Gold Pool and makes a fascinating historical study.


Needless to say, the London Gold Pool soon imploded and was crushed by overwhelming free-market forces and the United States was forced to declare bankruptcy on its obligation to back the US dollar with gold for foreign holders.  There are simply no historical, economical, or logical truths supporting the idea that the global gold market can be manipulated indefinitely.


The ONLY way I can concede it MAY be possible to suppress gold globally is if, God forbid, there was a one world government.  The government would have to be ruthless and authoritarian.  It would have to control every gold mine and placer gold deposit in the world with heavily armed military forces in order to control fresh supply.  Such a government would have to have a gun to the head of every potential gold consumer as well.  Unless such a terrible entity existed, that had a ruthlessly and rapidly enforced death penalty for anyone owning gold anywhere on the planet, I cannot intellectually see a macro global gold manipulation enduring very long.


As a free man under God, I am so thankful such a government does not exist, although many have tried to make it so for millennia.  As long as numerous sovereign nation-states exist and mankind is free somewhere on Earth, there is simply no conceivable way to control the global gold market indefinitely.


The folks suppressing the market have vast riches, why can’t they hold gold underwater forever?


The answer to this question is the same as the earlier answers above.  UNLESS a single entity, or cabal of entities, can exercise absolute, dictatorial, life or death control over every human being on the planet Earth, backed up by irresistible military force, a global free market cannot be suppressed.  The laws of supply and demand of economics are immutable and cannot be broken, and their crushing power can only be delayed for a significant period of time through overwhelming Orwellian force.


The gold shorts are mere mortals like you and I, regardless of the capital they command.  There is no need to fear them.  They put on their pants one leg at a time, they experience hopes and fear just like us, and they make mistakes like every other speculator.  They are not superhuman, they are not immune from the law, and they are DEFINITELY not exempt from the laws of economics. 


Why fight the anti-gold forces?  Why take personal and professional risks to aid this effort?


This question never ceases to amaze me.  Why fight dishonest weights and measures, fraud, the wanton destruction of my fellow human beings in poor African gold mining nations, and a host of other evils?  Because they are wrong and need to be fought! 


In my opinion, it is an absolute truth that dishonest weights and measures such as an artificial gold price are an abomination.  It breaks my heart that western welfare states tax and inflate their populations to death yet they attempt to hide their bloated fiat currency time bombs by attempting to assassinate the golden canary in the hostile fiat currency coal mine.  It makes me ashamed to realize that elite first world bankers are still willing to enthusiastically rape and pillage entire nations.  Our fellow humans, brothers and sisters in poor third world countries around the world, are living terrible lives of poverty in disease ridden filth partially because an artificially low gold price has denied them their just compensation for the natural resource wealth of their nations and the fruits of their hard labor.  My blood boils at the repulsive thought of cheating tens of millions of poor people around the world by destroying their livelihood, in order to enrich a privileged few in the west.


SO many great first world areas were first settled and then grew to greatness because of gold mining roots.  California is a perfect example.  The California gold rush in the mid 1800s laid the foundations for the most prosperous and populous state of our nation.  Why deny other countries the benefits of their God-given natural resources and prevent them from enjoying the blessings we enjoy in the first world?  The gold suppression scheme is truly despicable and indefensible.


For the brave freedom fighters on the front lines taking the risks, I salute them and look up to them as heroes.  Fighting the elite interests suppressing gold is risky and probably dangerous.  Nevertheless, progress is ALWAYS made because brave men and women are willing to take huge risks and fight conventional wisdom. 


In the United States, we are a nation of risk takers.  What would have happened if the men fighting the abominable British monarchy a few hundred years ago had listened to the naysayers?  What if our founding fathers had been too frightened to speak out?  What if they were too scared to take on the biggest and mightiest empire in the world at the time, the British?  What if they were too fearful to sign the Declaration of Independence?  The United States would not even exist today! 


There are, of course, such fearless visionary men and women scattered around the globe.  To them we all owe much.


Change involves risk.  It is never easy to challenge the status quo.  For lovers of financial freedom and fans of the ultimate asset fire-tested in the kilns of six thousand years of history, why not fight to liberate the global gold market?  I realize many are timid and too comfortable in the status quo to join the groundswell of support to liberate gold, and I bear no ill will for them.  Yet I fully understand that only risk-takers change history, and only risk-takers truly experience life.  The timid and fearful doom themselves to a bland existence of excruciating mediocrity.


A couple phenomenal quotes sum these concepts up, one from the great American President Teddy Roosevelt and the other from the fearless American patriot Samuel Adams…


"It is not the critic who counts, nor the man who points out where the strong man stumbled, or where a doer of deeds could have done them better. The credit belongs to the man in the arena whose face is marred by dust and sweat and blood, who strives valiantly, who errs, and who comes up short again and again, who knows the great enthusiasms, the great devotions, and spends himself in a worthy cause. The man who at best knows the triumph of high achievement and who at worst, if he fails, fails while daring greatly, so that his place will never be with those cold timid souls who never knew victory or defeat." - Teddy Roosevelt


"If ye love wealth better than liberty, the tranquility of servitude better than the animating contest of freedom, go home from us in peace. We ask not your counsels nor your arms. Crouch down and lick the hands which feed you. May your chains set lightly upon you, and may posterity forget that you were our countrymen." - Samuel Adams


In the future, when I look back on my own life, I hope and pray I can truly say that I fought the good fight, upholding principles of truth and freedom, and vigorously opposing falsehoods and deceits in all their guises.  I suspect the men on the sharp edge of the gold liberation struggle, like Bill Murphy and Reg Howe, feel the same way.  There is no doubt that a free gold market is well worth fighting for!


Will the Howe case reach the discovery phase?


Although I am not a legal scholar and do not even begin to understand all the convoluted court processes, I believe the Howe case will NOT be thrown out and will make it to discovery. 


The allegations by Mr. Howe are very serious, and they need to be addressed.  Many today scoff at the notion that the court will give Howe a fair hearing, but I think we should give it the benefit of the doubt.  There have been innumerable times in American history when the US court system, under unfathomable pressure from very deep pockets, has made the right decision and upheld truth, justice, and the inalienable rights of the little guy.


Even if, God forbid, the case should be smothered by the legion of elite lawyers the alleged anti-gold forces can muster, it is still important to try and address Mr. Howe’s grievances in a proper legal venue.  That is one of the primary ways disputes are pursued and addressed in the United States of America.


If, for any reason, the Howe case is discarded, advocates of free gold markets should not be discouraged.  The gold price suppression can only last as long as central banks have enough physical gold to flood the market and artificially drive down prices.  After Reg Howe and GATA, I have no doubts that the people short vast amounts of gold fear NOTHING more than global investor demand.  If global investors become interested in gold and begin buying, the game is immediately over.  The gold markets are very thin and if even a tiny fraction of money at risk in equities moves into gold, its price will explode. 


THIS IS WHY it is critical for all lovers of free-markets to wage the info-war against the anti-gold forces.  Tell your friends, tell your neighbors, tell your colleagues, spread the word that the gold market is being suppressed and that there will be vast opportunities to profit when the lid is inevitably blown off!  Spread the joy and kick up some investment demand!


I personally believe Mr. Howe is going to WIN, and I am incredibly excited about his efforts.  Nevertheless, whether this legal offensive shatters the opposing forces or not, they ARE going down… it is only a matter of time.


How much central bank gold is left to dump on the market?


Not much, I suspect.  Central banks collectively declare they own about 33,000 tonnes of gold.  Unfortunately, due to goofy accounting conventions, gold already lent out to the market can still be counted as an asset on CB books.  The legendary Frank Veneroso, consultant to nation-states and probably the most respected gold analyst on the planet with his vast experience in the gold world, believes the gold shorts may run 15,000 tonnes right now.  So of the 33,000 tonnes CBs report on their books, perhaps only 18,000 physical tonnes still exist in vaults.  Of that, over 8,000 tonnes belongs to the people of the United States of America.  Although our government may try (or may have tried) to liquidate our public gold, odds are they will fail when the American people learn their gold, which the government confiscated in 1933, is being thrown away at the bottom of a multi-decade bear market.  That leaves 10,000 tonnes.


Of those 10,000 tonnes, how many more central banks are willing to dump their gold at firesale prices, emptying their treasuries of the only financial asset with intrinsic and undisputable value, in order to save a few fat cat banker speculators who made silly bets?  I suspect CBs are getting more and more averse to lending more gold to be sold on the market, especially as they realize that they will probably never see those gold loans paid back.


Dr. Jessica Cross of Virtual Metals reports that 6000 to 9000 tonnes of gold were available for lending before the Washington Agreement in 1999.  Her most recent numbers indicate only 500 to 1000 tonnes may be left that are available for lending and selling in the open gold market.  That is far less than a single year’s supply/demand deficit!  The recent explosion in short-term gold lease rates confirms easily available gold is becoming hard to scrounge up.  I suspect that the CB gold overhanging the market is dwindling rapidly.


Why invest in a market you believe is not on the up and up?


In history, after a market is artificially bullied in one direction for a while, TREMENDOUS free-market forces build behind the obstruction.  When the market bursts free and the laws of supply and demand shatter the manipulation scheme, the market roars to the other extreme with violent fury.  It takes a long time for the market to clear itself for something as hard to produce as gold after an artificial suppression scheme.  After all, you can’t snap your fingers and make gold appear out of thin air like a dollar or stock certificate.


The profits to be made when gold bursts forth from its shackles are simply mind-boggling.  I believe this is truly a once in a lifetime contrarian macro speculation opportunity!


It is generally agreed that 120,000 tonnes of gold have been mined in six thousand years of human history and still exist on the planet today.  At $260 per ounce, this gold is worth US$1,003,103,181,600 … one TRILLION dollars.  Assume gold rockets to $1500 per ounce after the marginal CB supply dries up and before enough new mines can be dug to push prices to a new market clearing equilibrium…  $1500 / $260 = 5.75x conservative appreciation potential.  US$1t x 5.75 = $5.75 trillion.  So, if gold ran to $1500 per ounce after being liberated almost $5 TRILLION, yes trillion with a T, dollars in profits will be realized.  By investing in gold, I am staking my claim to a lucrative piece of that immense pie.


Is $1500 gold absurd?  I don’t think so, I believe it is conservative!  After all, in constant inflation-adjusted year 2000 dollars, gold exceeded $1500 in 1980.  If you are interested, please see our earlier “Is Gold Dead?” essay for graphs and a deeper discussion of “real” gold prices.  This time around, it would not surprise me one bit if gold temporarily blasts through US$5000 per ounce on a short covering gamma spike.  The pressure accumulating behind the suppressed gold market is staggering.


What is your outlook on gold?  When will gold explode? 


My outlook on gold is unapologetically and zealously mega-bullish.  As for timing, I don’t know.  Only God knows the future, not mere mortals like myself.  As a contrarian speculator and investor, all I can do is use my imperfect and incomplete information to buy value, wait for a catalyst, and sell hysteria.  History, economic fundamentals, and logic dictate gold is amazingly undervalued and due for a monstrous rally.  My capital will be ready for the coming gold rush!


Adam Hamilton, CPA     March 30, 2001     Subscribe