In Jim Cook's Archive

(Ted Butler’s letter to the Commodity Futures Trading Commission follows this essay.)


By James R. Cook

The price of gold, along with its popularity, are slightly on the rise. Although gold remains far from the mainstream of finance, a growing number of economic writers now make mention of the yellow metal. Could we be in a new bull market for precious metals? It’s probably too early to tell, but the things that make gold rise seem to be lining up like so many ducks in a row.

When you’re hot you’re hot, and when you’re not you’re not. The U.S. economy is definitely not. If trouble comes in bunches, and it seems to, the U.S. may have a long and arduous path ahead with some nasty surprises to come. While Wall Street applauds the Federal Reserve and whoops it up for loose money, the verdict of every economist from John Maynard Keynes on back to Adam Smith would be that we are committing financial suicide. Well, what did they know anyway?

Apparently some people who hold dollars think that they know something. With nine-hundred thousand billion dollars sloshing around the world, our currency looks to have begun a devaluing process. To protect themselves against further dollar declines, dollar holders either switch into foreign currencies or hedge their holdings by selling short. This has the same price depressing effect as an actual sale. By hedging themselves, dollar holders pressure the currency down. Most foreigners are still bullish on America, but this perception is in the early stages of changing. Pity us if it becomes widespread.

A sinking dollar drives up the price of imported goods, including raw materials from outside the country. Normally, you would associate it with rising inflation. However, the Chinese currency is linked with the dollar and, as the dollar drops, Chinese goods only become cheaper. Not to make too much of China and its deflationary impact, because it’s not the main event. The real issue is that all those dollars we send to China and elsewhere ($500 billion trade deficit) are not going to U.S. companies. If they did, we’d have horrendous inflation, but instead the loss of these dollars to overseas companies decimates the profits of U.S. corporations.

Weak profits and the resultant low capital investment depresses the U.S. economy. This bad economic news causes some dollar holders to look for the exit. As the trickle turns to a stampede, the monetary authorities will be forced to react. Expect intervention in currency markets by the U.S. to prop up the dollar. According to many experts, this won’t work because the amount of dollars in the hands of foreigners has become so huge it’s now unmanageable.

Eventually the world will become a terribly expensive place for Americans. To those across the pond, the U.S. will become a bargain basement. They’ve been buying up our assets and they’ll own a lot more as the dollar falters. There comes a point in the process where capital flight from our shores (and an imploding dollar) must be reversed. That’s because we require those dollars to finance our debt at every level. Thus interest rates will have to rise.

If and when that happens, stocks must wash out as higher borrowing costs kill off corporations, ruin heavily mortgaged consumers and throttle government solvency. Throughout this whole ordeal the Federal Reserve will be shoveling out money and credit in every conceivable way to keep the bad economy and falling markets from frightening more dollar holders away.

Can you have a crack-up boom and dollar destruction without price inflation? At least in the early stages it may be possible. A flight from the dollar, were it to worsen, would by definition fan the flames of inflation. The upward direction of gold and the euro testify to the fact that the dollar now has lost stature. Wall Street and the politicians would have you believe that a weaker dollar is a good thing and that its decline can be controlled. It’s not good and it’s not controllable.

In the worst of all worlds it’s sayonara for the dollar as the world’s reserve currency. In that event, a Christmas Barbie will be 300 bucks. A crashing dollar means a crashing economy as interest rates run up. That’s the end of our empire and the end of life as you know it. The Golden Age will be no more. Perhaps never in history has the currency of a major nation had less going for it while at the same time having more for a country to lose if it declines.

Anybody with assets needs to have a portion of their dollars in something real that can hedge and protect them from the possibility that a dollar landslide will sweep them away. There’s a number of choices; foreign currencies (takes expertise), mining stocks (if you pick the right one), real estate (maybe), collector items (perhaps) and gold and silver. The latter offers the most perfect hedge. You have the potential for appreciation, the historical record of 5,000 years of value, international recognition, worldwide demand and near perfect liquidity. Precious metals don’t require expertise and they appear less risky than equities.

Our job at Investment Rarities is to get as much gold and silver into the hands of the American people as we can. We believe it will benefit them greatly. Our advice to put ten percent to twenty percent of your net worth into precious metals is more logical and prudent than ever. You cannot afford to take the chance that happy days lie ahead for the economy. And even if our gloomy economic forecasts prove incorrect, both gold and silver have a great chance to be an exceeding profitable asset. It’s our view that the only way you can lose is by ignoring our advice. The deterioration of the U.S. economic climate is palpable and easy to see. Think it over; record low savings, people mortgaged to the hilt, shaky corporations mired in debt, foreigners controlling our financial destiny, money and credit spigots wide open, government deficits heading for the stratosphere, trillions lost in stocks, rampaging consumers, overbuilding of retail stores, business spending and factory construction sinking out of sight. No wonder the dollars may be rolling over. What will persuade you if this doesn’t?

The fact that you are reading this epistle puts you in a small minority of contrary insiders who are considering alternatives to mainstream assets. The masses are still almost totally committed to stock investments. For them, wishful thinking prevails. In the face of historically high price earnings ratios and record valuations, they anticipate another bull run. It’s terribly unlikely. The bear seldom quits until people wash their hands of stocks.

The higher the price of gold and silver the more the public will be attracted to it. Make your entry before this happens. The trend has begun. Don’t take these events lightly. If we are right, all hell will break loose.

* * * * * * * * * * *

January 20, 2003

Michael Gorham
Division of Market Oversight
Commodity Futures Trading Commission
Washington, DC Via e-mail

Dear Mr. Gorham:

Thank you for your letter of December 9, in response to my letter to Chairman Newsome of August 13. I appreciate the time and effort you have taken to look into this issue and respond in detail, as befits its serious nature. It is not my intention to engage the Commission in a never-ending debate on this issue, as I am a private citizen and you are the regulator of last resort. Since only the Commission can intercede against the silver manipulators, I feel a responsibility to ask you to reconsider your conclusion that all is well in COMEX silver.

I had written to Chairman Newsome with two specific allegations, namely, there were no legitimate speculative position limits in COMEX silver, contrary to commodity law, and that the large commercial dealer speculators were masquerading as hedgers. While I appreciate your acknowledgment upfront, that I am, “… essentially correct that the COMEX does not have speculative position limits outside the spot month…”, I ask you to reconsider your justifications as to why this does not matter. In all due respect, sir, this is key to the COMEX manipulation.

Further, your argument that because there are no legitimate speculative position limits in place, then, “…there… is no motive for a speculator to masquerade as a dealer/hedger in order to evade position limits.” Sadly, I must agree with you, but this is almost tantamount to admitting that most silver trading on the COMEX is speculative in nature, which was my original point, namely, that speculators, not real producers and consumers, are dictating the price of silver. As you well know, allowing unlimited speculation is not the economic purpose and justification of futures trading.

Just like the COMEX’s Neal Wolkoff, you failed to provide any evidence of the real silver, or specific hedging agreements, that backed up the 8 or less traders’ net short sale of 350 million ounces of silver. It is obvious that the real silver backing up the short sales does not exist, and any “hedging” agreements are with foreign producers violating the intent of our commodity law. Unfortunately, you have given the institutional crooks on the COMEX the green light to continue their decade long manipulation in silver.

You have a staff loaded with taxpayer-funded economists, yet not one can explain, in free market terms, how a commodity price can remain depressed in every possible objective measurement, against 13 consecutive years of a documented deficit. Or how inventories, including those of the US Government, can approach, and hit zero, because of that deficit, without the price rise dictated by the law of supply and demand.

Commodity law is incredibly clear on this point – speculators should not dominate the price of a regulated commodity, like silver. That’s why the law dictates speculative position limits. I ask you, with the utmost sincerity and respect, to uphold and enforce the law and reconsider your approval of this manipulation.

Ted Butler

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