Editorial appearing today on the gold-eagle site predicts that Y2K will act as a "trigger" leading to an economic disaster, much like a nuclear bomb explodes via a catalyst in the form of an initial chemical explosion. (With Andy on vacation, I guess I'm kind of filling in for him with this kind of stuff, this week....)

Link

-- Jack (jsprat@eld.net), July 14, 1999

Answers

Thanks for posting this link. Thankfully, this article relies on facts to make its major arguments and doesn't indulge in hyperbole (much). I suppose I like it most of all because it very closely mirrors my own thinking on the subject, even down to the prediction that the price of gold is likely to go much lower (under $200/oz.) before it goes higher. It also predicts that even with remediation progressing well, the costs of remediation, coupled with the effects of y2K failures will eat into corporate profits enough to burst the USA stock bubble.

The author's pessimism on the near-term price of gold is very unusual for gold-eagle editorials, which usually promise the faithful that gold is poised to double in value "any day now".

However, I believe a drop in the price of gold to be a much more realistic assessment of what would be among the first wave of effects from a collapse of a debt bubble.

At first, insolvent people would sell gold to raise cash to pay debt. Later, the price of gold would benefit from fear of government actions to reflate their currencies. Gold would become a safe haven again, but only after the selling pressure caused by insolvencies abated.

Anyway, an excellent analysis. Thanks again.

-- Brian McLaughlin (brianm@ims.com), July 14, 1999.

Brian, I too noted the author's expectation regarding the price of gold, and completely agree (with both of you). Buying gold (and silver) coins now makes good sense as yet another preparation safety net for a Y2K barter/meltdown scenario. And I've noticed that many of the folks over at the gold-eagle site are actually quite clueless about Y2K, looking at gold as simply a contrarian type investment that is bound to explode upwards Someday Soon. (With many of their gold investments being in the form of stock rather than physical coins!)

-- Jack (jsprat@eld.net), July 14, 1999.

Very interesting article. Thanks, Jack.

The author provides a fundamental analysis for the current decline in gold prices:

"Reinforcing the present slump, according to gold analyst Larry Edelson, is one fundamental fact: that central bankers are running low on currency reserves, requiring them to sell their other assets, together with the analogous response of ordinary citizens of countries in Asia and elsewhere to the ongoing debt crisis: sell gold to raise emergency cash."

Robert Prechter, in his book At The Crest of the Tidal Wave, written in 1995, predicted that gold would go well below $200, based on Elliott Wave analysis of the amplitude of various waves relative to each other.

It's scary when fundamental and technical analysis is in such good agreement.

-- de (delewis@Xinetone.net), July 14, 1999.

Selling gold to raise cash is the first explanation of why Central Banks sell gold that makes any sense unless they are trying to force the price of gold down. As people hoard cash in anticipation of Y2k, the lending ability of the banks decreases drastically as each dollar of deposits supports in excess of $50 in loans. Therefore, they sell gold to obtain cash to make more loans. They hope that the profits on the loans will exceed the decline in the value of the gold loaned if they do in fact get it back and they know that the value of the gold will go up sometime in the future when the Central Bank gold sales decline. The problem is that as the economy tanks, the number of bankruptcies will increase, loans will not be repaid and the amount of money in circulation will decline. This could lead to higher interest rates, lower corporate profits, a decline in the stock market, calls to pay back margin loans used to purchase stocks, more declines in stocks and a big mess called recession or depression. When will investors decide that gold is safer than stocks? That is when gold will turn around and go higher, and people will buy gold. Y2k problems and perceptions could cause the reversal in gold prices. There will be more huge losses when this occurrs (short sales and derivataves anyone?). I still do not understand why they announce in advance that they will be selling 400 tons of gold knowing that the announcement will drive the price down. There are several conflicting objectives in play here. Good timing will determine profits or losses in these markets. The risk is high and is getting higher as the mania continues.

-- Steve (sfennel@nettally.com), July 15, 1999.

Does anybody have a URL for the quantity of gold coins sold per month for the last year or so? I have the http://www.usmint.gov/bullion/annualsales/sales1999.cfm for the US Treas. figures, but could not find anything on overall No. Amer. or world sales.

Thanks in advance.

-- Ken Seger (kenseger@earthlink.net), July 15, 1999.