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Section: Daily Dispatches

1:30 a.m. EDT Saturday, May 15, 1999

Dear Friends of GATA and Gold:

Here's another exchange with Martin Armstrong of
Princeton Economics that may be of interest.

Secretary, Gold Anti-Trust Action Committee Inc.

* * *

Friday, May 14, 1999

Dear Chris:

There is no interest in gold on the part of
institutional investors while coin sales due to Y2K
scares are high. I had dinner with the Royal Canadian
Mint and their fear is that sales will drop like a
stone next year, and if nothing happens, that same
supply will be dumped by the public. I suppose it is
possible; this we will have to wait and see.

I think you are missing the point about the central
banks. They are not seeking to keep gold prices down to
support their paper system. The Euro is their desired
path -- pure electronic currency. This new monetary
system is believed to once and for all destroy the
underground economy and in so doing capture their just
due in the form of taxes. They are selling their gold
because there is no way they will return to a gold
standard. Any such system would also require the
dismantling of most social programs and the left wing
will not stand for that. A gold standard is inflexible
and actually can produce deflation if the supply does
not increase in proportion to population. The gold
standard has never prevented wild swings in the economy
and on many occasions it was the cause of such swings
particularly following the California and Australian
discoveries of the past century.

The LTCM bailout was necessary not to prevent losses on
Wall Street but to prevent the meltdown of the
financial system. LTCM was the largest player in the
convergence trades that allowed the Euro to "appear" to
be working. The degree of leverage used endangered the
entire financial system and the bailout you speak of
was not actually a bailout at all. More than 60 percent
of the so-called bailout was money already owed to the
houses by LTCM. The Fed actually proposed the orderly
liquidation of LTCM rather than a 2-5-year lawsuit that
would have damaged the integrity of the marketplace.
The Fed did not put any cash in and the banks that had
lent the money ended up having to take a capital
position in place of the debt.

The English are the English. There is no collusion in
trying to help an American firm. They simply think it's
fair play to announce their intensions over a long
period of time and see their actions as market neutral.
This is contrasted to the Australians who dump
everything short-term and they tell later.

The IMF is also not a manipulation. They have lost
billions and most of their loans will never be
recovered, particularly in the case of Russia. The
nations that they have gone hat in hand begging for
more money are getting tapped out and pressure is
applied to the IMF to cough up some money of its own.
There is no reason why the IMF should even own gold any
more since there will never be a return to the gold
standard. Hence, any future loans will need to be cash
not gold.

The strong dollar depresses gold in dollars but at the
same time it lowers the cost of production in most
Third World nations, and so they are making a profit.
You are based in dollars so you see a loss. Investors
in gold outside of dollars would not share your view
and actually cheer the rise in the dollar. You, on the
other hand, hate the dollar and want to see its demise.
If that happens, your investment may increase but
others now enjoying profits will lose.

I just think that there are a lot of complex issues at
work here and to call this a conspiracy or manipulation
may sound good but it has no motive. The simple fact is
they are more interested in moving to an electronic
form of currency to increase tax collection as they see
it. They are merely getting rid of an asset they have
no use for any more. Their agenda is electronic, not a
conspiracy to depress gold for any other purpose. They
have already altered the Consumer Price Index; they do
not need to worry about gold.

All the best.

Princeton Economics

* * *

Saturday 5/15/99

Dear Martin:

Thanks for such a thoughtful reply to my reply to yours
in which you argued against a belief in collusion in the
gold market. We agree on a few things:

1) Yes, there is little institutional interest in gold,
and yes, the public's interest in gold coins is likely
to diminish greatly when people come out of their
hangovers on the afternoon of New Year's Day 2000
and realize that it's not that the world is coming to an
end but that they just had too much to drink the night

2) I agree that the central banks are not going to
return to a gold standard. I don't advocate one. While
I'd never call gold, as Keynes did, a "barbarous relic,"
I agree with you about the weaknesses of a gold
standard. I'm not a gold nut or even a gold bug; I'm a
fan of William Jennings Bryan, whose "Cross of Gold"
speech condemning the gold standard and arguing for
bimetallism and thus reflation of the U.S. economy won
him the Democratic nomination for president in 1896.
But I claim Bryan as a hero and gold as a bit of a
cause today because both involve the struggle to
democratize government economic policy. Such policy
today seems controlled mainly by the clique of financial
houses that staffs the central banks and runs economic
policy more for their own benefit than for the public's.
Money is not a private function but a function of
government, Bryan said, and "the banks ought to go out
of the governing business."

But we disagree on a few things too:

1) You argue that the central banks are not trying to
suppress the price of gold. But Fed Chairman Greenspan
told Congress last summer that this is exactly what the
central banks stood ready to do. The timing and
frenetic announcement of some of these CB sales suggest
that this is just what they are doing now, and that
they have powerful motives other than the mere riddance
of a supposedly wasting asset.

2) The central banks may have no use for gold anymore,
but the world still has a use for it; it's a measure of
the currencies issued by those central banks. It's the
truth teller. It's a device by which the central banks
can be held to account. So of course central banks
dislike gold; storage costs are the least of their

3) Long-Term Capital Management WAS bailed out,
along with the financial system. That is, the fortunes of
some very rich people gambling with other people's
money were preserved by government intervention. (Yes,
the government didn't spend the money; it made agents
of the financial houses in compelling them to come up
with the cash, but only as dues for the government's
letting them run the financial system. So I'd say that
these dues were more or less public money.) And what
kind of financial system is it that can be brought down
by the failure of a few large private institutions that
are "too big to fail"? That's hardly a democratic system.
You may not be able to contemplate a world without
Goldman Sachs, but I can.

4) Your interpretation of the LTCM disaster only
confirms my argument, and Bryan's before mine, that the
banks indeed are in the governing business. As for the
Fed's intervening to prevent damage to the integrity
of the marketplace, I would argue that any marketplace
requiring such intervention to control the price and
supply of financial securities and commodities doesn't
have much integrity to begin with.

5) Whatever the Bank of England's motives, it makes no
sense to say that one is selling gold to maximize the
return on one's asset and then to collapse the price
before the asset is sold. And if the bank really was
announcing its sale of gold in advance out of its
devotion to "fair play," it would be letting the public
in on ALL its transactions and ensuring public access
to everyone's books in the London gold market. "Central
banks" and "fair play" really don't fit in the same

6) You say that the IMF is not a manipulation. I
disagree here too. I think the IMF is the device by
which developing nations are mortgaged and then
expropriated by the most organized wealth of the
developed world, with the local gangsters getting a
huge cut of the transaction, which is quickly wired to
their numbered accounts in Switzerland or some such
place. If that has not been the intent, it surely has
been the result. As for the IMF's "owning" gold, my
understanding is that the IMF doesn't really own any
gold, that this gold is just more or less pledged by
its member countries and that the U.S. gold
particularly cannot be sold without an act of Congress.
Rather than get rid of our gold in the name of throwing
good money after bad with the IMF and its gangsters, I
imagine that most Americans would prefer to maintain
Fort Knox just as it is and let IMF officials give away
their clothes and melt down their own jewelry to
provide relief to the poor people they have helped to

7) No, I really don't "hate" the dollar. Of course
you're right that an American's investment in gold is a
bet on a declining dollar, which at the moment is a
contrarian play. But investment in ANY commodity is a
bet on a declining dollar too. And a strong dollar is
not such a blessing after a certain point; it becomes
the definition of deflation. I imagine that the dollar's
being as strong as it is has done to the rest of the
world lately what the gold standard was doing to the
commodity-producing regions of the United States when
Bryan became their hero in 1896.

Thanks for listening, Marty. Your turn if you still
want to play.

With good wishes.

Secretary, Gold Anti-Trust Action Committee Inc.