IMF study acknowledges risk of double-counting leased central bank gold


By John Dizard
Financial Times
Monday, June 5, 2006

For all the fireworks in the gold price last month, including a 25-
year high, the metal that drives men mad ended down by slightly less
than 2 percent from the end of April. To me and some of the more
sober chart watchers, the bell has been rung. Last month's highs
($728 on the June Comex contract on May 12) probably won't be
exceeded for a year or so. The hyperbolic frenzy that seized the
metals people has to be worked off.

That doesn't mean the long-term bull market in gold -- what the
technicians call the "secular" trend -- is over. That's a multi-
decade trend, and this bull market really only started in 1999;
about the time of the International Monetary Fund meetings in
September and October of that year. The four-figure dollar numbers
that are now only a gleam in the gold bugs' eyes could well be hit.
But just not yet.

The uptrend in gold was a byproduct of simultaneously strong
economies in the developed and the emerging economies, and the
commodities price rises that followed. The commodities price
increases formed by real-world activity were then levered up by
investment managers looking for one more asset play ... just one
more before the next carried interest was calculated.

It may not entirely be a coincidence that the cyclical gold peak was
just past when Hank Paulson was appointed U.S. treasury secretary.
This, one can be sure, was not the president's idea. There is a
range of opinions of Mr. Paulson, but nobody thinks of him as only
another front man, which is what the political world was expecting.
Someone -- or, rather, a lot of people -- grimly informed the White
House that it was time to get serious. Forget the cheerleaders.

A fiscally more conservative, militarily less adventurous,
monetarily tight world is not conducive to a higher gold price, and,
for now, that is what we're probably going to get.

How can we be sure this isn't a long-term peak for gold?

Well, the public really didn't get as caught up in this gold frenzy
as it did in the dot-com stock boom, or anywhere near as involved as
it did in real estate speculation.

For example, take the reception that John Hathaway, the manager of
the Tocqueville Gold Fund, had at the Money Show in Las Vegas this
month. Hathaway's fund was up more than 45 percent when he gave his
pitch to a roomful of investors at the show on May 16. The fund's
assets under management had risen to more than $1 billion. It was,
Hathaway recalls, somewhat painful. "I had 50 people or so in the
room, which could have held four times that number. We'd been given
one of the smaller rooms. It had emptied out after the previous
speaker." And this was at his all-time high point.

Actually, to someone with a long-term interest in gold, that was a
good sign. Clearly, there are a lot of potential buyers left to be
found out there, which can't be said, for example, about Phoenix or
Las Vegas real estate. As Hathaway says: "At least we know that this
time, it wasn't the public" pushing up prices. "It was the momentum
guys and the trend players. After Las Vegas I flew to Geneva to see
potential clients for our offshore fund. They were better than the
(American) retail (investors) in Las Vegas, but not much better. It
was a very hard sell."

If this were a long-term peak in gold, Hathaway would have at least
$50 billion in his fund. He would have had investors throwing their
room keys at him on the stage.

Martin Pring of the eponymous technical analysis firm is fairly
certain that May's price action in gold means that "for all intents
and purposes the game is over for now. There could be a sharp
downside and then a trading range, or we could work off (the
overexcitement) with a slow Chinese torture. I think $490 is the
logical retracement level. When it gets there, I'll start thinking
about what the new secular highs will be.

"For me the proof that we'd passed a top was the story in a weekly
financial newspaper about gold going to $8,000 an ounce."

The man interviewed in that story is James Turk, author of "The
Coming Collapse of the Dollar" and founder of I had a
chance to talk to Mr. Turk last week when he passed through New
York. He's much lower-key in person than in his press releases,
appearing more like the banker he once was rather than what you
think of when you hear the word "goldbug."

It's hard to pinpoint the difference between someone who is just
bullish about gold and a goldbug, since both share a high level of
scepticism about most countries' monetary policy and the markets'
present valuation of financial assets.

The most significant difference would be the goldbugs' firm
conviction that the gold price has been manipulated by a cabal of
Western governments, gold dealers, and bankers.

I've heard and read their arguments and I don't buy it. But Jim Turk
does. He and his confreres believe that through the 1990s and up to
the present time, Western governments have used the gold leasing
market, along with central bank gold sales, to push the price below
where it should be by all rights. As he says: "Manipulation of the
gold price is done to maintain the illusion that the dollar is
worthy of being the world's reserve currency."

Mr. Turk and the other goldbugs have an alternative reserve currency
in mind, of course.

You don't, however, need to believe in the resurrection of the gold
standard to conclude that gold is a very useful investment -- or at
least savings -- medium.

There are too many overleveraged financial markets in the important
currencies, and the prices of these currencies need to be marked
down to meet people's ability to support them with real income.

That doesn't mean timing isn't still very important. You probably
have $100- or $150-worth of correction to go before you should go
back into gold. And I'll be examining one of the goldbugs' theories
about the Clinton administration and gold market manipulation in a
future column.


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