WHY ISN'T GOLD SKYROCKETING? by Dr. Gary North

Oh, this is soo good, even I do not agree everything...

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WHY ISN'T GOLD SKYROCKETING? by Dr. Gary North

For those readers who have sent for (and read!) all of the
day-by-day lessons in my free course on gold, "The Gold Wars,"
the failure of gold to climb back anywhere near its May 12, 2006
price of $725 is not a surprise. If you haven't read it, I
suggest that you do. Click on the link, which will activate a
pre-addressed pop-up e-mail letter. Then click "Send." In about
60 seconds, you'll receive a confirmation link letter. Click the
link. You will instantly be sent Lesson 1.

goldwars@kbot.com

This course will take you through the basics of gold over
the next few weeks.


A POLITICAL METAL

Gold is a political metal. Governments and central banks do
not like to have the central bankers' policies of constant
monetary inflation revealed in a single, easily followed price on
international markets. So, central banks announce gold sales,
which puts a ceiling on gold prices. In the good old days, such
an announcement immediately drove down gold's price. These days,
the gold market does not change much.

There is no question that these announcements are
politically driven. No seller of any asset announces sales if
the announcement might drive the sale price lower.

The size of the Swiss sale is high. The bank says it will
sell about 350 tonnes in 2007 and 2008. Compare this with Great
Britain's sale -- demanded by now-Prime Minister Gordon Brown --
of 450 tonnes, 1999-2001. The Swiss bank sold 1,300 tonnes from
2000 to 2004. The remaining 250 tonnes constitutes a fifth of
its remaining told reserves.

From March to May, Spain's central bank sold 108 tonnes.
The Belgian central bank also sold gold. Spain's finance
minister told the Parliament that the central bank would use the
money to buy bonds. "The Bank of Spain's fundamental goal is to
maximize returns." (http://GaryNorth.com/snip/272.htm) Really?
Then why didn't the bank sell gold at $800 in 1980 and buy T-
bills, which were close to 20% at the time? Why didn't it buy T-
bonds in 1981, which were at 13%? Why did it hold onto gold for
26 years?

Such statements are nonsense. Central banks buy government
debt with newly created counterfeit money and then live off the
interest. They can do this at any time. The goal of high
returns is just public relations smoke that is used solely for
justifying gold sales. The bankers and finance ministers never
mention the goal of increasing the bank's returns except when
they sell gold.

They are justifying the sale of the gold that was
confiscated in 1914 and never returned to the domestic
populations. This confiscation was done in the name of the
nation's solvency in a time of war. Now the bankers are selling
off this most crucial of the nation's central bank reserves.
They broadcast this months or years in advance.

At all other times, they are dead silent about their returns
on investments. They say only that the central bank is pursuing
a policy of full employment without inflation, when in fact there
is always inflation. No one cares about the rate of return,
except when justifying another gold sale.

There is a ceiling effect on gold due to these sell-offs.
Gold buyers always have a threat hanging over their investment.
Central banks control -- or are widely believed to control --
most of the world's above-ground stocks of gold. While gold
leasing by the central banks has served as a way to transfer gold
into the private sector, holding down gold's price, these leases
are not reported as sales, and are therefore not reflected in the
central banks' statistics on their gold reserves.


IS GOLD AN INFLATION HEDGE?

Because of the promise of the United States to sell gold to
central banks and governments at $35 per ounce, from 1933 to
about 1967, there was no money made in gold. Only in the late
1960's were there some minor moves upward. Then came Nixon's
unilateral breaking of the 1933 contract in 1971. Gold moved up.
It was about $50 in early 1972. By early 1974, it was at $100.
It was at $185 in March, 1975. Then it fell to $105 on September
1, 1976. It shot upward in September. It continued shooting
until January, 1980, when it peaked at $840.

Then, down, down, down . . . for 21 years. Meanwhile, the
price level doubled.

So, gold was a really good investment from 1967 to 1980.
Still, you lost over 40%, March 1975 to September 1, 1976. Then
for 40 months, gold became a great investment.

Had you bought gold double eagle coins in 1933 and held them
to 1980, selling at the top, you would have made about 20 times
your investment, based mostly in 40 months of spike at the very
end. Prices rose by a factor of six, so by dividing 20 by 6, we
get 330% on your investment. But you would have paid capital
gains taxes: over 20%. So, you would have more than doubled your
money. That took you 47 years. And you had to sell at the very
top, which you would not have done. That would have made you
1.3% per annum on your investment.

Held to 2001, the price level was 13.6 times higher than
1933. Gold was at $260 in March. So, for holding gold for 78
years, you increased your wealth from by about a factor of six
after taxes, which was less than half the rate of price
inflation.

The only investment worse than this, 1933 to 2001, was
silver.

What if you had bought a house for cash and lived in it for
77 years? Depending on where you lived, you would have made 100
to one and had a roof over your head.

My grandfather in 1933 was offered a waterfront lot on
Balboa Bay in Southern California for $3,000, with another lot
not on the water thrown in as a bonus. He turned down the offer.
What would that be worth today? Three million? Five million?

Gold has had three moves up since 1933: 1967-74 (double
eagle numismatic coins or British sovereigns, since it was
illegal for Americans to own bullion coins until 1975);
1976-80; and 2001-6. That's it. Gold bullion produced a loss
for investors for the rest of the time, because official price
inflation rose by a factor of 16, 1933-2007.

http://www.bls.gov

So, let's say your brother-in-law comes to you. He has just
heard about gold. He asks you: "Is gold a good inflation hedge?"

What would you tell him? This: "It's better than silver."

When gold rises, it rises in spurts. Then it falls, twice
by more than 40%. The lowest percentage fall has been May, 2006
to today.


"THIS TIME, IT'S DIFFERENT"

Maybe. Maybe not.

The Federal Reserve System adopted a policy of tight money
as soon as Bernanke became chairman in February, 2006. This
policy was maintained until July, 2007. In that period, the
monetary base rose by about 1.2% per annum, which was
historically low.

This policy was much-needed. Its effect was predictable, as
I and other Austrian School economists predicted it: a falling
real estate market and a decline in liquidity. The liquidity
crisis hit so fast and so sharply in 2007 that panic hit the FED
in July.

I think the FED has reversed its tight-money policy for this
phase of the business cycle. I think monetary inflation has re-
surfaced. The reason why I think this is that the FED has
started lending money in $500 billion wads to America's four
largest banks. This is unheard of. Something big is going on.

What will it take to restore investors' confidence in
subprime mortgages and all of the hedge funds and other
institutions that invested in them? A lot more fiat money than
the FED has pumped in since early July. A whole lot more.

The money is gone. The losses have been sustained, no
matter what the official book value of these assets is.
Confidence is declining. There are endless press releases about
how the subprime mortgage market is separate from the capital
markets generally. These remind me of the press releases by Dr.
David Lereah in 2005 and 2006 about how there was no end to the
boom in the housing markets. He was chief economist for the
National Association of Realtors. He is no longer with that
organization. Reality eventually caught up with him.

Reality is also going to catch up with the writers of happy-
face press releases about the containment of the subprime
mortgage meltdown.

So, gold's price ought to rise. But gold investors face
these problems:

1. Gold sales by central banks
2. The possibility of a recession
3. The need for liquidity (cash) in a recession
4. The recent advent of buyers who do not know
how poor an inflation hedge gold has been
5. The possibility of a sell-off by these recent
investors in a recession

On the other hand, there is a looming possibility of a war
against Iran. I think there will be such a war before January
20, 2009. I hope I am wrong.

The de-stabilization of the Middle East is already in its
early stage. If Iran, a Shi'ite nation, counter-attacks the U.S.
by smuggling massive supplies of low-cost, low-tech weapons into
Iraq and Afghanistan, as the U.S. government says it is already
doing, then our troops will be at risk of defeat. Getting them
out will be a logistical nightmare.

As for the future of Sunni Saudi Arabia, I would not bet on
its survival.

This creates a scenario of oil at $200 a barrel. Gold
usually follows oil. Gold is a U.S. military disaster hedge. It
is an oil embargo hedge. The world's stock markets will fall. I
don't think gold will follow the stock markets under this
scenario.

Absent this Iran scenario, I think gold will follow the
stock market. At this point, I see more reasons to forecast that
the stock markets will be lower in a year than higher.


THE CASE FOR GOLD

I have heard the case for gold and silver since 1962.
Basically, the main arguments do not change. Those offering them
change. Men retire, die, and are replaced.

The main arguments are these:

1. Gold is an inflation hedge.
2. The Federal Reserve System always inflates.
3. Prices always go up.
4. The central banks are running out of gold.
5. The investing public will finally buy gold.

When gold doesn't go up, there are these arguments:

1. The price of gold was manipulated by central
banks.
2. The price of gold was manipulated by
speculators.
3. The price of gold was manipulated by the
commodities exchanges.
4. The price of gold was manipulated by
governments.

I have personally heard all of these arguments since 1963.
My question is: How did manipulators do this from 1933 to 2007,
except for about 16 years, all of them after 1966?

We were told that silver was even better than gold because
central banks owned no silver to sell. Silver peaked in January,
1980, at $50. It fell for the next 21 years to $4.50 in January,
2001. We are told that silver sellers somehow got their hands on
two billion ounces of silver, which silver bulls were unaware of
in January, 1980. Where? We are never told.

We know central banks own gold. We know central bankers do
not want the public to perceive the decline of their currencies.
So, central bankers will continue to sell until they are out of
gold. This could be long after you are dead.

When they do run out of gold, as the Treasury was clearly
out of silver after 1980, what is to prevent gold from imitating
silver, 1980-2001?

So, before you buy gold, ask yourself:

1. Is the case for gold in 2007 essentially the
same as the case for gold in 1981?

2. Is the case for gold in 2007 essentially the
same as the case for silver in 1981?

3. Is the explanation for gold's fall since 2006
the same as the explanation for gold's fall,
every year after 1980?

4. If silver fell for 21 years when governments
had no silver to sell, why can't gold fall
for 21 years after central banks stop selling
gold?


SHOULD YOU BUY GOLD?

I suggest that you ask yourself these questions:

1. Do you think America will go to war in Iran?
If you do, buy gold.

2. Do you think escalating monetary inflation is
the central bank's only way to keep short-
term interest rates from rising, once
foreigners cease buying T-bills? If you do,
buy gold.

3. Do you think foreigners, including central
banks, will continue to buy T-bills when the
trade deficit is always $800 billion a year?
If so, buy gold.

4. Do you think the FED will inflate, no matter
what, to keep from having a recession? If
you do, buy gold.

5. Do you think Chinese and Indian investors,
not being the products of Western tax-funded
educations, will buy gold when they make more
money? If so, buy gold.

In short, ask yourself this:

At long last, has the FED run out of rabbits
in its hat, leaving only fiat money?

What do I think? I think there will be a war with Iran. I
think the oil-exporting Middle East is a more likely candidate
for disintegration than the FED is as an agency of currency
disintegration.

Investors who bet against the FED after 1933 lost a lot of
money, except for ten years. The American economy has not
suffered anything like a depression since 1940, and nothing like
mass inflation, except for 1977-80. The price controls of World
War II hid the effects of monetary inflation. The politicians
could blame the war for shortages. "Don't you know there's a war
on?" was the universal mantra of the administrators and
allocators.

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CONCLUSION

There is a reason why there are not many more retail coin
stores selling gold and silver bullion coins this year than there
were in 1960.

There is a reason why the same man, Burt Blumert of Camino
Coin Company, since 1960 has run one of the largest of these
stores, with a total staff of about half a dozen people.

The reason is the same: hardly anyone buys gold coins. This
is not a mass market. The bullion market is, but not gold coins.

But the coins are real. They leave few records.