On Thursday (Jan. 16) it was announced that the UN inspection team in Iraq had found some ten-year old empty chemical warheads in a weapons dump. The warheads were similar to some purchased by Iraq in the late 1980s - almost certainly from the US who was then Iraq's ally in their war with Iran - and they were empty. The missiles had been inoperable for more than a decade. No matter - SMOKING GUN!! Gold, which had been slowly subsiding back towards the $US 350 level for the previous few days, shot up $US 7.00 on the news to hit a new 2003 (multi-year) high of $US 358.
Obviously, it is the anticipation of war which has driven Gold up to these "thoroughly overbought" levels in the past six weeks or so, right? Here's proof - the "smoking gun" is found and spot future Gold jumps $US 7.00 in a matter of minutes. That's the message that most financial commentators would have you believe.
Having taken that one, we now get the second barrel. Of course, once the war actually STARTS, there will be no further "anticipation" of war and Gold will suffer accordingly. For proof of this assertion, the eye is cast back to the start of the "air campaign" in Daddy Bush's Gulf War on January 17, 1991
Here is what The Privateer had to say in the issue in which we reported that event. This is quoted from The Privateer (Number 162 - Mid January 1991) to describe the state of the US economy and financial system at the outbreak of Desert Storm on January 17, 1991:
"The US Comptroller of the Currency has 350 banks on the 'shaky list' with an additional 1000 plus banks being on the list of 'potential problems'. Amongst the recent problems is, of course, the Bank of New England. After the US Treasury threw in $US 1 Billion, the bank failed anyway! A report published told even simple-minded despositors that the bank's fourth quarter loss would entirely extinguish its capital and leave it insolvent - in other words - BROKE!"
"Depositors rushed the bank and hauled $US 1 Billion out in short order. Then it was the regulators to the rescue and the long-suffering US taxpayer became the 'owner' of another bank. All the depositors got their money, even those with deposits above the $US 100,000 FDIC limit."
"That certainly did not please depositors in Harlem who had their hard earned money deposited at the Freedom National Bank. Regulators stormed into that bank too - and shut it down. These depositors who had deposits UNDER the $US 100,000 ceiling got their deposits in full. But those ABOVE the limit got only 50 cents on the Dollar for any amount exceeding the $US 100,000 limit. Several charity organisations, sadly, saw large amounts of their funds cut in half."
"In Rhode Island, just three hours after being sworn in, the new Governor acted with speed and CLOSED 45 small banks and credit unions. For good and sufficient reason too - the 'private' deposit insurance fund had gone broke! More than 300,000 accounts were frozen and slightly more than $US 1.7 Billion in deposits are on ice. And so it goes."
"THESE ARE EXAMPLES - THE PROBLEMS ARE RIGHT ACROSS THE US SYSTEM.
BANKS BIG AND SMALL ARE FIGHTING FOR THEIR LIVES. LENDING HAS CEASED!"
(The Privateer - Number 162 - Mid January 1991 - January 20, 1991)
In 1991, a war was MANDATORY - as a distraction. The above quote demonstrates why. Here are some more reasons. The US Treasury was about to announce the biggest official annual deficit in its history ($US 421 Billion). The nation was mired in recession. The Fed Funds rate was 6.75%, having been lowered by 1.00% over the previous six months. The Dow had dropped as low as 2470 in the previous week, more than 250 points below the high it had set nearly four years before in August 1987. The Dow was down 16% since July 1990. And last but not least, the US banking system was already imploding and was threatening to implode en masse.
None of this is remembered now. All that is remembered is that on the day the air war started, January 17, 1991, Gold had a $US 40 intraday swing and ended up down $US $US 30 (or 7.3%) on the day, Oil plummeted, and US and world stock markets boomed.
Now, we are supposed to believe that it is all going to happen again, just as soon as Bush Junior gets his act together and attacks Saddam. Will it? The US is in a recession far worse than the one they were in in 1991. Treasury debt is more than double what it was in 1991. US stock markets have already sagged far further (on a comparative basis) than they had in 1991. And the latent threat to the US financial system in January 2003 is far greater, albeit not as glaringly obvious, than it was in January 1991.
The latent threat is far greater ...? Here's exhibit A":
At the time of "Desert Storm 1" in 1991, the US had been a net international debtor nation for not quite six years. As "Desert Storm 2" looms in 2003, the US has been a net international debtor nation for not quite eighteen years. Foreigners now own 18-20% of US "equities" and up to one third of US Treasury debt. They are taking a bath on BOTH "investments". The US Dollar is in a CONFIRMED bear market and has nowhere to go but DOWN.
In such circumstances, there is NO WAY to keep Gold down, not for long. It is certainly possible, even likely, that a replay of 1991 will be attempted. It is certainly possible, even likely, that it may succeed for a while, Gold may drop into the $US 340s, the $US 330s, or even back into the $US 320s. Don't forget, at the beginning of December 2002, Gold was trading at $US 315 - 317.
As wars go, Desert Storm 1 in 1991 was a huge anomaly. Historically, the demand for Gold and the "price" of Gold has always increased in the lead up to and the waging of a war as individuals strain to preserve their wealth. It is actually far more likely that Gold will revert to the historical norm this time, ESPECIALLY if the US runs into any "problems" in waging their war with Saddam.
Be prepared for some wild gyrations when (we don't think there's much chance of an if) the war breaks out. But keep firmly in mind the FACT that Gold is in the early stages of a BULL market, as solid a bull market as it has enjoyed since Nixon closed the Gold window in 1971. It may be forced down for a day or a week, but it can't be kept down this time.