Response to Martin Armstrong

2:30p EDT Thursday, July 1, 1999

Dear Friend of GATA and Gold:

Martin Armstrong of Princeton Economics
International has replied to Professor von Braun's
reply to his essay of June 28.

While I have received some hostile and even violent
reaction to my posting Martin's commentaries because
they disagree in part with the beliefs of many
advocates of gold, I think we benefit immensely from
being able to test our views against those of such
an expert and historian. Martin honors us by
engaging and arguing with us. I always learn from
him even where I disagree with him. And where we
disagree, as decent people we should be able to
agree to disagree.

CHRIS POWELL, Secretary
Gold Anti-Trust Action Committee Inc.

* * *

Dear Professor von Braun:

The statistics you quote about the gold market may
be reliable, but then again they may not be. For the
smoke-and-mirror act that is going on is in fact the
assumption that there is a huge conspiracy to drive
down the price of gold.

The word quot;manipulationquot; implies that there is some
goal to be achieved. No one seems to have defined
that goal, and the assumption that a conspiracy has
been in motion among the central banks for some time
shows the lack of understanding that governments
themselves have no memory beyond the current
administration.

Regarding being quot;off the gold standard,quot; I am sorry
to inform you that the European Central Bank changed
the classification of gold from an asset quot;backingquot;
to the same category as a currency. That is the
quot;officialquot; demonetization of gold on the part of
central banks.

If there is a conspiracy involved, it is indeed to
demonetize gold, perhaps without making a public
statement. But that is a change in monetary policy
objectives and it is simply due to the fact that
most governments are facing monumental debt problems
just past the year 2010. Their way of meeting that
problem is as always the silent debasement or
devaluation of the currency while increasing their
ability to collect revenue.

The sales of gold by the central banks of Europe
began in late 1996 and continued into 1997. Most
sales were done on a forward basis and then the gold
was delivered. The purpose behind the liquidation
was to quot;cook the books,quot; if you will, to reduce
their debt-to-gross domestic product ratios in order
to meet the criteria to join the European Monetary
Union. The German government actually sold its
entire gold reserves on a journal transaction to the
Bundesbank. The price of this transaction was never
disclosed. The paper profit was used by Germany to
meet the criteria for the EMU.

This is the primary reason why the Bundesbank
opposed IMF sales, because the Bundesbank also has
the highest cost of gold on its books.

It does not make sense that the central banks,
including Germany, would try to drive down the price
of gold. What purpose does this serve? Surely, if
the goal is to fight inflation, governments have
already manipulated the consumer price index
statistics to achieve that goal.

Targeting gold is no longer a critical issue for
governments. We have been off the gold standard now
for nearly as long as we were on it in the postwar
era. Governments won. They have been able to create
money at will and are free at last of any restraint.

Gold is by far not worthless. Gold has simply fallen
out of favor, as have most other commodity
investments. When people can earn 15 percent on
equities and perhaps double their money on
individual stocks in a matter of weeks, it is hard
to get them to buy anything else.

The decline in gold is directly linked to the
decline in demand by investors. Such demand is never
constant and it swings back and forth between
sectors. Our models are based upon global
correlations. Based upon such analysis, it does NOT
appear that gold is doing anything abnormal that
would constitute a quot;manipulation.quot;

That word is used freely as an excuse for having
been wrong on expectations for gold. To argue that
gold is being manipulated is in reality a statement
that gold would not have declined against
expectations has there not been some giant
conspiracy.

A bear market in gold is NORMAL at this time, given
the strength of the dollar, the fall of the euro,
and the rise in equities. When gold reached $875 in
1980, the dollar was declining and making its
historic low. It is impossible to expect a raging
bull market for gold when investment money has more
attractive alternatives.

The central bank sales from Australia were in fact
front running what the bank already knew was coming.
The purpose of the International Monetary Fund's
holding gold was to lend it to nations in trouble to
meet gold payments. Now that the gold standard is no
more, the IMF lends dollars. The IMF goes hat in
hand begging for more funds and refuses to offer any
tranparency to its contributors. The IMF gold sales
are the result of governments getting tired of
handing over cash and getting nothing in return. The
IMF has simply been told to start using some of its
own capital. The only problem is that 90 percent of
its liquid assets are tied up in gold reserves.

I do not see how telling the truth is trying to
scare anyone out of gold. It was Princeton Economics
International that blew the lid off the manipulation
of the CPI.It was PEI that uncovered the
manipulation of the GDP statistics. We hold no love
for governments and regard them as self-interests
that are most often opposite of the interests of a
free society. If we saw any sign of a coordinated
effort on the part of the CBs to manipulate gold for
some sinister purpose, we would be the first to
point it out.

There is no denying that any shortfall between
supply and demand in gold is being made up by CB
selling. Unlike England, most central banks sell
gold first and announce later. We do see a policy
shift to where the central banks do not see gold as
a reserve asset. This is their view. We have also
been on record that floating exchange rate systems
throughout history have ALWAYS been followed by high
volatility and a return to a fixed exchange rate
system. This is a fact and it will be inevitable
after 2003.

As for NORMAL technical trading patterns, it is NOT
uncommon for any bull market to make a correction
that retests its high of the previous cycle. In the
case of gold, that stands at $192 in 1974. This BY
NO MEANS is bearish for gold long-term, nor does it
imply that gold is worthless. It also does NOT
suggest that gold will never rally again. We believe
firmly that a major sector shift back to
commodities, including gold, should materialize
either next year or by 2003. Our models strongly
suggest that the next peak for the commodity markets
will arrive around 2007.

But none of this has any impact on the short-term.
If you would like to see a true free market, then
you should welcome the liquidation of gold by
central banks and get it over with once and for all.
At least at that point they will be unable to lend,
lease, or sell gold.

The key will be a shift in investment demand back to
commodities. We saw a brief hint of that following
the 30 percent decline in Internet stocks after
April 8. That trend did not prove sustainable.
Nonetheless, that trend will re-emerge in the near
future -- just not in 1999.

There have been many monetary standards through
history. Western culture began with cattle, moved to
grain, and then to silver. Gold did not emerge as a
circulating medium of exchange until 600 BC in
Turkey.

The Greeks issued no gold coinage until the age of
Alexander the Great. The Romans used bronze as money
for the first several hundred years and did not
issue silver or gold until after the First Punic
War. When Rome fell in 476 AD gold disappeared and
the silver penny formed the monetary system. Gold
did not resurface as money until the reign of Henry
III in England during the 12th century. That is why
the British pound is still called quot;sterlingquot; today,
a referance to silver as the monetary system.

China used bronze as money along with paper money,
which shocked Marco Polo. China never issued silver
or gold coins until the 19th century.

The United States abandoned the gold standard during
the Civil War, and gold also traded on the New York
Stock Exchange until the return of the gold
standard.

Monetary systems come and go. What we are seeing is
not the only lapse in a gold standard, and we may
see a return to the gold standard beyond 2010,
despite the objections of government.

Nevertheless, all this changes nothing and it means
nothing to gold now. Those who want to see a return
to a gold standard should be very careful for what
they wish. The dream may come true at the cost of
another confiscation.

Gold is still a viable hedge against government. Its
role is fulfilled because it is the only commodity
that is easily transported and internationally
recognized by the same grade and standard. That
cannot be said even of oil. Silver is just too bulky
and its storage is costly.

In conclusion, we see no manipulation and no goal
for manipulation. We do see liquidation and the
disinvestment on the part of the central banks. We
see this as a normal process of the business cycle
and nothing more.

Coincidences are merely that and too many people are
just looking for a reason why the price of gold is
declining. We should not forget that the United
States and International Monetary Fund held regular
gold auctions between 1976 and 1979. Those sales did
nothing to depress the price because demand was
strong. When Russia was a big seller after 1980, the
rumor was that the Swiss would NEVER allow gold to
decline below $400. Now there are too many people
trying to blame too many other people, and meanwhile
there are too many theories that are clouding an
issue that may be rather simple after all.

MARTIN ARMSTRONG
Princeton Economics International

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