Dear CIGAs,

To clear up one point:

Assume the broad measure of liquidity was $100 and was covered by 25% gold value. If the liquidity measure then rises to $125, a 25% cover to remain the number is now 25% of $125 for the value of gold held.

There is no connection between this cover and interest rates. Everything floats and the market determines that float in anticipation of the liquidity level.

Simply stated:

There is an exceedingly high probability that when gold gains significant value as the singular currency of preference there will be NO repeat of the 1980 scenario.

There are Two Types of Inflation:

1. Cost push
2. Demand Pull

Increased interest rates can soften the power of Demand Pull Inflation by acting to slow down the pace of business activity, but has no power at all as the present inflation is caused by “Cost Push” as increased short term rates simply add to the costs. Business is not recovering and credit problems are spreading, making hawk talk nothing but talk.

We do not control Asian economies that will continue to grow, even if at a lower rate of gain. The cost of materials has suffered a severe reaction in a severe up trend, but is far from being in a bear market as financial TV now declares. Global destruction of demand as applied to crude is just a tad too extreme to be applied to the world energy situation.

If the US Fed were to embark on a program of inflation fighting utilizing short-term interest rates, under present monetary conditions they would trigger a transition from a severe recession into a world-class depression. Hawk talk makes good press and neat spin, but to those few that understand, it is rank crap.

Conclusion of today’s commentary:

Gold is going to $1200 and to $1650. This week’s action can only delay that event but not for a substantial period of time.

Gold when it reaches these high prices needs not repeat the 1980 scenario. The means of that phenomenon beyond the grasp of the gold bears is The Federal Reserve Gold Certificate Ratio, not tied to interest rates, modernized and revitalized.

Either a significant rise or a significant fall in the euro has a firm economic rationale for a significant rise in the price of gold. That event will be determined by who monetizes international financial entities and major manufacturing companies - the Fed, ECB, or both.

I believe the US Fed must be that entity and therefore the euro rises and the dollar falls. However in the end, it does not matter.

The basis of my belief is that the ECB cannot legally perform such rescues. Changing that restriction is in a practical sense, impossible.

Gold will go to the levels outlined.

Do not allow the events of the past week to weaken your determination to protect yourself by distancing yourself from your financial agents to the degree of practicality.

Do not be sour of gold held without margin. It is an insurance policy that most unfortunately will certainly payoff.