Silver Stock Report
by Jason Hommel, March 24, 2001
Editor’s Note: The following is an interview between GOLD-EAGLE and market analyst Jason Hommel. Most of the questions put to Mr. Hommel reflect some of the common concerns many investors have regarding the current gold market. His answers provide a good overview of the situation for new investors, who are beginning to learn about gold. Further, Mr. Hommel’s insightful knowledge serves to help investors clarify their own ideas. To be sure, his clear logic provides incentives to buy physical gold and silver.
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GOLD-EAGLE: Would you tell us why the bullion banks with such a huge SHORT GOLD position have not taken any significant actions to cover?
Hommel: Many of the banks ARE covering. But for each bank that covers, there has to be a counter party who accepts the risk that they wish to cover. What has happened is that the exposure has been shifted onto fewer and fewer big banks, which have been named in GATA’s lawsuit. These are: Goldman Sachs, Deutsch Bank, and I think Morgan? see www.gata.org Please forgive my spelling mistakes. I believe the positions of gold owed by two of these banks is a matter of public record, yet not too well publicized in the media, except on the internet.
The point is that gold is owed. To truly cover, they would have to BUY BACK the gold itself. Where would someone buy 10,000 to 20,000 tons of gold today, without affecting the price of the commodity in the positive direction??? When the Bank of England’s sales of 25 tons move the market?! And the Washington Agreement, limiting gold sales by most of the central bankers of Europe to 400 tons per year caused a massively quick run up to $340 from $250?
The way these positions have been consolidated is that the big players know that they would have to buy gold at higher prices if they started buying. So they MUST keep selling. It’s a sickness, a catch-22. They are digging their own graves. There is a way out, maybe, politically. They can simply default on the promise to pay gold, (bankruptcy!) and do a cash settlement, without actually buying physical which would cause a massive run up in the price beyond what is possible to pay. But to foreign powers such as oil, to whom much of this gold is owed, this will be like an act of war.
Again, the size of the gold owed is massive. $80-100 Billion for one bank? If gold tripled, this would be like owing $300 Billion, like taking a $200 Billion loss, and this is nearly equal to the assets of the largest banks in the world. And these are the banks that are “too big to fail”, whose failure would pose a “systemic risk”. Since “covering” would require buying back the gold, causing a run up in price, and failure, I don’t think the biggest players ever really want, or intend, to cover. Do you? They simply can’t. The gold is not there to buy anyway.
All they can really do under the current rules, prior to default, is to prolong the game, by looking for other nations to keep selling or leasing their gold, and this has been going on for the last several years as these players keep getting desperate. After the Washington agreement, smaller and smaller nations who were not a part of the agreement kept announcing they would either sell or lease their gold. Kuwait agreed to lease a few tons of gold (maybe 70?) in return for military weapons. Figuring out how much gold was leased and the cost of the military supplied, showed that they leased their gold at the cost of about a $600-800/oz. favor, if my memory serves.
GOLD-EAGLE: Gold at $260 per troy ounce is cheap, but will gold be cheaper? (Particularly, if we take strong dollar factor into our consideration?)
Hommel: At $260, how much cheaper do you need gold to get? If you adjust for inflation, it’s lower than any time in history (except for briefly in the early 70’s), going way back even to when gold was $20/oz, prior to the revaluation to $35/oz. during the Great Depression in the 1930’s. If you adjust for inflation not using government figures, but true figures, then gold is even cheaper. The last time gold was this cheap, adjusted for inflation, was early 70’s, at the start of the decade long run up from $35 to $840, a 24 fold increase.
Gold, may, in fact, get cheaper. What if it goes to $250 again, or even as low as $240? Whoop-de-do! Who cares? Why wait? Is the $20 savings worth it? And what is the guarantee you will be able to buy later at these fire sale prices? What if it goes up to $4000 before you buy? Think risk vs. reward. The point is that it can’t go as low as zero, unlike paper, which can. It costs money to take gold out of the ground, and lower than $300 is causing mine closures. And in the current price environment, 2500 tons is pulled out of the ground annually, while 4000 tons is purchased for things like jewelry, which cannot be easily repurchased once it finds its way into the hands of people in India, who have no use nor affinity for paper dollars.
Yes, with the strong dollar, and as long as the dollar gets stronger, this will help put a lid on gold. However, with Greenspan increasing M3 at about 10% annually since 1995, why should we continue to expect a strong dollar for much longer? With the economy and stocks dropping, why expect a strong dollar? With pressure to lower interest rates, why expect a strong dollar? With the manufacturing base destroyed in the U.S. since NAFTA and GATT, in the mid 90’s, why expect a strong dollar? With the trade deficit ever increasing, and nothing to sell to the rest of the world, how long can our strong dollar continue? What happens when those dollars that are going overseas come home to buy something? What will they buy when we have nothing to offer, no stocks, few manufactured goods, and the little that can be bought here can be purchased elsewhere because they are produced with cheaper labor? How can we export a massage or a lap dance, or similar frilly service economy? We can’t. When the overseas dollars show up, and with liquidity being needed to prop up our failing stock market, we have a recipe for inflation, a weak dollar is coming. Want to try and time exactly when? What for? Fiat dollars like ours have collapsed as much as 30% or 50% in a single day. Even the almighty U.S. Fed Reserve dollar collapsed by 8% overnight in recent years. History has shown the way that gold could easily “pop” up to $600/oz., overnight, and that’s just for starters.
GOLD-EAGLE: Equity markets are way down, and we think they will continue to decline. Nevertheless, funds fleeing the stock markets are flowing to bond markets, rather than to gold. Is this anomaly due a strong dollar?
Hommel: . I think the markets are down for nearly the same reason everyone else does. They were overvalued. Companies which never saw a profit, at multiple Billion dollar valuations? There was something fundamentally wrong with that.
Moreover, I believe bonds are more attractive than gold for several reasons.
– because they pay interest, and gold does not
– because they are “sold” by institutional salesmen, gold is not
– because gold purchases are actively discouraged at institutional levels
People who think gold will go up are sold “Call Options”, which are derivatives on the paper contracts, instead. As I have hopefully shown, these paper contracts will eventually be worthless, because they can NEVER be honored with real gold. And paper on paper, (options on contracts) which are denominated in paper dollars, are really just funny when you think about it. Again, why wait, or be bamboozled into thinking that some counter party will honor their “impossible to honor” agreements? Just buy the real stuff and sit and wait.
GOLD-EAGLE: If the dollar continues to be strong, does that mean the gold price will continue to decline?
Hommel: Buying gold at institutional levels is a real hassle. They require all sorts of paper agreements prior to making the sale for you, which actually takes a few weeks to process! Then they hassle you with “storage fees” and mystify you with “assaying fees” which will be assessed if you tell them you want to take possession of the gold itself, and not use their storage facility, which they may charge up to 1% per year for. They say the assaying fees will be pricey, without telling you the price, so as to discourage people from actually taking possession of gold, and to talk you into the high storage costs. And this does not even begin to include the commission, which is another charge. It’s real funny, they will tell you “don’t buy gold, because of these charges”, but they charge commissions for everything else they will sell you. And after all of this, they will then tell you not to buy “spot” gold, but a futures contract to get the gold cheaper, which involves another set of paperwork, and which is buying into the very thing you don’t want, the paper market.
And if you buy gold in an IRA, which you can do, what’s the point? You can’t take physical possession! And if the company which holds your gold defaults, then you are basically out of luck. And if you actually own physical gold, and it does run up in price, there is no capital gain to begin with on gold sales, so there’s really no need to hold it in an IRA, the purpose of which is to let your money grow without capital gains accruing. Buying gold in an IRA is just a way to keep the IRA money safe.
And if gold does run up really high, who is to say the government won’t change the rules on you like they tend to do? If they decide to confiscate gold, IRA gold will be gone. Gold in the hand can still be hidden. Why not just “buy into the system” with bonds and avoid the hassle? Which people do.
GOLD-EAGLE: Gold is a commodity, and supposedly is not allowed to be manipulated, legally speaking. On the other hand the U.S. dollar is a currency and therefore the U.S. government does have the right to decide the value of its own legal tender. Consequently, since keeping the dollar value high means maintaining a lower gold value, do you think it is plausible that the U.S. government will continue to support a strong dollar strong (and conversely suppress the price of gold) with a view to preventing bullion banks from collapsing?
Hommel: If the United States government decided to continue manipulating gold on the world markets, by secretly selling gold from the U.S. reserves, as it has done I historically, there is a way to calculate how long they could continue to do so. Simple math, really.
The current deficit is 1500 tonnes. 4000 tonnes consumed and growing, 2500 mined and shrinking. The U.S. gold reserve is about 8000 tonnes, (down from the historic high of 27,000 tonnes). Using that gold to supply the market to satisfy the deficit of 1500 tonnes per year would deplete the U.S. hoard in how many years? Just over 5 years. Like I said, it’s simple arithmetic. But think for a moment. If this gold were to be secretly dumped to keep the price low, then less and less gold would be mined, as is occurring, and more and more gold would be purchased, as is occurring, as people figure it out, like they always do, and have figured out as history has proved. Thus, the end would come much, much sooner than 5 years, and the U.S. government would probably not continue to play the game realizing they cannot do it longer than 5 years anyway.
Somebody high up will surely realize that it might be good to hold on to some of the gold reserves and not let it all go for short-term political gain. As it is, the last time we played this game, we lost 2/3rds of our reserves. Why play it again, when the outcome will simply impoverish our nation’s reserves of wealth?
My conclusion is that we should not depend on the government to preserve wealth for us. They fail every time. Instead, we should take advantage of government stupidity and lack of foresight, and protect wealth by buying gold personally. Buying gold and silver right now is better.
BTW, Ted Butler has done some wonderful research on the silver market. http://www.gold-eagle.com/research/butlerndx.html
http://www.gold-eagle.com/silver_section/reports.html
Unlike Gold, silver has been consumed by industry on a massive scale. Today, there is ten times as much gold above ground than silver. Silver is more rare. And if the problems for storing gold were bad, it gets worse when you have to move around a few hundred pounds of silver for a mere $25,000 investment. With silver, you get so much for your money. It’s truly a rare case of under valuation; which will probably turn out to be the golden opportunity of a lifetime.