Likely Vintage Year for Gold
By John Browne
The Federal Reserve estimates
that in the past year losses in real estate,
stocks and mortgages have sucked out some $7.2
trillion of wealth from the U.S. economy. Some
are now putting the figure at $20 trillion. A
massive recession is starting and will likely
spread throughout much of the world. These
forces have exerted their classic strong
downward pressure on the price of gold.
In addition, the $700 billion TARP fund to
salvage the American financial system, and large
amounts spent by other governments to protect
their own banks, has greatly reduced the fear of
a financial breakdown. As a result, the
financial panic insurance value of gold was
largely eroded, adding further downward price
2008 was a volatile year for gold. Prices have
gyrated quite violently between the $700’s and
$1,000, or by some 25 to 30 percent. This
volatility alone acts as a depressing influence
on gold prices as it discourages the belief that
gold is a credible investment.
The world’s major governments long have sought
to eradicate gold as a monetary measure in order
to remove the last vestiges of monetary
discipline and to clear the field for massive
government over-spending and inflation.
In 1968, the London Gold Poll was abolished. In
1978, America forced a further move, via the IMF,
to write gold out of the international money
supply. In August 1971, President Nixon broke
the U.S. dollar-gold exchange link.
In September 1999, the United States, while
being careful to keep its own gold stocks
intact, led other major nations, in the first of
two so-called ‘Central Bank Gold Agreements’ to
flood the gold market with sales of gold.
In 1999, the central banks held some 33,000
tonnes, or one quarter of all mined gold. The
effect of government gold sales was potentially
very bearish for gold.
Gold market observers, who have studied the
pattern of IMF gold sales, allege that the sales
are timed to cause the maximum volatility in the
price of gold, to discourage investment.
More recently, there are allegations that the
Government has allowed certain institutions to
engage in massive naked short selling of gold
and silver. This has caused distortions in the
gold price that do not reflect genuine market
pressures. In short, they amount to market
A fair conclusion is that gold is cheap and that
its present price does not truly reflect market
On December 16th, the Fed announced, as we have
long forecast, a further cut in interest rates
to between zero and 0.25 percent. It also
announced ‘unlimited’ support to buy assets from
The amount of debt and new money injected into
the economy should progressively raise inflation
alarm bells. The fire of future inflation is
being stoked alarmingly, but the recessive
forces of deleveraging are concealing it
The Fed looks desperate. This could lead to
feelings of panic and upward pressure on the
Investors should also especially be concerned as
to who will repay these massive debts. The
conventional answer of politicians is
“taxpayers”. But this is a serious
understatement. Any depreciation of the U.S.
dollar means that every American citizen and
every single holder of U.S. dollars throughout
the world will suffer from monetary loss and a
severely reduced standard of living.
In 1934, facing a depression President Roosevelt
first confiscated gold from every American.
Then, he unilaterally devalued the U.S. dollar
by 75 percent against gold.
At a stroke, FDR wiped out 75 percent of the
dollar denominated debt of the U.S. Treasury.
As both President-Elect Obama and Fed chairman
Bernanke are students of FDR, we face the real
possibility of a massive devaluation of the U.S.
dollar against gold in 2009.