Martin Armstrong answers the Professor

11:55p EDT Friday, July 2, 1999

Dear Friend of GATA and Gold:

The exchange between Professor von Braun and
Martin Armstrong of Princeton Economics International
continues here, with the professor's reply to Martin.
Enjoy.

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

* * *

July 2, 1999

Dear Mr. Armstrong:

Thank you for taking the time to comment on the
article entitled quot;The Gold Market Mystery -- Fact or
Fiction?,quot; which appeared at Bill Murphy's web site,
www.lemetropolecafe.com.

Let me first say that the Rocket School of Economics
recognizes the expertise that Princeton Economics
International provides in its forecasting services
and appreciates the effort that has gone into
establishing your data bases, as well as the very
good information you provide to the market via your
well-read websites.

I have reread your essay, quot;Gold Manipulation or
Exaggeration?,quot; as well as reviewed your response to
Philip Skarshaug.

There are several issues that arise.

The first is that the activities of central banks,
regardless of who they are, must be regarded as
being part of the free-market concept, since it is
difficult to imagine more than one free market and
even more difficult to imagine the existence of both
a free market and a controlled market at the same
time. Although as you note, this has been tried
before.

I do not believe that central banks are involved in
manipulating the price of gold to the downside any
more than I believe that politicians have the best
interests of their constituents in mind when they
make decisions on monetary policy. But I would say
that the actions of central banks have to be
regarded as an aspect of the free-market system,
since it seems impossible to have both systems. The
element of control the central banks assume they
have may be as much a myth as the unicorn.

Whether the European Central Bank changes the
classification of gold from an asset-backing entity
to a currency does not change that gold is gold.

The price of gold is set in London by members of the
LBMA. This fixing is in U.S. dollars. Regardless of
who holds gold and regardless of how they describe
that gold holding, the value of that holding is
determined by market participants.

The market factors are of course supply and demand,
the one buyer/one seller principle. But at present
the published supply/demand numbers do not make
sense. If these numbers are correct (and I agree
that this is a big quot;ifquot;) there is a shortfall of
gold.

I do not agree with your assumption that this
shortfall is being met by Central Bank selling. We
may be talking 4,200 tonnes over the last three
years, which is an amount that would have to have
been reported eventually, and this has not happened.

I would concur with the concept of a policy of
demonetization best described as an international
policy that has not been publicly expressed in terms
of central banks and their gold quot;reserves.quot;

While this policy of demonetization has not been
publicly expressed, I am sure that discussions about
it have been held with the member banks of central
banks, formally or informally. And shame on them.

It is our belief that mining companies' forward
sales account for, at most, only half the gold that
has been leased/loaned (and consequently sold
into the market), and it may not be correct to
describe the mining companies as the primary
borrowers. This certainly was the case from 1985
through 1995, but we believe that a shift took place
late 1995 and early 1996 and that it coincided with
the current decline in the gold price, which began
in February 1996.

The last three years have seen an increase in the
leasing or mobilizing of central bank gold reserves.
Just who the primary borrowers are is a difficult
question. Whether they are bullion banks, investment
banks, hedge funds, or Arab sheiks, the borrowing is
not being done under the watchful eyes of the
regulators you refer to. Perhaps a quot;nudge, nudge,
wink, winkquot; policy may be at work here.

A paper contract for delivery of physical metal at a
future date is not the same thing as owning the
physical metal itself, and we believe that too many
contacts have been written that are good only as
long as the music continues; when it stops and the
market turns, there will be a scramble to obtain
physical metal.

You imply that the Bank of England was being up-
front about its intention to sell a large part of
its gold reserves and decided that it would be
quot;jolly decentquot; of them to let everybody know in
advance of the sale. We do know that the sale
was opposed by the bank itself and was a political
decision, if a very costly one. We agree that
politicians are on average quot;stupidquot; and that they
have short memories and even shorter attention
spans.

But I would not jump to the conclusion that the Bank
of England's timing was coincidental, since quot;stupid
is as stupid does.quot; Before concluding mere
coincidence here, we will watch the activity over
the next few weeks to see whether it happens again.

What may be occurring is the beginning of a shortage
of physical metal itself, which would be a good sign
for the gold bulls but not good for the shorts.

Not all central banks hold the view that gold should
be sold, and the European central bankers have
longer memories than their U.S. counterparts. Your
own comments about the shortcomings and dangers of
floating exchange rates and their, something you
have been warning about for some time, and the
potential for a return to a fixed exchange rate
system are views that have not been overlooked by
the central banks.

Of course returning to the gold standard is a lot
easier if you have some gold -- a point that the
Germans and the French have not missed, I think.
Neither have the Americans.

Gold loans/leases to mining companies are of course
covered by reserves in the ground that can be used
to repay the commitment; we have no problem with
that. But gold that has been loaned/leased to any
other entity apart from a gold owner that has been
sold into the marke place with the proceeds used for
some other form of investment are at risk if
repayment depends on gold's being purchased as
opposed to newly created (mined).

Which brings us back to the shortfall in supply and
demand numbers from the World Gold Council and GFMS.
Something smells a bit here.

Gold is, of recent times, always the fallback
position when things go wrong with paper currencies,
and yes, it is easily transported and
internationally recognized. Indeed, it is a good
hedge against political whims, errors, and plain bad
policy.

We agree with your comments about the International
Monetary Fund, an organization that is well past its
user date and should be replaced. The odds do favor
IMF gold sales simply for the reasons you have
stated. They don't have any money left and their
liquid reserves are gold. How a U.S. politician can
stop this event from happening is a mystery to me.
Politicians' resolve can disappear in seconds and
I'm sure that some quot;goodyquot; is being kept for this
purpose by the Clinton administration.

You say your models point toward a major shift back
to commodities that could materialize next year or
by the year 2003. We agree and suggest that it may
have already started. Certainly the energy market,
along with sugar, hogs, and now copper, appear to be
coming off historic lows.

We do NOT disagree with a final low for gold in the
$200 area, which could see the start of a new bull
market for the metals.

But we respectfully point out that highs and lows
each contain their respective peculiar
characteristics, and that the presence of
absurdities associated with each is a requirement.
Overselling to obtain a profit has happened before
and this may simply be the case with gold.

But having knowledge of an intent by central banks
that may not be available to the public and then
acting on such knowledge has no place in a free
market, and I believe that that is GATA's complaint.

Any anti-trust action is brought about as a result
of an identifiable attempt to give direction to a
market that is based on either a control
practice, as in Microsoft, or a collusion of market
participants. Certainly the gold market has the
potential for this.

The secretive nature if the major players, along
with the London factor, something you pointed out in
your response to Phillip Skarshaug, in your comments
about insider trading in commodities, and in your
comment about the lack of reporting in Britain,
equally apply to gold.

Keep in mind that Watergate may have gone away if it
had not been for the efforts of just two Washington
newspaper reporters. Whether GATA is a two-man army
or not, its complaint may have some merit, and I
would not regard it as a group of gold bulls trying
to justify their wrong investment decision.

Not everybody has the desires to follow the trend.
Market participants do have the right to know what's
going on, and it is good that there are people who
stay with their chosen field and are prepared to get
vocal if they see market activity they don't
understand. Otherwise we would have very one-sided
markets. Once again your comments to Mr. Skarshaug
about the silver market come to mind.

Once again thank you for your response.

Professor von Braun

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