Seat of Power

Summary and Conclusions

• The World Economy is currently controlled by the World's Central Banks, which are operating as a single cohesive team with a commonality of purpose
• If The Markets want a "Gold Standard", they can have it; but the design of this new Gold Standard will be a sham. The gold price will be guaranteed to rise in proportion to the rise in the amount of fiat currency in circulation.
• A flattening of the angle of incline in the long term up trend of the gold price will point to The Market's acceptance of the view that the Central Bankers will retain control, and that the rate of increase in the money supply is likely to slow down to more pedestrian levels than the recent "frantic" levels.
• That the Central Banks are moving to embrace some form of sham gold standard is being evidenced by the tentatively emerging severance of the inverse linkage of the price of gold in dollars, and the US Dollar Index.

Mayer Amschel Rothschild is reputed to have made the statement: "Give me control of a nation's money and I care not who makes the laws". Perhaps more telling is the quote attributable to his son Nathan Mayer Rothschild: "I care not what puppet is placed upon the throne of England to rule the Empire on which the sun never sets. The man who controls Britain's money supply controls the British Empire, and I control the British money supply."

The truism that "he who owns the gold, makes the rules" is so entrenched in our psyches that some people have forgotten what it really means. The emphasis of the sentence is not on the word "gold" (input). It is on the word "rules" (outcome). People do not aspire to own wealth for its own sake. Wealth is really only a means to an end and, often, that end is "power".

There are those who would talk of "conspiracy" in the 21st Century, and it is clear that such people do not understand in their stomachs that which has been documented above - choosing to focus more on the messenger than on the message. By focussing on the messenger, one's mind will naturally go down the road of "conspiracy", but by focussing on the message, a light of understanding begins to dawn that anyone who wishes to control the destinies of men (and women, to be Politically Correct) will aspire to accumulate wealth as a means of wielding power. At the extreme, he (or she) who controls the ultimate source of wealth - in a world where physical wealth continues to be important - has the power to control mankind.

In today's environment, those who control the World's money supply are the Central Bankers and, if one looks at the world through their eyes, whether or not they are able to retain their power base lies in their ability to maintain a broad-based confidence in fiat currencies. The word "conspiracy" is a non sequitur here. "Commonality of purpose" is a more accurate description. One can draw the analogy of a well drilled soccer team, where there is no need to sit behind closed doors and plan in secret. Everyone on the team understands that the purpose of the game is to score goals; and the team that scores the most goals will need to rise above its individual prima donnas and work together towards achieving the common objective.

With this in mind, it follows that the most powerful Central Bankers are certainly working together as a team. This said, they will not (if they have the power to do anything about it) allow one member of the team to let the entire side down. By contrast, if any Central Banker wishes to play outside the rules of the game, all the team needs to do is bar the renegade from participating in the "core" game, otherwise known as International Commerce. For example, "Mr Hussein, if you want to play according to your own rules and sell your oil for Euros so as to undermine the core fiat currency (The US$), we will kick you out of the game".

Given that all exporting and importing countries will absolutely need at some point to deal with the most powerful countries, the probabilities of any single Central Bank having the power to sabotage the entire game are vanishingly small. And, in extreme cases where "force" becomes necessary, well Saddam Hussein is an example of what can happen to you.

The key underlying assumption (whether subliminal or conscious) in Mr Warren Buffett's thought processes - when he took a $21 billion position against the US Dollar has to have been that confidence in fiat currencies in general will be retained, and that the markets will naturally shift their emphasis away from the US Dollar and towards other currencies. If he had made any other base assumption, he would not have diversified into other fiat currencies

Whilst not wishing to be critical of the decisions of a man who has been so demonstrably successful in the field of investment, it is this analyst's view that what Mr Buffett has effectively done is that he has taken a $21 billion bet against the combined might of the world's Central Banking Team to retain the (world-wide) Market's confidence in fiat currencies in general. The US Dollar is not just any fiat currency. Currently, the US Dollar is at the heart of the very concept of fiat Currency.

The argument that the US Dollar might be supplanted by a hotch-potch of lesser fiat currencies is just too limp-wristed to be taken seriously. Yes, it is possible that - eventually - the Euro may become a viable alternative "world" currency. It is even possible that a single world fiat currency might eventually manifest and, for the purposes of this discussion let's call it a "Globus" (Maybe "Global" because Globi is perhaps too high-brow a plural relative to the more plebeian word "Globals").

The problem with such a concept is "acceptance". The Euro is not yet fully accepted within Europe - let alone the entire world - and it is way too soon to be talking about Globals.

Against this background, a Gold "Standard" (which is the alternative being espoused by the Gold-Philes) is the nemesis of the World's Central Bankers. Regardless of its theoretical merits (or lack thereof), any "external discipline" which gold might or might not represent, will defocus the team from its goal, because the game will not be the same anymore. A Gold Standard will have the effect of clipping the wings of the Central Bankers and that is PRECISELY what the Central Bankers want to avoid at all costs.

The argument gets more complicated, but at this point it seems appropriate to put forward the following chart as a reference point of departure for discussion. It is a chart of the ratio of the gold share prices ($XAU) to the Gold Price (courtesy stockcharts.com)

For those who are not inclined to look at the technical behaviour of markets, what this chart is showing is that Gold Shares have been in a declining trend relative to gold since October 2003. More importantly, the relationship appears recently to have been accelerating in its rate of breakdown - to the point that it might reach (or even breach) the level of its previous lows in April 2003. The MACD (Moving Average Cumulative Differential, or Moving average Convergence/Divergence) oscillating line is also reaching for a previous low - in this case reached in April 2004. And the Relative Strength Indicator is also approaching what appears to be a significantly oversold position.

There are three possibilities that arise from this chart:

1. The ratio could fall to a lower low than in April 2003. This would be highly significant, and would probably represent a "throwing in of the towel" by Gold-Philes - that the Central Bankers have won, and that they will retain control of the World's economy no matter what.
2. The ratio could rise which, in turn, might imply that:
   1. The Gold Price could fall from here relative to gold shares which bottom out here. (Technically, this would be fairly healthy action, because it will imply that the gold price will probably remain in its long term rising trend after it finds support at lower levels, but above its long rising trendline)
   2. The Gold Shares could soon start to rise from current levels, against a background of a static or rising gold price. In the latter case, gold shares - because of their leverage - would rise strongly.

When we look at a chart of the $XAU by itself, an interesting set of possibilities manifests: (Chart courtesy bigcharts.com)

One needs to be objective when looking at such long term charts because past behaviour is not necessarily a pointer to future behaviour, and it does not necessarily follow that prices which have been following any particular angle of incline or decline will continue indefinitely to do so. Indeed, the longer a trend has been in existence, the lower the probability that it will continue.

But, in the end analysis, logic should prevail. What does logic tell us here?

Taking a 20 year view (and with the exception of the period 1998 - 2002 when the Central Bankers were probably at the peak of their gold sales activity in the market place) the level of 60 seems to offer support, with the level of 90 -100 being an apparent fulcrum around which prices have been oscillating, and 150 being the upper extreme.

The gold and silver share prices are currently closer to their 20 year lows than their highs, and the probabilities therefore favour that the long term rising trendline will hold for the present. i.e. The Bull Market in gold shares (and gold) is probably not yet sufficiently "mature" to be aborted.

One possible negative flows from the fact that the Relative Strength Index is still above its 1999 lows and could have further downside potential. However, it could also be argued this is similar to the situation which manifested in 1995 when the RSI broke below the zero line and then rose once more.

Mitigating against this latter argument is that the breakdown in the RSI in 1995 occurred on a pullback from wave 1 in a three wave up-move, whereas the current breakdown in the RSI occurred as the price pulled back from wave five in a five wave up-move. Paradoxically, whilst prices "should" trend lower in a pullback - for a total of three down waves (thereby indicating further downside possibility) - nonetheless, a five wave up-move indicates that the Primary Trend is "up".

Against a background of all of the above, logic is telling us that the long term uptrend in gold shares is likely to continue, but that price may move relatively sidewards over the short to medium term to cause the angle of incline of the rising trendline to become shallower.

On a positive note, the daily chart below shows a deeply oversold position, from which the $XAU seems likely to bounce up, and also shows gaps on the chart at the 100 level and the 87 level which will almost certainly be covered in the fullness of time. i.e. Based on these factors it appears highly unlikely that the $XAU is going to "collapse"

Also of interest, is that if the $XAU holds at this level, the following Point & Figure chart - which ignores time and which has been sensitised to reflect 5% moves only - will hold above its rising trendline.

Returning now to the concept of the "Seat of Power".

Regardless of any arguments to the contrary, it seems reasonable to argue that anyone who aspires to exercise control via the means described above will be anything but stupid. One might or might not agree with Sir Alan Greenspan's decisions, but it is nothing short of ridiculous to argue that his actions have been motivated by stupidity. The men and women at the seat of ultimate power are highly intelligent and, those who would care to do some homework in this regard will discover that many of the leaders who walk the corridors of Anglo Saxon power - particularly in the left leaning political parties where it requires greater intellect to lead the majority of left leaning supporters in a conservative direction - have been bright enough to be Rhodes Scholars (Mr Bill Clinton of the Democrat party in the USA, and Mr Bob Hawke and Mr Kim Beazley of the Labor party in Australia are examples thereof.)

So, if I was a reasonably intelligent Central Banker, what would I be doing now - given that the markets seem to want the gold price to rise, but I do not want a rising gold price to interfere with my ability to control the money supply?

Well, to start with, I have time on my side at present. The chart below shows the relationship between gold and commodities, and it clearly shows that gold has significant upside (commodities have significant downside) before I need to start worrying.

Of course, I would be ill advised to ignore the fact that the gold price is in a rising trend relative to commodities. What this is telling me is that "The Markets" are positioning to ascribe to gold a greater level of importance.

There is an old saying: "If you can't beat them then join them". It would be most ill advised for the Central Banks to proceed from the assumption that they can overpower the combined might of "The Markets". Such an outcome defies logic. But what is possible to achieve - just as the jiu jitsu combatant does - is to use the weight of your larger opponent to your advantage and against him. In this case, the "opponent" of the Central Banks is "The Market"

If The Market is wanting gold to play some role in future economic affairs, well then, why not "appear" to let that happen? In the end analysis, provided I can retain overall control, I don't particularly care how I do this.

The following is a quote from a speech by Mr Greenspan on January 16th 2002:

"The value of fiat money can be inferred only from the values of the present and future goods and services it can command. And that, in turn, has largely rested on the quantity of fiat money created relative to demand. The early history of the post-Bretton Woods system of generalized fiat money was plagued, as we all remember, by excess money issuance and the resultant inflationary instability."

"Central bankers' success, however, in containing inflation during the past two decades raises hopes that fiat money can be managed in a responsible way. This has been the case in the United States, and the dollar, despite many challenges to its status, remains the principal international currency.

"If the evident recent success of fiat money regimes falters, we may have to go back to seashells or oxen as our medium of exchange. In that unlikely event, I trust, the discount window of the Federal Reserve Bank of New York will have an adequate inventory of oxen."

To this analyst, in order of importance, the following statements require a particular focus of attention:

• "..the discount window will have an adequate inventory." This represents an oblique swipe at gold, because the core argument of the Central Bankers against gold is that its finite availability places limits on the ability of Central Bankers to grease the economic wheel.
• "… fiat money can be managed in a responsible way". Trust us guys. We know what we are doing
• "the value of fiat money … rested on the quantity …relative to demand". Money is worth what it will buy. If vendors perceive the value of fiat money to be dropping they will demand more of it. Nevertheless, so long as vendors can be persuaded to accept fiat money in payment for what they supply, price inflation is not really an issue, except at the margin.

When these concepts are strung together, it becomes apparent the Central Bankers believe that if the only currencies that are available to make routine purchases are fiat currencies, and provided faith in fiat currencies can be maintained, they (the Central Bankers) can continue to control the world economy indefinitely.

So, in my imaginary scenario, if the Market wants me to once again link gold to the world's Central Bank Reserves, and I respond by prescribing that gold will always represent (say) 5% of my reserves, then I can allow "The Market" to "force" the price of gold to rise so that it remains 5% of the total reserves.

You want a Gold Standard? Sure! I'll give you a Gold Standard, if that will make you happy. But it will not be "gold instead of" fiat currencies. It will be "gold in addition to and/or in parallel with" fiat currencies.

Coming out of my reverie, the question arises as to why this analyst is a Gold-Phile.

From my perspective, investment in gold (the metal) is a no lose situation in the above context. If the Central Bankers somehow screw things up and print too much money, the price of gold will skyrocket. Alternatively, if the Central bankers pull off the heist, then the nominal price of gold will never fall again - except if the money supply contracts, or if gold floods onto the market at a rate that is greater than the rate at which the fiat money supply is increasing. Alternatively, if the debt mountain implodes, then gold will again represent the ultimate store of value and, whilst it might not rise in absolute price, it is likely to hold its value relative to other prices which are falling.

But if gold is a no lose situation, and shares are leveraged to gold, why then is the $XAU falling relative to the Gold Price?

In short, the market got carried away with the view that the Central Banks would lose control, and that the gold price would rocket ahead. What is happening is that The Market has been adjusting the order of magnitude of the built in leverage of the shares.

What evidence is there that all of the above "imaginary" logic may have an element of truth?

The following chart - which shows the gold price in US Dollars multiplied by the Dollar Index - is in a rising trend.

A closer look at this chart shows the emergence a pattern technically known as an ascending "right-angled' triangle. More often than not, a right angled triangle will break in the direction of the hypotenuse - in this case "up".

The evidence therefore suggests that the inverse nexus that has heretofore existed between the dollar gold price and the dollar index will soon be broken and, if the above argument is substantially correct, this will imply a retention of control of the World Economy by the Central Banks.

Epilogue

It was with some surprise that I noted my first article for Gold-Eagle was dated August 5th 2002. It has been an interesting time and, whilst there are some who may have formed the view that I have been an apologist for the Establishment, this is not the case. I am neither for nor against the Establishment. What I am strongly against is the concept of disempowering the Establishment in the absence of another alternate (and pragmatic) methodology for ensuring that the wheels of international commerce continue to turn. In light of this positioning, it is probably fair to conclude that I fall firmly into the camp of the antidisestablishmentarians.

There are also some who may argue that I have been inconsistent in my arguments - sometimes swaying one way, and then another. My response to these critics is that whilst the willow may bend and sway in the breeze, the roots which ensure its stability run deep. My thought processes have always been anchored by the firm belief that gold represents more of an insurance policy against failure of the Establishment to retain control, than it represents an "investment".

The evidence now seems to point to the conclusion that the Gold-Philes may enjoy the best of both worlds: A rising gold price, and a retention of control by those in power.

On the other hand, for those of us who have greater aspirations for Humanity than the amassing of wealth, it seems that we also might be in for some pleasant surprises as we move inexorably towards the culmination of the Age of Materialism. There appears to be the prospect for a new game to emerge - one in which the Central Bankers and the Politicians will be sidelined, eventually to become irrelevant.