-->The Case For Gold
The Daily Reckoning
Paris, France
Tuesday, 28 January 2003
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*** Dow down triple digits...the lumpen ready to panic?
*** Hussein must be trying to hide something...why else
would the U.S. want to attack him?
*** Tech slump...Americans de-leveraging...taking it or
leaving it...and more!
The Dow has been down triple digits in 5 of the last 6
sessions. It is the"end of the cult of equities," says the
Financial Times.
"The Bubble is over for all of us," adds the Orange Country
Register.
More than half of America's households still own stocks.
And more than half of them have no idea what they are
doing; they are the lumpeninvestoriat who got lured into
the stock market when everybody said it was the right thing
to do. These people wouldn't know a balance sheet from a
bedpan. They just go along with the mob whichever way it is
headed. Sooner or later, the mob will leave the stock
market, but when?
Usually, sometime after the first stage of a bear market,
the mob gets spooked and panics. But so far, the lumpen
have sat as still and silent as if they had had a fatal
stroke yesterday. Their stocks are down 45% (Wilshire
reading) from the top. Their dollars have lost 20% of their
value, or more if measured against gold. Their economy -
once the crown of creation - is now beginning to prick them
painfully. They're having trouble paying their
debts...their net worth is going down...and their friends
are losing their jobs and having a hard time finding new
ones.
Yet, the poor saps just take the abuse like smokers - they
do not complain.
Still, the day may come - and come soon - when they are
finally disgusted. Year after year, they get older. Year
after year, they get poorer, too. How much more will they
take?
We don't know. But be warned: they could panic any day. In
any direction.
Eric, what did they do yesterday?
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Eric Fry, reporting from Wall Street...
- Well the"kangaroo" weapons inspections reached their
predetermined verdict yesterday: Iraq is guilty of
something...Of what, no one is exactly sure. The
approximate verdict reached by chief UN sleuth Hans Blix is
this:"That Hussein guy is trying to hide something, most
likely weapons of mass destruction...and we don't like it
one bit."
- Yesterday, Blix's report called on Iraq to prove that it
has disarmed itself. We're confused; isn't it Blix's job to
determine whether Iraq has disarmed? Since when does the
mouse alert the cat to its whereabouts? In any event, Blix
told the U.N. Security Council that the various inspectors
need more time to verify Iraqi compliance.
- But the Bush administration has heard enough already, and
it is clearly itching to pull the trigger on an Iraqi
invasion."We can't keep kicking the can down the road,"
Colin Powell said of extending the inspection deadline.
- Countering Powell's impatience, Senate Minority Leader
Tom Daschle - a man who never met a foot he didn't want to
put in his mouth - posed two very worthwhile questions
yesterday:"First, does Saddam Hussein pose a threat to our
national security so imminent that it justifies putting
American lives at risk to get rid of him? And second, how
are our efforts to deal with this threat helped by short-
circuiting an inspections process we demanded in the first
place?"
- We suspect that Daschle's question will go unanswered,
drowned out by the drumbeat of war. Thus, the prospect of
an American invasion draws ever nearer, and with it, the
prospect of a fourth straight losing year for the stock
market.
- Yesterday, stocks tumbled yet again, as the Dow dropped
141 points to 7,989, closing below 8,000 for the first time
since Oct. 14. The blue chips are now down more than 4% so
far this year. The Nasdaq joined the Dow and S&P 500 in the
minus column for 2003 by falling 17 points to 1,325. Global
stock markets are also sliding lower. London's FTSE dropped
for an 11th straight day, while most European bourses fell
about 3% each.
- Conditions have become so tough out there on Wall Street
that even the gold stocks are falling. The yellow metal
itself continued its winning ways by gaining $1 to $369.40
an ounce, but most gold stocks declined. The Philadelphia
Gold & Silver Index fell 3.2% to 79.6.
- But while share prices are tumbling, home prices are
soaring. Somehow - we don't know how - despite rising
unemployment, despite intensifying global geo-political
turmoil and despite deteriorating U.S. economic conditions,
the U.S. housing market keeps chugging along like some sort
of financial Mr. Magoo. Sales of existing homes rose about
5% in December, capping a record year for the industry,
according to the National Association of Realtors. Housing
remains one of the very few bright spots in a very somber
economy.
- The tech sector is more typical of the tough times on
Main Street. At the World Economic Forum's annual meeting
in Davos, Switzerland, Microsoft founder Bill Gates said he
did not expect a big pickup soon in technology spending.
"This economy is fairly flat," said Gates,"technology
spending, there's no big uptick." Gates gets no argument
from his fellow technology company executives. In fact, the
outlook is fairly grim throughout techland, which is a big
part of the reason that stocks are falling - with or
without the Iraqi conflict.
-"The stock market has reneged on its early promise," says
Andrew Kashdan of Apogee Research."Pretty much all the
market leaders have been forced to dampen analysts'
enthusiasm for a recovery that is looking not so imminent.
The list of party poops includes General Electric,
Microsoft, IBM, Sun Microsystems and Intel. To take one
example, Intel beat the numbers (if anyone still cares),
but another machete-like cut to capital spending did not
exactly inspire confidence. Sun Microsystems didn't even
bother making a forecast for its fiscal third quarter..."
- Being a long-term investor just isn't as much fun as it
used to be. In fact, Strategic Investments editor, Dan
Denning, says that investing in the U.S. stock market is
far more likely to be painful than profitable."Any
strategy that counts on the relative out-performance of
traditional blue chips is a lot like trading futures on
death row inmates," says Denning,"hoping you'll own the
one that gets a pardon. And unless the stock market starts
acting like the Governor of Illinois and gives clemency to
the hundreds of blue chips which will get crushed by the
bear market, its' not going to pay to try and guess which
blue chips sill 'survive.'"
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Back in Paris...
*** Americans have been leveraging themselves with stocks,
real estate, and credit card debt for many years. Debt
totaled only 150% of GDP in 1950. Now it is twice that
high. Little by little...or in a sudden panic...they will
have to de-leverage themselves somehow. Not until that
happens will the bubble really be over for us all.
*** De-leveraging can take a long, long time. Japan began
in 1990. But yesterday's news brought evidence that the
process continues. Short-term interest rates have fallen
BELOW zero, reflecting obstinate deflation...retail sales
fell 3.9% in December...and the nation's trade surplus shot
up by more than 51%. The Japanese just won't spend money.
*** Here at the Daily Reckoning, our beat is money. But
long time DR sufferers have realized that money is just a
cover...an alibi...a pretext for commenting on other
things. We're fascinated by the way the world works...and
by this strange creature, homo sapiens sapiens, the infests
the place. Watching him carefully - rather than studying
statistics or econometric formulae - gives us clues to how
his money works, too.
But we don't really care about money, dear reader. We live
simply and frugally. A bed, book, and candle are all we
really need. In fact, as long as we have enough to pay for
our office and our apartment...our 2-hour lunches...good
vintage wines...our summer house...vacations...riding
lessons...music lessons...French lessons...antique
cars...Savile Row suits...19th century French landscape
paintings...boarding school and college for our 6
children...the cleaning lady...the gardener...cement for
our stone walls... heck, we can take it or leave it. After
all, it's the simple things that really matter.
*** Maria is on a modeling assignment in Mauritius, where
she is staying at a resort called Touessrok.
"You wouldn't believe it," she said last night."This place
is so beautiful and so deluxe. Everybody who comes here
must be super-rich. I came into my room last night and they
had spread rose petals on my bed. Everywhere you look, it
is stunning...There's a white sand beach...a coral
reef...the sea is a beautiful color of green...
"I had a free massage...and tomorrow I don't have to
work...so I'm going to sit by the pool and have one of
these guys in the white uniforms bring me drinks with
umbrellas in them..."
You see, dear reader, it really is the simple things that
really matter.
The Daily Reckoning PRESENTS: Gold - the 'Trade of the
Decade' - is up 30% over the last two years. But, as Lord
William Rees Mogg wonders,"is gold still cheap?" Below,
Rees-Mogg contends that while a multi-year bull market in
gold is possible, there are still several factors to
consider...
THE CASE FOR GOLD
By William Rees-Mogg
In 1974, I wrote a short book,"The Reigning Error", in
defense of gold as a monetary instrument. The argument was
that all paper currencies are abused by the governments or
banks which issue them. Gold cannot be created or
replicated by a printing press; it is therefore protected
from the human abuse of over-issuance.
Many people do not realize that a strong historic argument
for gold even exists. Put at its simplest, one can say that
gold has the same exchange value as it did in 1900. That is
approximately true in high inflation countries, like
Germany, which had two wipe-out inflations in the 20th
century; in medium inflation countries like Britain, which
lost 98% of the purchasing power of the pound; and in low
inflation countries, like the United States, which lost
about 95% of the purchasing power of the dollar. In
Britain, the gold price has moved with the cost of living
index, at least over long periods. An ounce of gold will
now buy about the same area of farmland as it did in 1660.
After my first book, gold responded to the global inflation
of the 1970s. At one point, it rose from the official price
of $35 an ounce to a peak of around $850, or by about 23
times. Provided one sold out near the top, gold was the
star performer of a very difficult decade. Since then, gold
has been a poor performer, particularly when compared to
the Wall Street boom of the late 1990s.
However, I thought that the bull market in equities was
seriously losing touch with reality rather too early - at
around the time Fed Chairman Alan Greenspan started to talk
about"irrational exuberance". At its bottom three years
ago, gold fell below $260 an ounce, and it came close to
that low point again two years ago. An investor who
switched from equities to gold in the course of the
millennium year would now be more than twice as wealthy as
one who stayed in equities, let alone the Nasdaq.
I have repeatedly written that gold has become a better
investment than the Dow, and it has been. In 1980, at $800
an ounce, gold was a bubble. At $260, it was dirt cheap,
and the dot-com shares were a bubble. Is gold still cheap?
The gold market is certainly performing very well, up 30%
in the last two years and outperforming most other
investments. For several months, the gold price hovered
around $320 an ounce and seemed to have difficulty breaking
out above that level. What are the factors now?
The expectation of war in Iraq is probably the most
important one. Gold certainly benefits from inflation, but
it also benefits, more generally, from uncertainty. I think
it is probable that the United States will go to war to
overthrow the Saddam Hussein regime, and that the war will
be short and successful. At least temporarily, that would
be unfavorable for the gold price, because it would remove
uncertainty. However, there is no certainty about any war.
Gold remains a good protection against a spread of war,
such as is widely predicted by Arab commentators. So long
as the uncertainty exists, oil prices are likely to remain
high, and Middle Eastern investors are likely to be putting
some money into gold.
The second influence to consider is interest rates. They
are abnormally low at present, not only in the United
States, but also in Europe and Asia. That means that the
cost of holding gold, which is always a first-class
security, is very low. Governments remain afraid of another
recession, so there seems to be little risk of a higher
trend in interest rates for the time being. That is
favorable to a higher gold price.
So is the general anxiety about the major world currencies.
The dollar has been weak, because the United States has a
high and rising external deficit to finance. It now amounts
to nearly 5% of the gross domestic product. Because the
dollar has been weak, the euro has been comparatively
strong. But the European Union has agreed to accept 10 new
members, with 20% of the existing E.U. population. These
are poor countries and will be a burden on the currency.
The Japanese banking system is in serious trouble, which
affects the yen. It is not hard to see that gold is more
attractive than any of these currencies. Every other
currency relates to debt; gold has no debt, though
individual gold holders, of course, may.
Central banks have been selling gold, but that has largely
stopped. The main creditor countries, including China,
Taiwan, and Japan, are in Asia. They have a gold tradition.
I expect their central banks to prefer gold to dollars in
2003. This seems to be the view of the market. A year ago
there were large bear positions, but now the speculative
positions are bullish.
My own view is that the latest rise is only the start of a
long-term bull market in gold. From the late 1960s, the
last bull market in gold lasted for over 10 years. It is
quite possible that what looks like a new bull market will
run for some years, and go well above the present price.
But, inevitably, there will be market reactions along the
way.
Regards,
William Rees-Mogg,
for the Daily Reckoning
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