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WSJournal, NYTimes commentaries urge: Murder gold

Section: Daily Dispatches

12:30p ET Wednesday, August 31, 2011

Dear Friend of GATA and Gold:

Commentaries in The Wall Street Journal today and The New York Times yesterday plainly confessed the emnity of government and financial institutions generally toward gold.

The commentary in The Wall Street Journal, written by David Malpass, a Treasury Department official during the Reagan administration, quotes former Federal Reserve Chairman Paul Volcker as having repeatedly declared gold to be "the enemy," something GATA Chairman Bill Murphy has cited about Volcker from time to time in his daily "Midas" column at Malpass writes that "sound monetary policy will produce lower gold prices," which are desirable because "piling trillions into foreign countries, gold, and idle Treasury bonds sucks capital away from growth. The Fed should put an end to it."

At least Malpass blames the Fed for creating the huge distortions in the world economy.

The commentary in The New York Times, written by the newspaper's "DealBook" columnist Steven M. Davidoff, proposes that the U.S. Commodity Futures Trading Commission force commodity exchanges to raise margin requirements for gold trading to quash "speculation" in the monetary metal, and even "to limit the gold acquired individually and by the ETFs. All of these measures would have to be coordinated and put into effect on a global basis."

Coordinated and put into effect on a global basis? As in a "conspiracy" of central bankers?

Mr. Davidoff, it's already in operation.

So much for free markets.

Of course free markets died long ago at the hands of the U.S. government. (See But why does GATA face such resistance in pointing this out in regard to manipulation of the gold market particularly? Could it be any less obvious than the sun's rising in the east?

The Wall Street Journal and New York Times commentaries are appended.

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

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Beyond the Gold and Bond Bubbles

Shouldn't the Fed Try to Improve Incentives to Invest in Growing Businesses?

By David Malpass
The Wall Street Journal
Wednesday, August 31, 2011

Treasury bond yields have been at near-record lows and gold prices at record highs, attracting millions of investors into idle assets through coins, exchange-traded funds, and even warehousing facilities. This reflects fear about inflation and the stability of the financial system and, for some, the coming breakdown of society under the weight of $3.6 trillion in annual Washington spending and transfer payments.

Last week's letup in the gold and bond-buying bubbles was good news. It meant less fear that the financial system will collapse. The Federal Reserve and the Obama administration should pile on by championing sound money and fiscal restraint as a way to rechannel capital into growth.

Fed Chairman Ben Bernanke's Jackson Hole speech last Friday, in which he did not announce still more quantitative easing, was a welcome step back from the frenetic central-bank activism that has been adding uncertainty to an already weak economy. The Fed has bought over $2 trillion of bonds since 2008 and forced interest rates to near zero, which hasn't helped small businesses or created jobs.

... Dispatch continues below ...


Sona Drills 85.4g Gold/Ton Over 4 Metres at Elizabeth Gold Deposit,
Extending the Mineralization of the Southwest Vein on the Property

Company Press Release, October 27, 2010

VANCOUVER, British Columbia -- Sona Resources Corp. reports on five drillling holes in the third round of assay results from the recently completed drill program at its 100 percent-owned Elizabeth Gold Deposit Property in the Lillooet Mining District of southern British Columbia. Highlights from the diamond drilling include:

-- Hole E10-66 intersected 17.4g gold/ton over 1.54 metres.

-- Hole E10-67 intersected 96.4g gold/ton over 2.5 metres, including one assay interval of 383g of gold/ton over 0.5 metres.

-- Hole E10-69 intersected 85.4g gold/ton over 4.03 metres, including one assay interval of 230g gold/ton over 1 metre.

Four drill holes, E10-66 to E10-69, targeted the southwestern end of the Southwest Vein, and three of the holes have expanded the mineralized zone in that direction. The Southwest Vein gold mineralization has now been intersected over a strike length of 325 metres, with the deepest hole drilled less than 200 metres from surface.

"The assay results from the Southwest Zone quartz vein continue to be extremely positive," says John P. Thompson, Sona's president and CEO. "We are expanding the Southwest Vein, and this high-grade gold mineralization remains wide open down dip and along strike to the southwest."

For the company's full press release, please visit:

Mr. Bernanke should directly confront the fear index imbedded in high gold prices and low bond yields. Gold at more than $1,800 per ounce is a loud public statement of no confidence in our central bank. It means people would rather buy gold than hire workers or start businesses -- that they don't trust the central bank to maintain the value of their money.

Former Fed Chairman Paul Volcker thought of high gold prices as his enemy and repeatedly said so as a way to build confidence in the central bank. In the 1970s, high gold prices reflected Fed incompetence that had produced inflation, stagnation and malaise. Jimmy Carter named Mr. Volcker to replace G. William Miller as Fed chairman in 1979, a rare moment of Washington accountability. Gold then fell in the 1980s and '90s in what was called affectionately "The Great Moderation." Inflation and oil prices followed gold prices down, tax rates were cut, and jobs became plentiful. Foreign capital beat a path to America's door, the mirror image of the exodus of growth capital the Fed's weak dollar is fueling.

Equally harmful in our current environment, low bond yields (negative yields in some cases) signal fear of deflation and a collapse in the financial system. Investing on these fears hurts growth -- investors buy billions in gold to protect from inflation and billions in government bonds to protect from deflation. It's like a farmer plagued by both floods and droughts and having to buy insurance against both extremes.

It's not an abstract fear. The Fed caused high inflation in the 1970s and participated in a weak-dollar policy in the 2000s that made gold a vital investment for capital preservation. And the Fed has repeatedly warned of a Japan-style deflation over the last decade, itself buying bonds in huge quantities and now forcing more capital into dead-end government bonds by assuring near-zero interest rates into 2013.

Reinforcing investor fears, the Fed has caused extraordinarily wide and harmful swings in interest rates, the value of the dollar, gasoline prices, and inflation in recent decades. This makes precautionary investments like gold, bonds, and foreign diversification more profitable than investing the old fashioned way in small, growing businesses.

The result: Growth has stagnated. With gold prices flying through the roof, interest rates at near-zero and 10-year bond yields at only 2%, too much capital has been diverted into protecting investors from monetary-policy extremes.

The Fed takes the view that gold prices have limited meaning and that low bond yields are desirable as stimulus, not a market-based indicator of slow growth and high risks to the financial system. This leaves the financial world in suspense over whether the Fed will buy back more of the national debt or even new types of assets as some are urging. The uncertainty is great for the Fed-watching community and Wall Street, which profits by buying bonds in advance of Fed purchases. But the suspense hurts growth and jobs.

To break this cycle, the Fed needs to rebuild a monetary system in which the dollar is a strong and stable store of value and capital is allocated based on interest rates and market forces rather than the rationing of regulatory capital. Gold prices would be lower and bond yields higher in anticipation of a growing economy and a safer financial system.

Unless the Fed breaks the cycle, many of the arguments for buying gold and bonds still pertain. The Fed owes $2.8 trillion in liabilities, undercutting confidence in the dollar and the financial system. It is willing to promise zero interest rates for years but not willing to criticize the declining value of the dollar, one of the most important metrics of central banking.

These missteps aren't fatal. The Fed's plump balance sheet can be pared back when growth starts. Last week's improvement in the gold/bond fear index provides an opportunity for the Fed and the administration to talk up the economy and put a bullish top on the price of gold.

Instead of locking in 2013 interest rates, as it has done, the Fed should reassure markets that sound monetary policy will produce lower gold prices and higher bond yields over time, an important step in restarting growth. The status quo -- piling trillions into foreign countries, gold, and idle Treasury bonds -- sucks capital away from growth. The Fed should put an end to it.


Mr. Malpass, a deputy assistant treasury secretary in the Reagan administration, is president of Encima Global LLC.

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How to Deflate a Gold Bubble (That Might Not Even Exist)

By Steven M. Davidoff
The New York Times
Tuesday, August 30, 2011

Gold is caught in a frenzy.

The price of gold reached a record high of $1,917.90 an ounce last week, not adjusted for inflation, and then promptly plummeted by about $120 an ounce. The volatile trading is again spurring claims that gold is in a bubble, one that will pop badly.

As with past booms in housing prices and Internet stocks, the four-year surge in gold prices raises the same fundamental questions for market regulators. How should they react? Should they react at all? How do they even know if a bubble exists?

It is clear that speculation has been driving gold’s rise. People are buying gold as either a hedge against inflation or economic calamity or solely because they think the price will rise. As evidence of this speculation, the World Gold Council reports that demand for gold bullion bars more than doubled from 2009, to about 850 metric tons a year. This is largely gold that is bought and sits there as people wait for price increases. Indeed, demand for gold in industry and for jewelry has actually declined by 18 percent from 2004, to about 2,500 metric tons a year, according to the World Gold Council.

This speculation is aided by the financial revolution. Previously, gold could be bought by retail investors only through dealers and street shops. Now anyone can go on the Internet, click and buy gold in the market through exchange traded funds. These funds will buy gold on the investor's behalf, and now hold about 2,250 metric tons of gold -- or nearly a year's worth of output.

Speculation alone doesn’t necessarily mean that gold is in a bubble. Gold is historically viewed as a protection against inflation and tumultuous economic times. It is a way to diversify a portfolio and hedge these risks. The price rise can be explained by people's rational betting that these phenomena will occur. This is particularly true in light of the heightened risks to the economy because of events in Europe and the still-lingering effects from the financial crisis in the United States.

But like paper money, gold is worth only what people believe it is worth, and because of this, it is sometimes referred to as the barbarous relic. You can't eat gold. Its industrial uses are limited. If someone else doesn't assign the same value to gold that you do, you are out of luck. For those who predict it will be valuable if society completely collapses, guns and canned goods might come in handier.

Gold's relative uselessness has helped spur talk of a bubble. The problem for regulators is whether this speculation is natural, prudent hedging or people irrationally piling ever more into a bubbly asset.

After all, Alan Greenspan, the former Federal Reserve chairman, speculated that the stock market might be "irrationally exuberant" in 1996, well before the actual bubble took hold. As with the Internet bubble, we will know if a bubble truly existed only if and when gold falls.

In his book "Irrational Exuberance," Robert J. Shiller of Yale University tried to set forth a test for spotting bubbles. Bubbles are created when people buy in to the next great thing. They accept that this is a game-changing asset -- like housing or the Internet -- that cannot fail. As more people buy the asset, the speculation and frenzy increase.

According to Professor Shiller, a crucial driver of a bubble in today's modern age is the Internet and media.

If you watch cable television, it would certainly appear that gold is in a bubble. Commercials abound for buying gold. Commentators on CNBC talk about gold hitting $2,400 an ounce, which would be a genuine record (the previous high of $850 in 1980 would be about $2,300 today, adjusted for inflation). In fairness, other CNBC commentators have said that this is foolish and that gold prices are too high. Still, the marketing of gold to the masses is an ominous sign.

Even after the downturn in prices last week, it is not clear if gold has hit its peak. Is gold still being driven by fundamentals or is it a speculators' delight?

Because of this uncertainty, regulators have acted as hesitantly as they did in the case of the Internet and housing bubbles. The Chicago Mercantile Exchange recently raised margin requirements for gold, the amount of money you can borrow to buy gold. The Singapore exchange also raised margin requirements last week. Other exchanges in other countries have not acted similarly, leading to differences that will drive gold trading to those markets.

The Commodity Futures Trading Commission, the primary regulator of the gold market in the United States, does not appear to want to act. The agency is following form, as it also refused to act forcefully when oil jumped to more than $145 a barrel in 2008. It seems hesitant to quash speculation. The commodities regulator, though, could force American exchanges to further raise margin requirements, reducing leverage and the ability of investors to buy more gold. The agency would also have to act to limit the gold acquired individually and by the ETFs. All of these measures would have to be coordinated and put into effect on a global basis.

Those would also be very aggressive acts to attack a problem that some say doesn’t even exist. This analysis could be applied to other commodities that have had huge run-ups in past years, including oil, food, and other metals like silver.

In other words, not only is it hard to spot a bubble, but the measures to fight it, like restrictions on leverage and holdings, are hard and controversial to put into effect. Limiting the type of media barrages we see is also impossible in a free society.

Yet if regulators are going to stop the next bubble, they will need to act aggressively. Of course, they shouldn't act in every circumstance, but when we see volatility and speculation as is the case of gold, acting to curb these forces through limiting leverage in cooperation with international regulators would be a prudent course. This would ensure that if a crash does come, it does not have aftereffects on banks and other institutions. Even if the Commodity Futures Trading Commission is hesitant to take such steps, it could, as an initial foray, take to the media to try to "talk down" the speculation.

Otherwise, we're left hoping, without much basis, that people have learned that this time will not be different, something not much in evidence in the case of gold.


Steven M. Davidoff, writing as The Deal Professor, is a commentator for DealBook on the world of mergers and acquisitions.

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Lewis E. Lehrman on How to Solve the U.S. Debt Problem

Lewis E. Lehrman, chairman of the Lehrman Institute, sponsor of The Gold Standard Now project, advises that to reduce the $1 1/2 trillion U.S. deficit, the Republican Party must initiate an investment program.

Working Americans are not saving, which enables the banks to lead the country into a cycle of debt, leverage, boom, panic, and bust.
Lehrman says: Eliminating the budget deficit of a trillion and a half dollars cannot be done overnight. The proposal by U.S. Rep. Paul Ryan was very dramatic -- one Republican called it radical -- but it was not happily received. The solution, of course, is to design an American program for prosperity, because you can solve these entitlement problems with a growing economy. We need a tremendous program of investment, and investment comes from savings. When you pay savers, middle-income professionals, and working people 0 percent at the bank, you are not going to encourage them to save. Then we are left with a bank cycle of debt, leverage, boom, panic, and bust."

To read more and to sign up for The Gold Standard Now's free, noncommercial, weekly report, "Prosperity through Gold," please visit: