Hommels Gold Report
Jason Hommel
Editor's Note: The following
is an interview between GOLD-EAGLE and market analyst Jason Hommel.
Most of the questions put to Mr. Hommel reflect some of the common
concerns many investors have regarding the current gold market. His
answers provide a good overview of the situation for new investors, who
are beginning to learn about gold. Further, Mr. Hommel's insightful
knowledge serves to help investors clarify their own ideas. To be sure,
his clear logic provides incentives to buy physical gold and silver.
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GOLD-EAGLE: Would you tell us why the bullion banks
with such a huge SHORT GOLD position have not taken any significant
actions to cover?
Hommel: Many of the banks ARE covering. But for each
bank that covers, there has to be a counter party who accepts the risk
that they wish to cover. What has happened is that the exposure has
been shifted onto fewer and fewer big banks, which have been named in
GATA's lawsuit. These are: Goldman Sachs, Deutsch Bank, and I think
Morgan? see www.gata.org Please forgive my spelling mistakes. I believe
the positions of gold owed by two of these banks is a matter of public
record, yet not too well publicized in the media, except on the
internet.
The point is that gold is owed. To truly cover, they
would have to BUY BACK the gold itself. Where would someone buy 10,000
to 20,000 tons of gold today, without affecting the price of the
commodity in the positive direction??? When the Bank of England's sales
of 25 tons move the market?! And the Washington Agreement, limiting
gold sales by most of the central bankers of Europe to 400 tons per
year caused a massively quick run up to $340 from $250?
The way these positions have been consolidated is
that the big players know that they would have to buy gold at higher
prices if they started buying. So they MUST keep selling. It's a
sickness, a catch-22. They are digging their own graves. There is a way
out, maybe, politically. They can simply default on the promise to pay
gold, (bankruptcy!) and do a cash settlement, without actually buying
physical which would cause a massive run up in the price beyond what is
possible to pay. But to foreign powers such as oil, to whom much of
this gold is owed, this will be like an act of war.
Again, the size of the gold owed is massive. $80-100
Billion for one bank? If gold tripled, this would be like owing $300
Billion, like taking a $200 Billion loss, and this is nearly equal to
the assets of the largest banks in the world. And these are the banks
that are "too big to fail", whose failure would pose a "systemic risk".
Since "covering" would require buying back the gold, causing a run up
in price, and failure, I don't think the biggest players ever really
want, or intend, to cover. Do you? They simply can't. The gold is not
there to buy anyway.
All they can really do under the current rules,
prior to default, is to prolong the game, by looking for other nations
to keep selling or leasing their gold, and this has been going on for
the last several years as these players keep getting desperate. After
the Washington agreement, smaller and smaller nations who were not a
part of the agreement kept announcing they would either sell or lease
their gold. Kuwait agreed to lease a few tons of gold (maybe 70?) in
return for military weapons. Figuring out how much gold was leased and
the cost of the military supplied, showed that they leased their gold
at the cost of about a $600-800/oz. favor, if my memory serves.
GOLD-EAGLE: Gold at $260 per troy ounce is cheap,
but will gold be cheaper? (Particularly, if we take strong dollar
factor into our consideration?)
Hommel: At $260, how much cheaper do you need gold
to get? If you adjust for inflation, it's lower than any time in
history (except for briefly in the early 70's), going way back even to
when gold was $20/oz, prior to the revaluation to $35/oz. during the
Great Depression in the 1930's. If you adjust for inflation not using
government figures, but true figures, then gold is even cheaper. The
last time gold was this cheap, adjusted for inflation, was early 70's,
at the start of the decade long run up from $35 to $840, a 24 fold
increase.
Gold, may, in fact, get cheaper. What if it goes to
$250 again, or even as low as $240? Whoop-de-do! Who cares? Why wait?
Is the $20 savings worth it? And what is the guarantee you will be able
to buy later at these fire sale prices? What if it goes up to $4000
before you buy? Think risk vs. reward. The point is that it can't go as
low as zero, unlike paper, which can. It costs money to take gold out
of the ground, and lower than $300 is causing mine closures. And in the
current price environment, 2500 tons is pulled out of the ground
annually, while 4000 tons is purchased for things like jewelry, which
cannot be easily repurchased once it finds its way into the hands of
people in India, who have no use nor affinity for paper dollars.
Yes, with the strong dollar, and as long as the
dollar gets stronger, this will help put a lid on gold. However, with
Greenspan increasing M3 at about 10% annually since 1995, why should we
continue to expect a strong dollar for much longer? With the economy
and stocks dropping, why expect a strong dollar? With pressure to lower
interest rates, why expect a strong dollar? With the manufacturing base
destroyed in the U.S. since NAFTA and GATT, in the mid 90's, why expect
a strong dollar? With the trade deficit ever increasing, and nothing to
sell to the rest of the world, how long can our strong dollar continue?
What happens when those dollars that are going overseas come home to
buy something? What will they buy when we have nothing to offer, no
stocks, few manufactured goods, and the little that can be bought here
can be purchased elsewhere because they are produced with cheaper
labor? How can we export a massage or a lap dance, or similar frilly
service economy? We can't. When the overseas dollars show up, and with
liquidity being needed to prop up our failing stock market, we have a
recipe for inflation, a weak dollar is coming. Want to try and time
exactly when? What for? Fiat dollars like ours have collapsed as much
as 30% or 50% in a single day. Even the almighty U.S. Fed Reserve
dollar collapsed by 8% overnight in recent years. History has shown the
way that gold could easily "pop" up to $600/oz., overnight, and that's
just for starters.
GOLD-EAGLE: Equity markets are way down, and we
think they will continue to decline. Nevertheless, funds fleeing the
stock markets are flowing to bond markets, rather than to gold. Is this
anomaly due a strong dollar?
Hommel: . I think the markets are down for nearly
the same reason everyone else does. They were overvalued. Companies
which never saw a profit, at multiple Billion dollar valuations? There
was something fundamentally wrong with that.
Moreover, I believe bonds are more attractive than gold for several reasons.
- because they pay interest, and gold does not
- because they are "sold" by institutional salesmen, gold is not
- because gold purchases are actively discouraged at institutional levels
People who think gold will go up are sold "Call
Options", which are derivatives on the paper contracts, instead. As I
have hopefully shown, these paper contracts will eventually be
worthless, because they can NEVER be honored with real gold. And paper
on paper, (options on contracts) which are denominated in paper
dollars, are really just funny when you think about it. Again, why
wait, or be bamboozled into thinking that some counter party will honor
their "impossible to honor" agreements? Just buy the real stuff and sit
and wait.
GOLD-EAGLE: If the dollar continues to be strong, does that mean the gold price will continue to decline?
Hommel: Buying gold at institutional levels is a
real hassle. They require all sorts of paper agreements prior to making
the sale for you, which actually takes a few weeks to process! Then
they hassle you with "storage fees" and mystify you with "assaying
fees" which will be assessed if you tell them you want to take
possession of the gold itself, and not use their storage facility,
which they may charge up to 1% per year for. They say the assaying fees
will be pricey, without telling you the price, so as to discourage
people from actually taking possession of gold, and to talk you into
the high storage costs. And this does not even begin to include the
commission, which is another charge. It's real funny, they will tell
you "don't buy gold, because of these charges", but they charge
commissions for everything else they will sell you. And after all of
this, they will then tell you not to buy "spot" gold, but a futures
contract to get the gold cheaper, which involves another set of
paperwork, and which is buying into the very thing you don't want, the
paper market.
And if you buy gold in an IRA, which you can do,
what's the point? You can't take physical possession! And if the
company which holds your gold defaults, then you are basically out of
luck. And if you actually own physical gold, and it does run up in
price, there is no capital gain to begin with on gold sales, so there's
really no need to hold it in an IRA, the purpose of which is to let
your money grow without capital gains accruing. Buying gold in an IRA
is just a way to keep the IRA money safe.
And if gold does run up really high, who is to say
the government won't change the rules on you like they tend to do? If
they decide to confiscate gold, IRA gold will be gone. Gold in the hand
can still be hidden. Why not just "buy into the system" with bonds and
avoid the hassle? Which people do.
GOLD-EAGLE: Gold is a commodity, and supposedly is
not allowed to be manipulated, legally speaking. On the other hand the
U.S. dollar is a currency and therefore the U.S. government does have
the right to decide the value of its own legal tender. Consequently,
since keeping the dollar value high means maintaining a lower gold
value, do you think it is plausible that the U.S. government will
continue to support a strong dollar strong (and conversely suppress the
price of gold) with a view to preventing bullion banks from collapsing?
Hommel: If the United States government decided to
continue manipulating gold on the world markets, by secretly selling
gold from the U.S. reserves, as it has done I historically, there is a
way to calculate how long they could continue to do so. Simple math,
really.
The current deficit is 1500 tonnes. 4000 tonnes
consumed and growing, 2500 mined and shrinking. The U.S. gold reserve
is about 8000 tonnes, (down from the historic high of 27,000 tonnes).
Using that gold to supply the market to satisfy the deficit of 1500
tonnes per year would deplete the U.S. hoard in how many years? Just
over 5 years. Like I said, it's simple arithmetic. But think for a
moment. If this gold were to be secretly dumped to keep the price low,
then less and less gold would be mined, as is occurring, and more and
more gold would be purchased, as is occurring, as people figure it out,
like they always do, and have figured out as history has proved. Thus,
the end would come much, much sooner than 5 years, and the U.S.
government would probably not continue to play the game realizing they
cannot do it longer than 5 years anyway.
Somebody high up will surely realize that it might
be good to hold on to some of the gold reserves and not let it all go
for short-term political gain. As it is, the last time we played this
game, we lost 2/3rds of our reserves. Why play it again, when the
outcome will simply impoverish our nation's reserves of wealth?
My conclusion is that we should not depend on the
government to preserve wealth for us. They fail every time. Instead, we
should take advantage of government stupidity and lack of foresight,
and protect wealth by buying gold personally. Buying gold and silver
right now is better.
BTW, Ted Butler has done some wonderful research on
the silver market. http://www.gold-eagle.com/research/butlerndx.html
http://www.gold-eagle.com/silver_section/reports.html
Unlike Gold, silver has been consumed by industry on
a massive scale. Today, there is ten times as much gold above ground
than silver. Silver is more rare. And if the problems for storing gold
were bad, it gets worse when you have to move around a few hundred
pounds of silver for a mere $25,000 investment. With silver, you get so
much for your money. It's truly a rare case of under valuation; which
will probably turn out to be the golden opportunity of a lifetime.
Jason Hommel
Jason group@spintheweb.com
March 24, 2001
Also by Jason Hommel
Other essays by Jason Hommel:
25 Reasons To Support The Sound Money Bill - 08 July 2004
I'm Insanely Bullish On Silver - 19 June 2004
Silver Stock Evaluations - 22 May 2004
The Silver Bull Is Back - 04 May 2004
Late April Silver Update - 22 April 2004
Silver Juniors With Cash Flow - 04 March 2004
Major Frauds of the U.S. Monetary System - 26 February 2004
Market Perspective & Cabo Mining - 12 February 2004
Usury Enslaves - 19 January 2004
Sterling Mining - 29 December 2003
The U.S. Trade Advantage With China - 17 December 2003
Rising Gold Prices Will Help The Economy - 02 December 2003
Miners to Use Silver as Cash - 27 November 2003
Private Placements in Silver Companies - 20 November 2003
Is the Silver Market Too Small to Buy? - 13 November 2003
Inflation & Deflation During Hyperinflation - 06 November 2003
Silver Price Expectations of Silver Stock Investors - 30 October 2003
Buying & Tracking Canadian Silver Stocks - 29 October 2003
Canadian Zinc--Silver Potential - 23 October 2003
Silver Stocks--Comparative Valuations - 4 - 13 October 2003
Silver Stocks--Comparative Valuations - 3 - 06 October 2003
Silver Stocks--Comparative Valuations - 2 - 29 September 2003
Silver Stocks--Comparative Valuations - 1 - 22 September 2003
Silver and Cardero Resource - 08 February 2003
The Moral Failures of the Paper Longs - 22 January 2003
CFTC Response to Silver Problem - 14 January 2003
People Talking About $32,567/oz - 10 January 2003
Letter To Authorities of Silver Markets - 06 January 2003
Why no talk of $32,567/oz ? - 02 January 2003
Refuting Myths about Gold - 28 October 2002
Controlling Gold with Paper - 10 June 2002
Impending Gold Futures Default - 29 May 2002
Certain gold stocks are still cheap - 07 May 2002
A Few Supply and Demand Fundamentals of the Dollar and Gold - 06 May 2002
New DROOY Institutional Holdings - 21 February 2002
Hommels View of Gold - 23 March 2001
Gold Price Under Differing Scenarios - 24 June 2000
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