World Currency Values Race to Bottom
By Patrick A. Heller
For some time, a number of analysts have
suspected that the Federal Reserve was secretly
purchasing U.S. Treasury debt as a means to
support the value of the dollar. Last Wednesday,
March 18, the Federal Reserve openly announced
that it would be purchasing $300 billion of
Upon this announcement, the U.S. dollar index
immediately fell 2.5 percent and the price of
gold soared more than $50. The purchase of U.S.
Treasury debt by the Federal Reserve is an
outright increase in the money supply. In other
words, it is blatant inflation. The U.S.
government has now publicly revealed its
decision to sabotage the value of the U.S.
dollar in order to support the U.S. stock
Many more American and foreign holders of U.S.
dollars now realize that they need to move more
of their wealth out of the U.S. dollar and U.S.
dollar-denominated stocks and bonds into other
safe havens - such as gold and silver. Of
course, those who realized what was happening
several years ago have already had the
opportunity to protect themselves at more
advantageous price levels.
Last week's action by the Federal Reserve did
not occur in a vacuum. The Swiss central bank
recently announced a deliberate policy of
devaluing the Swiss franc against other
currencies. The Bank of England has also
announced that it will create an enormous amount
of new paper currency to try to cure the United
Kingdom's financial problems. The European
Central Bank is expected to match these moves
(if the internal stresses threatening the euro
zone don't bring down that currency first).
With governments around the world seeking to
lower the value of their currencies as a way to
manage financial crises (to more easily pay back
massive debts and to stimulate exports),
tangible goods, especially precious metals, are
almost certain to rise in price.
It's not just private parties who are now buying
gold. Russia's central bank, at least one
national central bank in the euro zone, and at
least two South American central banks are
openly adding to their gold reserves. Several
other central banks are suspected of secretly
adding to their gold reserves. If very many more
central banks start to openly add to their gold
reserves, we could see an all-out gold
buying/currency dumping frenzy.
Here's one more indicator that could foretell a
near-term explosion in the price of gold - the
backwardation of silver prices in the London
market. In normal commodity markets, contracts
for delivery in future months trade at a premium
to the current, or spot, month. In general the
premium is tied into prevailing interest rates.
Such normal markets are said to be in contango.
When there is an unusually strong demand for
immediate delivery commodities, it is possible
that the current spot month price could exceed
the price for delivery in future months. This
condition is called backwardation.
The London silver market has been in continuous
backwardation for about two months. This
portends an imminent supply squeeze that could
spill over into other precious metals markets,
with much higher prices for all of them.
When Warren Buffet's Berkshire Hathaway bought
129.7 million ounces of silver contracts in 1997
for delivery in early 1998, then requested
physical delivery instead of rolling over the
paper contracts, the price of silver soared. On
Aug. 6, 1997, the closing U.S. silver spot price
was $4.30. Six months later, on Feb. 5, 1998,,
it was $7.23, a 68 percent increase. Late last
year, Warren Buffett spent about $7 billion
buying shares in Goldman Sachs and General
Electric. Even with the recent stock market
surge, he has lost a substantial portion of
these investments. I guarantee you that if he
had instead put the same amount into purchasing
silver for physical delivery, Buffett would be
in a huge profit position today.
Compared to the trillions of dollars that are
flooding the paper asset market to try to stem
the downfall, it would take a comparatively
trivial amount of investor interest in buying
gold and silver to send prices to double or
triple current levels.
Notes on last week's column: The best
information I have as to the source of the gold
that was dumped onto the market on March 6 in an
effort to drive down gold prices is that it came
from exchange-traded funds (ETFs). Many ETFs are
allowed to lease gold, though I suspect an
intermediary (ultimately I believe to be the
U.S. government) subsidized leasing gold at a
loss that day.
Also, several readers who contributed comments
on last week's column wondered how long the U.S.
government might be able to manipulate gold
prices. A 1961 document prepared for the Federal
Reserve outlined how the U.S. government could
do so. I personally think that the available
documentation points to manipulation going back
at least to the mid-1990s.
Someday the U.S. government will run out of
assets and other tactics to suppress gold
prices. The facts that it has been unable to
prevent the nearly quadrupling of the gold price
during this decade and that the manipulation has
become more obvious as time goes on lead me to
expect that the U.S. government is getting close
to the end of its ability to suppress gold's
price. How close are we? No one knows for sure.
Those in the government working on the
manipulation are not talking, if even they have
any idea. But if you consider that the gold
price suppression may have been going on for
decades, however long it takes for gold to reach
$1,500, $2,000, and higher will seem short in