A different perspective from a long term gold proponent:

Gary North's REALITY CHECK

Gold's price:
http://www.GaryNorth.com/snip/300.htm

To subscribe to this letter:
http://www.snipurl.com/subscribenow


Issue 738 March 21, 2008

GREENSPAN'S LAST BUBBLE HAS POPPED: GOLD

"Greenspan gaveth, and Bernanke hath taken away."

Put a different way: "Ludwig von Mises was right. The
Federal Reserve System is wrong." (This rule is always
correct -- as Mises used to say, with "apodictic
certainty.")

I knew gold's decline was near. Also silver's. How
did I know? Because I understand Mises' theory of the
business cycle. The central bank inflates. This creates a
boom. This creates sectoral bubbles. Then the central
bank ceases to inflate. The bubbles will pop. The economy
will go into a recession.

On Monday, March 17, I posted this article on my
website, www.GaryNorth.com: "How to Short Gold and Still
Keep Your Gold Coins."

I had asked a specialist in commodity futures to write
it the previous Friday. He sent it to me on Saturday. I
scheduled it for automatic posting at 12:01 Monday morning.

That article must have seemed strange all day Monday.
Gold was at $1,005. In the aftermarket, it rose to $1,029.
Then it fell back.

Why did I have this article written? Because I have
believed for months that the Federal Reserve's policy of
monetary deflation would at last break the commodities
market, which I believed had all the characteristics of a
bubble. This was the last remaining Greenspan bubble.

On Friday, March 14, I wrote this article: "In
December, I Predicted Disinflation. Now It's Happening. Is
Your Portfolio Hedged?" It was posted on Saturday. I
reported on the most recent figure for the Consumer Price
Index for February: 0% price inflation. I wrote this:

There are good reasons to invest in gold and
silver. Inflation hedging in 2008 is not one of
them.

Re-read my article on commodities.

http://www.garynorth.com/members/320...

I realize that what I have been saying is opposed
to almost everything you have read. All I can say
is that February confirmed my predictions. We
will see if March does. And April.

Next time someone rants and raves about mass
inflation, sit tight. Be polite. Don't believe
it. Someday, yes. Not in 2008 or 2009. Probably
not in 2010. This recession is going to see to
that.

On that same day, March 15, I posted this article:
"What Is This Gold Chart Signaling?" I wrote:

The general commodities boom is adding fuel to
the fire. Of course, this can reverse along with
commodities in general. Recessions push down
commodities prices. I have discussed this before.

http://www.garynorth.com/members/320...

When you buy coins, buy for the long haul. If you
are buying bullion stored off shore, you should
be prepared to sell half your holdings -- not all
at once -- if gold moves down. Pick a price move
and stick with it, such as $50. Sell 10% of your
holdings for every $50 move down. If you are in a
gold ETF, the same rule applies.

These articles, posted on Saturday, were the
background material for the article on Monday on how to
short gold.

On Monday, the base metals fell sharply: copper, zinc,
lead, and aluminum. I wrote an article predicting that
gold would be next. I posted in on Tuesday. It was
titled, "What Base Metals Are Saying About Gold." I wrote:

Hold gold bullion coins. These are for hedging
against disaster. They are held to pass down to
children. Don't buy them as a hedge against
inflation in 2008. There is neither monetary
inflation nor price inflation today. The CPI in
February was flat: 0%.

In a recession, short-term credit is king. This
is why the T-bill rate fell on March 17 to 1.11%.

If you are not sure which way gold is going, but
you want to hold your physical position, you can
short gold. What you lose in one account, you
will make in the other. This is a break-even
strategy.

http://www.garynorth.com/members/325...

Don't sell yet, but get ready emotionally to
sell. If gold falls to $949, sell 10% of your
bullion position, or short enough bullion to
protect 10% of your investment. Sell 10% on $50
moves downward: daily closing prices.

Consider this: events that would push gold up to
$2,000 would collapse the stock market. But a
recession could drive down both gold and stocks.
It's safer to sell gold and use the money to
short stocks. I don't see the stock market rising
and gold falling for months on end.

By that point, I was convinced that the bull market in
commodities had ended. Gold would soon follow. So, I
wrote a long essay that explained in detail why I thought
that it was time to sell gold or short it. It was posted
on Wednesday, March 18. I opened it to the general public,
so that everyone could see the logic of my warning. I
titled it: "Every Investment Strategy Needs an Exit
Strategy, Even Gold. Do You Have One?" You can read it
here:

http://www.garynorth.com/public/3263...

I made it clear in that article that I was using
Mises' theory of the business cycle to make my prediction.

I believe in the Austrian School's theory of
money, including the business cycle. I have
written a short book on this. I am not so
committed to a position proclaiming the
ever-rising price of gold that I am willing to
abandon Mises' theory of the boom-bust cycle in
order to hold such a position.

Gold is ideal for Mises' inflationary crack-up
boom, although not as good as a home with a
garden in the country and a few thousand gallons
of diesel. This is not the crack-up boom. There
has to be monetary inflation for a crack-up boom
to occur. Today, there isn't any.

On that day, gold, silver, and platinum fell like
stones. Gold was down almost $50. It breached the $949
figure. So, I took my own advice. I sold a chunk of my
gold. I did not sell all of it. But I decided that it was
time to begin taking profits.

I report all this to let you know that what I am going
to tell you here, I told my site's members before it
happened. I saw this one coming.


WE ARE IN A DEFLATION

I define deflation as "a decline in the money supply."
Deflation produces price deflation.

Precious metals' prices do not normally rise in a
deflation. When they do, it's because they are in a
bubble. Deflation will pop the bubble.

Deflation has now popped the bubble.

I have repeatedly warned my readers that the Federal
Reserve was deflating. I have warned for a year that under
Bernanke, FED policy had changed, that he was determined to
whip inflation, and that the FED was barely inflating -- in
the range of 1% a year. If you have read my reports, you
knew about this shift long ago.

I kept saying that all forecasts based on the useless
and misleading M3 figure would turn out to be wrong. M3
has always vastly overrated the rate of monetary inflation.
The FED was correct in scrapping it in 2006.

So, to make my position crystal clear one last time, I
posted this article on February 18: "What the Federal
Reserve Is Doing to Solve the Credit Crunch. This Is
Getting Little Publicity." I began the article with these
words: "The Federal Reserve is deflating." Then I offered
evidence. I opened this article to the general public.
You can review my evidence here.

http://www.garynorth.com/public/3118...

I realize that you have read article after article
about Federal Reserve inflation. All of them were wrong --
not a little wrong or sort of wrong, but completely wrong.

We now see the effects of deflation: a CPI of 0% and a
falling gold market. Housing is falling. This has not
happened since the Great Depression.

The T-bill interest rate fell to 0.61% on Wednesday,
March 18. I have not seen T-bill rates under 1% in my
lifetime. We are seeing a frantic dash to liquidity. This
is a deflationary mentality. In the Great Depression, T-
bill rates fell below 1%.


WILL THE FED INFLATE?

Of course the FED will inflate. But it is not
inflating now. This is why gold is falling now, and why
real estate is falling now.

Will gold come back? Yes.

The question is: How far will it fall?

The other question is: Will you sell gold now and buy
back more later?

I don't mean sell all of it. I mean sell some of it
and sell more of it as the price falls. Then buy gold when
you think inflation has returned. Sell gold mining shares
first. Then sell bullion. Then sell a few coins. Sell
the coins last, and maybe not at all. You can short gold
to protect the value of your coins. The money you lose in
holding the coins is offset by the profit you make by
shorting.

The FED has been in deflation mode ever since last
August. We are now seeing the results. The equity markets
are falling. Treasury bonds have risen.

It is going to take a complete reversal of FED policy
to re-inflate this economy. The solvency of major firms
and investment banks is at risk. Mere fiat money at (say)
6% per annum will not save them. The capital markets are
unraveling too fast.

I do not recommend getting rid of all your gold
because there are still offsetting factors, such as war
with Iran, a falling dollar, a major terrorist attack, a
major purchase of gold by a central bank.

There is another factor: the bullion banks. They have
borrowed gold from the central banks for an annual interest
payment of 1% per annum. They have used the money from the
sale of this borrowed gold to buy bonds. Rising gold
prices threaten them with bankruptcy. They don't have
enough money to buy back the gold and return it to the
central banks.

In a deflation, gold falls and bond prices rise. This
two-fold action will save the bullion banks. These banks
are where the elite invest their money. They will be able
to unwind their positions. They can sell their bonds and
re-buy gold if the want to.

If I were them, I would want to.

What is happening is a dream come true for the bullion
bankers who borrowed gold to get money to invest in bonds.

If they start buying gold to repay the central banks,
this will put a floor under gold. That's why I think gold
will not collapse in price to $100 or anything like that.
But I think it will fall enough for the carry trade in gold
to be unwound quietly.

That's why I recommend selling 10% of your gold in
response to $50 downward moves. I don't know where the
bottom is.


-------------------------

CONCLUSION

This recession is going to be a bad one. You need to
protect your investments against deflation. I still
recommend foreign currencies. I have for years.

I think your first line of self-defense is your job.
If you lose your job, you are in big trouble. You will
have to sell your assets in a fire sale economy.

You need to do whatever it takes to increase your
value to your employer.