TIME "Three Marketeers" cover story B_____SH____T!

THE PRICE OF GOLD SHOULD HAVE GONE UP FROM 1996 AND SO
SHOULD THE PRICE OF OIL, BUT . . .

Jude Wanniski, president of Polyconomics Inc., is an
influential analyst of global and U.S. political
economics. His almost daily essays posted at
www.polyconomics.com frequently relate to gold.

In September 1998 he wrote an open letter to management
and labor at Northwest Airlines, then embroiled in a
pay dispute. In this letter Wanniski spelled out how a
fourfold increase in the price of gold from 1971 to
1973 led to a fourfold increase in the price of oil;
and how the price of gold will always have a direct
effect on the price of oil, and so other commodities,
and from there the price of everything else, including
airline travel and the paychecks of airline pilots.
It is a brilliant letter.

In other words, Wanniski was saying, allow a fair price
for gold to come through and the invisible hand of the
market will go on to find the right price for oil, and,
from there, everything else.

But a fair price for gold is not being allowed to come
through, and what Wanniski does not do is explain why
the gold price, which he thought should have risen in
1996, has instead dropped by 25 percent to its current
and deliberately suppressed low.

Of course GATA members know that the gold price
suppression has little to do with Fed Chairman Alan
Greenspan's commitment to contain inflation, and that
it has everything to do with protecting the bullion
dealers, who were already over the top -- or, perhaps
one should say, under the table -- with shorts in 1996.
The tune to which Greenspan and his cohorts Rubin and
Summers have been depressing the gold price has been
called Crony Capitalism, but should perhaps now be
called Desperation Blues.

Here is how Charles Keeler, who drew GO GATA's
attention to Wanniski's open letter, described Greenspan's
dilemma: "Alan Greenspan knows that he should add liquidity
until the POG (Price of Gold) is at least $325. Why is
he reluctant to do this? All of his buddies in the
gold-carry trade would get crunched and would have to
cover. This sudden short covering would send the POG
well past the $325 target. This is the box that you get
yourself into when you start to manipulate and
control the market.

"'Oh, what a tangled web we weave when first we
practice to deceive.'

"Would YOU like to borrow 1 million ounces of gold at
ridiculously low interest rates, sell the gold at
market, and invest the proceeds in Russian bonds paying 40 percent?

"It seems that our government wants to give these low
rates to those who would be ready to invest in this
manner. Now that Russia has defaulted, perhaps you
could consider the Brazilian bonds. Too risky? You
shouldn't worry because the U.S. Government will stand
behind your financial transaction. Robert Rubin himself
will 'dig up' money and wire it to any country that
gets into trouble. Also, the International Monetary
Fund will be right there to make loans to the country
that is paying you 30-40 percent interest rates.

"Are you afraid that the POG may go up during your
transaction and catch you short? Dont worry, Alan
Greenspan himself will tell the world that central
banks are standing by to lease gold at 1-2 percent if
the POG makes any move above $300.

"So just back your truck up to the Federal Reserve and
sign the papers for a $300 million loan. Every loan
made moves the United States closer to serious deflation."
GO GATA recommends a visit to www.polyconomics.com for
the full text of Wanniski's open letter to Northwest Airlines.

Wanniski writes: "The breakdown between Northwest
management and the Northwest pilots is due to the fact
that both sides are unaware of the external financial
forces over which they have no control. The turbulence
has been caused by policy errors at the Federal Reserve, our central
bank."

Wanniski explains his position through 10 points. The
first is particularly noteworthy. In it we read:
THE PRICE OF OIL QUADRUPLED IN 1973 AFTER THE PRICE OF
GOLD QUADRUPLED, FOLLOWING PRESIDENT NIXON'S TAKING THE
DOLLAR OFF THE GOLD STANDARD.

"In a true monetary inflation, the entire general price
level moves up to get back in line with a fall in the
dollar's value relative to gold," Wanniski writes.

"Gold is the most monetary of all commodities, which is
why its dollar price is always the first to rise when
the Fed makes an inflationary error. When there is this
kind of upward shift in the gold price because the
error persists, other commodity prices will follow in
train, and eventually prices of everything in the price
universe will settle at the new higher plateau. Because
oil also has more monetary properties than most other
commodities -- for example, it won't spoil -- it is
among the first to follow a gold price rise. We
observed this in 1971-73, when President Nixon took us
off the gold standard and the gold price quadrupled, to
$140/oz. from $35/oz. Only then was it possible for the
world price of oil to follow in tandem, quadrupling to
$10/bbl. from $2.50/bbl."

Point 2 follows on naturally: "When the central bank
makes an error in the opposite direction, by not
supplying the liquidity the market economy demands, the
first price to fall also is gold. That is, when
'dollars' become scarce relative to gold, the dollar
price of gold falls. Other commodity prices are forced
to follow in train, the order in the train depending on
their monetary characteristics. Again, oil will be
among the first to adjust to the new, lower general
price level demanded by the dollar/gold price change."
In Point 3 Wanniski traces how the dollar/gold price
followed an inflationary path from 1993 to late 1996,
and from then has followed a deflationary path.

"That is, a relatively steady gold price from 1985 to
1993 ended in late 1993 when the Fed supplied more
liquidity than the market demanded. The gold price rose
to a $385 plateau from the $350 plateau. Other prices
began to rise in train, including the price of oil. In
late 1996 the market began demanding more dollar
liquidity, but the Fed refused to supply it. The price
of gold has been dropping ever since, fed by global
demands for dollar liquidity associated with this
scarcity. This is a true monetary deflation -- not
simply a temporary fall in SOME prices associated with
a recessionary decline in the demand for goods."

Friends of GATA and gold, there you have the key
-- in big letters:

IN LATE 1996, THE MARKET BEGAN DEMANDING MORE DOLLAR
LIQUIDITY, BUT THE FED REFUSED TO SUPPLY IT.

WHY? Because all of Greenspan's buddies in the gold-
carry trade would get crunched and would have to cover.
And, to continue with Charles Keeler's words, "This
sudden short covering would send the POG well past the
$325 target. This is the box that you get yourself into
when you first start to manipulate and control the market."

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