report features GATA


9:20p EDT Wednesday, October 6, 1999

Dear Friend of GATA and Gold:

Herewith our friend Gordon R. Franke presents an essay,
"Cheating the Neighbors," which elaborates on GATA Vice
Chairman and Treasurer John D. Meyer's recent essay on
the meaning of the European central banks' declaration
in support of gold. I think you'll enjoy and learn from it.

Please post this as seems useful.

Gold Anti-Trust Action Committee Inc.

* * *


By Gordon R. Franke

October 6, 1999

Once upon a time, when gold was money and every loan
was well-collateralized, trade deficits meant that gold
left the country and prices dropped because there was
less money to pay for the goods made in the country.
With a shortage of money in circulation, debts would
become very difficult to repay and many people would go
bankrupt. Times would be hard, with governments and
economists developing an aversion to balance of trade
deficits. The U.S. dollar was backed with gold and
silver and it acquired a reputation as a desirable
currency. All around the world people acquired faith in
the U.S. dollar as a measure of worth.

A few weeks ago I read of an opinion expressed by Dr.
Kurt Richebacher, a renowned economist I respect. He
indicated that the balance of payments was causing
problems in the U.S. economy, in terms of pricing power
of U.S. business. I accept little on faith from
authorities, so I began to think about the financial
relationship between the United States and the rest of
the world.

It seems to me that the U.S. government has been
running up huge deficits and the reason we have not
seen this as inflation is that when other countries
send us shiploads of high-quality merchandise, we send
them shiploads of paper with dollar signs printed on
it. The people receiving the paper exchange it for
paper printed with the appropriate monetary symbols for
their own country. The banks of the country receiving
the paper with the dollar signs in turn exchange this
paper for still other paper with words like "bond,"
"bill," and "note" printed on it; this new paper can be
exchanged at some later date for still more paper. Our
government in turn uses the returned paper with the
dollar signs to buy votes through any imaginable kind
of non-economic spending. The foreign countries use
their paper as backing for their currency, pretending
that it has the same sort of validity as gold or some
other real thing.

But in the final analysis all the people in the foreign
country have are pieces of paper in exchange for
quality merchandise.

The paper with the dollar signs comes back to this
country in large part so there is no need for extensive
use of printing presses to buy votes and create
dependence through uneconomic spending. This means that
the game can continue as long as people in the other
countries have faith in paper. There is an unending
supply of government obligations to be turned into
dollars or currency of other countries.

To me, the agreement of European central banks to
curtail gold leasing should be a wakeup call to
everyone holding wealth in the form of U.S. dollars. I
refer you to Greg Pickup's excellent essay, "They Rang
a Bell" at and It seems that other
countries now are pulling the plug on the export of
U.S. inflation.


There is an interesting analysis by John D. Meyer on I had thought
about writing something like it but Meyer has better
credentials than I. An earlier posting at the same site
by Reginald H. Howe of suggests
how the U.S. Treasury and Federal Reserve are probably
involved in the mess. Also, James D. Davidson in his
newsletter, Strategic Investment, made the comment some
months ago that the president of the United States had
asked how markets could be manipulated. At the time,
Davidson had thought that the president wanted to
prevent manipulation; he capped his commentary with the
phrase, "silly me."

From this I have put together the following scenario:

The president wanted to hide inflation and deflect
blame from the many scandals surrounding him. What
better way than to have the stock market surge wildly
every time he made a speech or his misdeeds were being
exposed? Other fortuitous events occurring at crucial
times were international incidents, such as embassy
bombings. One calculation of the probability of such
events occurring at such times has odds of about 7
million to 1 against.

The question arises as to how the market manipulation
would be financed. The answer could lie in the sale of
call options on the U.S. gold reserves. This, in turn,
allows hedgers to lease gold and sell it on the market,
protected by the calls. Since the hedgers are
protected, they lease and sell more gold than they
would otherwise, driving the price down further yet,
promoting the "no inflation" mantra. Of course the sale
of hundreds of thousands of call options could finance
any sort of nefarious activity. Similarly, favors done
for unscrupulous hedgers could finance such activity.

Finally, in April or May, when gold prices show signs
of life and the call options might expire in the money,
making necessary the sale of gold from U.S. reserves,
an appeal goes to Britain to sell gold to help depress
the price. This allows the calls to be repurchased or
expire worthless. Naturally, to get maximum effect,
Britain's gold sale is announced beforehand.


People who believe they are going to win the lottery,
people who believe the stock market has a significant
permanent upward bias, adults who believe in the tooth
fairy, and people who believe that government can or
should even try to protect them from illness,
misfortune, and poverty are all part of the same sorry,
deluded lot.

Nevertheless, these people vote; and especially, they
vote for a ridiculously overpriced stock market at the
ballot box and with cash contributions. Hopefully, the
readers of this site are not part of this sorry lot.

I feel that the events discussed by Meyer are strong
signals of dissatisfaction with U.S. financial
practices among central banks in the rest of the world.
For those who can shake their delusions about the U.S.
stock market it is a signal to waste no time heading
for the lifeboats before the market falls to the bottom
of the sea. Junior gold stocks would be a good place to
put 10-15 percent of the proceeds and 25 percent in
precious metals. Many of the senior gold miners are in
the same trap as the hedgers.

The stock market will undergo a severe and prolonged
decline; every bubble market in history has been
followed by a severe bear market. This will result in
the loss of most people's wealth. During the past 16 or
17 years people have thought they were getting rich in
the market, but the true value of the market has
increased at most by 60 to 70 percent. During the whole
time, people have been paying capital gains tax on the
illusion of an 800 percent increase in wealth. During
the same time they have been charging taxes and living
expenses to their credit cards.

Let's consider a scenario of an 800 percent gain
followed by an 80 percent decline, which would not be

In 1983 $10,000 is invested in a mutual fund and now it
is valued at $90,000. During the intervening time
$70,000 in capital gains have been reported. The owner
has paid taxes at a combined state and federal rate of
28 percent on the gains. So he has paid a total of
$19,600 in taxes on the investment. Not wanting to
diminish his standard of living, he has gone from
$2,000 charge card debt to $25,000 debt but he thinks
this is all right because he has all this money in the
mutual fund.

Next, the market crashes and burns down to $18,000
value in his portfolio. He is allowed only a $3,000
deduction for loss on his tax return, saving him about
$1,000 in taxes. He has gone from $8,000 in net assets
to $7,000 debt. His "savings" are wiped out and it is
obvious where they went.

Capital gains are an illusion and taxation of them is
unwarranted confiscation.