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Jewelry promotion plan sad, stupid, tragic
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Guest Commentary:
Murray Pollitt on the Events of September 11, 2001
(EDITOR'S NOTE: Murray H. Pollitt is a Canadian broker
and mining engineer long active in both the investment
and operational sides of the gold mining industry. A
little over a year ago, Mr. Pollitt gave The Golden
Sextant permission to publish his quot;Open Letter to
Central Bankers.quot; Now he has graciously permitted us to
publish his recent letter to investment clients.)
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By Murray H. Pollitt
More of man's inhumanity to man, presented with
galvanizing intensity. In the aftermath, inevitable
questions and horror being replaced with anger and
sorrow.
Life goes on, and so will the economy. But the
recession will get worse no matter how much money they
throw at it, and many of the big, index-driven stocks
which depend on economic growth will go on hurting.
Also a lot of market action will depend less on the New
York tragedy and more on what lies ahead politically;
random revenge would further inflame regional hatreds
and anything with the faintest hint of a ground war
would rekindle memories of Viet Nam. All the money
printing will intensify the storm that has been brewing
in the financial system for years and, as we have
pointed out many times, the worst inflations come
during periods of disruption, depression and so on.
Tax revenues fall, government expenditures rise,
deficits go up, confidence goes down. Trade gets
trickier. Will Saudi Arabia always want to be paid for
its oil in dollars?
In 1994 Barings, Britain's oldest merchant bank, had
been speculating on the long side of the Japanese stock
market, the Nikkei, although most (all?) Directors
didn't know it. As the market drifted lower the Barings
trader (the infamous Nick Leeson) tried to support the
market using derivatives and massively built up the
long position. Then, on January 17, 1995 an earthquake
struck Kobe, in Japan's industrial heartland,
destroying 25,000 buildings and killing more than 3,000
people. Leeson continued to try to plug the market, but
it fell sharply and Barings was toast in less than a
month.
At the time people blamed the earthquake, but in
retrospect the market was falling inexorably. It was
then 18,000 and now it's 10,000; a number which has
nothing to do with earthquakes and everything to do
with economic reality. Likewise in the current
situation, overwhelming as last week's events were,
they will in time be seen only to have intensified
trends already in place.
And the most important trend already in place has to do
with gold, the dollar and confidence in the financial
system. For some time now the tide has been turning
against the dollar and in favour of gold, in spite of
the efforts of big governments, big commercial banks
and even big mining companies (where leadership has
aligned itself with the banks instead of the men
underground) and the economic establishment.
These efforts have included activities in the
derivatives markets to quot;stabilizequot; gold at
uneconomically low levels and have led to the
establishment of significant short positions. A large
proportion of gold held as a bank asset is really a
receivable from a speculator or a mine that may, or may
not, be able to produce it; a lot of the real stuff is
in Uncle Harry's teeth.
Much of the other real stuff remains in vaults (some is
even under the rubble of the World Trade Center) and is
likely to be subject to claims by more than one bank.
The same forces which are crying out for quot;supportquot; for
the stock market are almost certainly quietly working
to continue to put a lid on the gold price, for the
same perceived reason: to bolster confidence in the
system (meaning first the dollar, then the euro and the
yen.) These efforts may work for a short time, but long
term they won't. Leeson wasn't the only one who tried
to rig the Japanese market over the last decade, and
the big banks certainly lost a lot of gold while
holding the price down during the Vietnamese war.
Everybody is worried about the stock market while
nobody seems to worry about the financial system, but
it should be the other way around.
Notwithstanding the economy, America will emerge
stronger and even more united. The stock market will
have its bumps, but it will take care of itself. The
money printing will help some sectors: utilities have
dividend yields that will look better and better
compared to term deposits, food and energy will remain
staples and higher gold prices will lead to a
renaissance in that sector. Perhaps two years hence we
will once again have a hot mining market.
It's the money, our money, their money, that you have
to watch out for. Because J P Morgan Chase has a huge
reach and massive derivatives exposure, its shares
should act as a proxy for the global financial system.
If their price continues to decline, take out lots more
insurance.
