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Mix-Ansicht- The Case For Gold, Reprise / The Daily Reckoning (Nachtrag) - - ELLI -, 01.01.2003, 19:17
The Case For Gold, Reprise / The Daily Reckoning (Nachtrag)
-->The Daily Reckoning
Weekend Edition
December 28-29, 2002
Paris, France
By Addison Wiggin
MARKET REVIEW: The Case For Gold, Reprise
Not surprising, of course, but certainly notable: Stocks
continued their descent Friday... all four major indexes
lost roughly of 1.4%. The Dow gave up 128 points.
But indexes are indexes and don't really tell us what's
happening to the average punter...er, I mean investor.
Maybe this will: According to Lipper, the average stock
mutual fund is down 21.7% for the year. In this third
year of the bear market retirement-hopeful investors are
starting to wonder if stocks really do go up over the
long run. As well they should...
Gold stocks lost ground Friday along with the rest of
the indexes, but gold futures gained another 30 cents to
close at $349. Of the 41 fund categories Lipper tracks
only 3 will end 2002 with a gain: all three are gold
funds and they're up an average of 62%.
Only two trading days left and the dollar is down
12% for the year.
So what's really going on? Of course, your editors at
the Daily Reckoning never claim to know... all we can do
is guess along with the rest of the punters. But in an
effort to make our guess an educated one today, it might
be worth reviewing"the case for gold". After all, as we
noted in late May while turning readers on to a report
of the same name written by Tocqueville Funds' John
Hathaway, gold is the only investment story of the year
worth writing about.
For assistance in recapping"the case for gold" we turn
to an article authored by Frank Giustra and published by
Brien Lundin's GoldNewsletter. (I met Frank briefly in
New Orleans in early November this year. As the leader
of Yorkton Securities during the early 1990s, Frank
helped finance some of the most important mineral
discoveries in recent history. Frank left the mining
business briefly in 1996 to head up Lions Gate
Entertainment. You may recognize the name. They
produced, among other movies, Monster's Ball, for which
Halle Berry won an Oscar. Following the recent move in
gold... Frank's baaack!... now serving as director of
Endeavor Mining Capital Corp. Perhaps if Mr. Giustra is
ready to give up Hollywood gold for the real thing...
this as interesting a story as we're likely to ever find
ever in the investment world, eh?)...
"A Tarnished Dollar Will Put The Shine On Gold,"
headlines the Giustra piece. Among the factors leading
to a rising gold price, Giustra notes a widening
demand/supply gap in gold due to a decline in production
by the primary producers, expected to decline by an
additional 30% over the next 8 years; the decline of
interest rates making it less attractive for gold
producers to"hedge" their future produce; and the end
to the"peace dividend" - or as Harry Schultz put it
recently"geopolitics is back!" and the world is as
scary a place as at any time during the cold war. Iraq,
al Qeada and North Korean come to mind, for some reason.
But supply and demand, the derivatives market and
impending political violence are only the beginning of
the crises contributing to the renewed interest in gold
this year (and next?... and the year after that?)."The
most important dynamic affecting the gold price is,"
writes Giustra,"and will be, the fate of the US
dollar."
We need only look back 31 years to get a grasp on the
relationship between the dollar and gold. In 1971, Nixon
closed the"gold window", and put the final touches on a
political movement started early in the 20th century. In
Europe, banks made gold coins for general trade illegal
in the summer of 1914, at the outbreak of The Great War.
England restored the 'right' of citizens to use gold
specie briefly in 1925, but a run on the Bank of
England's gold reserves forced them to revoke the right
again in 1931. Gold coins were made illegal in the US in
1933 by executive order of President Roosevelt. Thereby,
removing gold from the radar of the average investor
altogether.
But Nixon's action - refusing foreign dollar holders
from redeeming greenbacks for Fort Knox gold - in '71
unhitched the dollar from any backing, except that of
the US government. Unfortunately, any period in history
of government-backed, or 'fiat' currency, has led to
disastrous bouts with inflation. In the 70s the dollar
"took a swan dive" losing 70% of its value against some
currencies over the next ten years. Gold, the
beneficiary of a dollar-decline, climbed until it
reached $800 within the same decade.
A short history of Fed over since then would reveal
repeated attempts to manage the relationship between the
dollar, now the world's reserve currency comprising 76%
of all central bank deposits, and gold... which has
suffered a 20 years of virtual neglect.
"The value of the dollar," writes Giustra"is impacted
by many factors including a) how much of it is printed
b) the rate of return it generates c) the fiscal health
of the government balance sheet sponsoring it and d) the
general state of the economy it represents."
In the past decade the US money supply has doubled from
$4 trillion to $8 trillion, with a full 25% of that
coming in the last 18 months while the Fed tries to
reflate the economy. What's more, currency that is
actually in circulation and being used has more than
doubled from $260 billion to $600 billion in the same
period. Neither of these attempts to stimulate consumer
spending are improving the economic picture. Most
notably, the corporate profit picture is not improving.
Government"fiscal responsibility," an oxymoron if we
ever heard one, is anything if not a pipe dream. And now
we have an administration promising to take"war on
terror" to any corner of the earth willing to host it...
on top of declining tax revenues from the busted economy
affecting all levels of government from the Feds down to
your local school board. Nobody has a keener interest in
keeping the bull market going, we noted this week, than
the government.
Record levels of consumer debt; mortgage rates at levels
not seen since 1965 encouraging even more borrowing;
record bankruptcy levels; and a current account deficit
that requires 75% of all the global trade surplus
capital to maintain... the list goes on and seems rather
endless... is it any wonder interest in gold is
beginning to awaken?
"As, one by one, the foundations supporting these
pillars erode," writes Mr. Giustra,"the faith in the
dollar may, at best, turn agnostic and, at worst, turn
outright atheist." And if the inverse relationship of
the last 30 years holds... gold is about to be the
beneficiary of a whole new crop of converts. Early price
movements in the year 2002 indicate the 'conversion
experience' may have already gripped a few... the
unsuspecting.
Happy New Year,
Addison Wiggin,
The Daily Reckoning
P.S. I'm working on getting a copy of Frank's article
posted to the website. I'll let you know when it's up.
Thanks for reading.
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