Gold Market Update

The prices of gold and gold mining shares since our last Update continued to consolidate their rapid January to May upward moves. Speculative long positions on the COMEX were unwound since the end of September, and a possible war in Iraq seemed less imminent. However, the rising gold price trend, which began last December and is running at an annual rate of 17 % a year, is still intact.

Japanese Monetary Disorder
Failure of Macroeconomic Policy to Prevent Deflation

Japan, the world's second largest economy, is facing an eventual financial crisis which could have dire consequences not only to Japan but also for the rest of the world. The Japanese face the dilemma that they cannot fund huge budget deficits forever and that the government could not stop spending abruptly without driving the economy into deep recession. Japan's stock market bubble burst in 1990. Rather than allow the market promptly but painfully to correct the bubble's resulting microeconomic financial and economic imbalances, the government intervened and adopted easy macroeconomic monetary and government debt financing policies to prevent its economy from turning into recession. The Japanese government currently runs a fiscal deficit of about 7 % of GDP. Deficit spending raised the gross public debt from approximately 60 % of GDP in 1990 to a forecast 155 % of GDP in 2002. Net public debt has jumped from 22 % of GDP in 1996 to a forecast of 74 % in 2002. The Bank of Japan conducted drastic monetary easing, unprecedented in the history of central banking. Short-term interest rates were reduced to zero. This spring the growth rate of its monetary base was raised to an annual rate of 20-30 percent. In spite of these policies the consequences have been economic stagnation, a four-year deflation and a build-up of bank bad debts. The business, household and speculative non-performing loans are estimated by the Financial Services Agency at the equivalent of $ 350 billion, about 8 % of GDP, but are put at up to 20 % of GDP by the Chairman of the U. S. Council of Economic Advisers and even higher by others. The bad loans have grown and kept many uncompetitive unprofitable companies in business. The Bank has promised to keep zero interest rates and to flood the market with liquidity until prices rise. If and when inflationary pressures build up, the banks' bad debt problems might ease, but long-term interest rates could rise, lowering the values of the debt held by the banks, substantially raising the government's interest cost burden, and making it harder for companies to meet interest payments, potentially driving up default rates and pushing more companies into bankruptcy.

Part of the equivalent of approximately $ 10 trillion financial assets saved by Japanese households could be at risk of becoming gradually worthless in terms of purchasing power. Moody's Investors Service downgraded Japan's sovereign credit rating from Aa3 to A2 in April because a debt trap might become inevitable. The Nikkei stock market average this month slumped to a 19-year low, down 74 % from its 1990 high. A government 10-year bond auction failed to be fully subscribed last month. As confidence in financial conditions fell, Japanese investors began to diversify into gold. Investment in gold rose by 15 % during the first half of 2002, compared to the year before. In August gold imports rose 64 % above a year ago, although they were off in September.

Gold Dinar-Possible Future Gold International Money

At a "Gold Dinar in Multilateral Trade" conference in Tehran on October 23rd it was reported that, subject to the agreement of the Cabinet, Malaysia would set up a body to study and promote the use of the gold dinar as currency for international trade. The Malaysian Prime Minister's economic advisor has already said that Malaysia is expecting to use gold dinars in trade with Islamic countries as of mid-2003 and is in discussions to that effect. The Prime Minister said that he was considering some potential partners. The Iranian government has voiced its support for the idea.