Midas commentary for May 16, 2000


5p EDT Tuesday, May 16, 2000

Dear Friend of GATA and Gold:

You may enjoy this commentary from Bill Buckler's
Privateer Market Letter, which, apart from being
insightful, mentions GATA toward the end.

Buckler asks whether GATA last week told Congress
that it should give up on the dollar and return the United
States to a gold standard. We didn't. We think the
dollar has its place as much as gold does. But we
did try to deliver a warning about the likely
consequences of the manipulation of markets and the
subversion of the gauges of markets.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

* * *

From The Privateer Market Letter
May 16, 2000

Breaking The Habit?

There is by now almost universal expectation that
when the FOMC meets on May 16, they will raise the
Fed Funds rate by 0.50 percent to 6.50 percent. So
far, some "benign" economic numbers, including a PPI
drop of 0.3 percent ("core" PPI was up 0.1 percent),
has done nothing to shake that conviction. Well, if
the Fed DOES raise by 0.5 percent on May 16, they
will be breaking a quite longstanding habit.

The last time that the Fed moved interest rates (up
or down) by any increment other than 0.25 percent
was on February 1, 1995, more than five years ago.
That rise was from 5.50 percent to 6.00 percent (the
Fed Fund Rate's present level) and was the
culmination of a period of exactly one year during
which the Fed Funds rate was doubled. It was also
about a month before the start of the great U.S.
bull market of the last half of the 1990s.

Cast your mind back to 1995.

The main feature of early 1995, besides a flat stock
market and a horrible blood bath in the bond market,
was a plummeting U.S. dollar. Partially because of
this Dollar weakness, the Fed had been very
aggressive in raising rates. How aggressive? Well,
in two stages between November 1994 and the
beginning of February 1995, the Fed raised by 1.25 percent
(a 0.75 percent rise on Nov. 15, 1994 followed by
the 0.50 percent rise on Feb. 1 1995). The rate
rises didn't help

On Dec. 22, 1994, the $US Index stood at 89.97. By
April 18, 1995, the index had plunged more than 10
percent to bottom out at 80.43. The rate rises,
demonstrably, didn't help. What did help was co-
ordinated currency intervention, led by the Fed and
the Bank of Japan, with even the Europeans getting
involved. From that low in April 1995, the Dollar
has been rising ever since. Again, interest rates
have not been the impetus. Official Fed rates now
are at exactly the same level as they were in
February 1995. But on May 16 that is expected to

What did gold do in 1995, despite all these dollar
gyrations? Essentially nothing at all

So why raise rates now?

In 1994 and early 1995 Mr. Greenspan's public reason
for raising rates was to head off unsustainable
rates of economic growth (in late 1993). The reason
that was hinted at but never stated was to damp down
an overheated stock market. The economic reason
which made perfect sense at the time was to support
a badly ailing Dollar.

OK, so here we are, five years later. Again, the
public reason for raising rates is to head off
unsustainable rates of economic growth. And again,
the reason hinted at but not stated is to damp down
an overheated stock market -- although judging by
the NASDAQ, that goal is well on the way to having
been realised. The only distinction between now and
early 1995, and it is a BIG distinction, is the
recent history of the dollar. Then it was weak. Now
it is strong.

If you who are reading this do not live in the
United States, ask yourself this. When was the last
time that your central bank raised interest rates in
the face of a currency that was not merely strong
but climbing rapidly against every other currency?
If you do live in the United States, ask yourself
this. When was the last time the Fed did it?

Nope, we can't think of a time either.

In fact, the Fed IS protecting the dollar, although
until Friday, May 12, it certainly did not appear as
if the dollar needed any protection. It is a fact
known to all financial policy makers both inside and
outside the United States that America is completely
dependent on an ongoing tidal wave of foreign
liquidity to maintain its economic nirvana. The
trade deficit numbers are all one needs to recognize

Over the past six weeks, since the Nasdaq turned
turtle and U.S. markets in general moved onto very
shaky ground, one potential magnet for foreign
capital has been severely injured. Over the past two
weeks, as the inverted curve on U.S. Treasury debt
paper worsened and as yields all along the curve
began to rise, a second magnet for foreign capital
has begun to flag. That leaves just one left: the
up-until-now all conquering U.S. dollar itself.
Ominously, we now have the first sign that the
dollar might be coming off too. For more on this,
see our $US/$A Gold comparison page.

The U.S. MUST continue to attract foreign capital.
It has no savings. Its people continue to live
beyond their immediate means, trusting the stock
market to provide. Thus, the U.S. MUST continue to
be a magnet for foreign capital. With prospects for
capital gains dwindling -- see the recent
performance of the U.S. stock and bond markets --
the prospect for at least a solid rate of return in
a SAFE investment must be maintained. That means
HIGHER interest rates.

Gold vs. The U.S. Dollar

"The final 'battle' was always going to be against
gold and gold's usurper, the U.S. dollar. If the
United States can manage to keep all the financial
balls currently in the air until the presidential
election is over, it will be an awesome feat. One
cannot rule it out, but we wouldn't want to bet the
farm on it." (Posted on this page on April 28)

Two weeks after that was written, the situation has
worsened. The prospect of the re-emergence of
another Asian crisis is looming, with most Asian
stock markets (including the Japanese market)
showing big year 2000 losses. Europe's stock markets
are holding up, though their currencies are not. In
the United States, the immediate prospect of
swallowing a 0.50 percent rate rise must threaten
further deterioration in both the stock and bond

That leaves the dollar, and waiting in the wings
(where it has been for a LONG time) is gold. There
comes a point where an investment that has been
looked upon as "guaranteed safe" for decades loses
its reputation. There comes a point where a rate of
return, no matter how badly needed, becomes
secondary to capital preservation. That point is not
yet here. It will be signalled by a turnaround of
recent U.S. dollar strength. We may have seen the
first signs of that on May 12.

A 0.50 percent rate rise on May 16 "should" be very
positive indeed for gold. So should any further
weakness in the dollar, especially in the aftermath
of such a rate rise. We say "should" for clear and
obvious reasons. There is the dollar, and there is
gold. They cannot co-exist in a monetary role. As
long as there is no official link between them, it
must be one or the other.

We do not know if GATA explained that to the
politicians they visited in Washington. We do know
that the gold machinations GATA is (properly)
protesting against are not new. We also know that
they are going to be sorely tested in coming weeks.