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Gold Finds a Comfortable Balance Around $350
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(August 22, 2003) The gold market has come a long way, in both stature and price, from its darkest days during the 1990s when equities and financial instruments roamed the earth like Goliaths and gold stayed buried underground, sinking in price, ignored, and forgotten by all except the faithful goldbugs. A look at what has changed…
The last time gold captured the popular imagination in this country was during the pre-Y2K hysteria, when some stockpiled food, water, gold and silver against the possibility of a massive computer failure that was predicted to bring our civilization to its knees, and possibly send us back to the Stone Age.

When the lights came on on January 1st, 2000, and all was seen to be well, well, that was kind of the final act for the old goldbugs. Gold’s fall from the heights of 1980’s $800+ price, and its fall from grace within the opinions of most Americans, was complete. The whole set of feeble justifications for buying gold after 1980 had all come to nought. Why on earth did people hold onto a commodity that fell from over $800 in January 1980 to a mere $252 by 1999?

For twenty years, the goldbug worrywarts time after time simply turned out to be wrong, wrong, wrong. The US dollar did not collapse into nothingness, oil did not reach $144 per barrel, “Bankruptcy 1995” didn’t come to pass, inflation seemed to diminish every year, the federal deficit actually shrank from year to year in the late 1990s - and just to top things off, the ultimate end-of-civilization-as-we-know-it scare known as Y2K turned out to be a non-event.

Gold’s 20-year run as the exclusive purview of the paranoid, alarmist Chicken Littles of the world was over – mostly because no one after Y2K would ever listen to that crowd again.

The first few months of 2000 saw every bullion dealer in America flooded with gold and silver, bought back from holders of emergency Y2k stashes who were now sheepishly selling because the sky did not fall on January 1st. Premiums disappeared, metal was discounted, smelters worked overtime as great stores of precious metals in the US were disgorged from their hiding places and sought a price, any price, just get this stuff out of my sight.

It certainly seemed like a watershed moment in the precious metals field. There was the sense that as the decade, century, and millennium ended we were also seeing the end of any demand for physical precious metals. I mean, with gold prices held down and the federal government actually generating a budget surplus, where was the next stimulus for the gold market going to come from, maybe Y3K? The slate had been cleaned, the rout was complete, and maybe, just maybe, it was true – gold was obsolete.

But oddly enough, the changes in our economy since the year 2000 have been so enormous as to put the idea of a lights-out Y2K computer malfunction into its proper perspective – at it worst, merely an irritating nuisance, as computers are wont to be from time to time. What he have found this century is much scarier.

Looking back, we can see that the 1990s were characterized by a strong dollar, a booming economy, millions of new jobs, and a stock market bubble under Clinton/Rubin/Greenspan. Clearly, such a run was going to end, possibly badly, and end it did.

Today we have a falling dollar, a slumping economy, millions of jobs disappeared, and a stock market slide that at one point had chopped some $10 trillion from investors’ portfolios. Historians and economists will debate for decades the causes and villains to be named later in this boom-and-bust cycle. Nonetheless, as for the federal budget:

“In Washington, they know how to run a budget deficit. After chafing uncomfortably for a number of years with unaccustomed surpluses, the red ink is gushing past $400 billion and counting…”…”Of course, the U.S. Government can run deficits without limit because it has at its disposal that device so beloved by Fed Governor Ben Bernanke – the printing press. Nobody need ever worry about the federal government running out of money since it can always print a pile of greenbacks.” –Randall W. Forsyth, in Barrons’ “Up and Down Wall Street,” August 25th 2003.

“ Some see a world hyper-inflation. Others see ever-increasing levels of stagflation -- inflation and deflation at the same time. No matter which 'near term' scenario makes sense to you, the one thing we can say for certain is that nothing these days is tried and true. Historical examples are few and far between, because this worst of all international monetary systems ever devised is unique to the 20th century and unvisited prior to 1971. There are no historical examples to draw upon in the greater sense -- only a small microcosm referred to as the 1970s.” – Michael Kosares, Centennial Metals/USAgold.com

Possibly the most remarkable thing about the gold price level today in the mid-$300 range is that no one finds it remarkable at all that gold is trading at this level. After all, today’s gold price of $363 is approximately 40% higher than its 21st century low of $256 set on April 3, 2001 – yet you still hear very little about gold as an investment vehicle.

The fact that gold is virtually ignored actually bodes well for the gold market. Gold is still (despite a 40% run in 29 months) the stealth investment. There was some popular talk about gold when it ran up before the Iraqi invasion, but once the tanks were on the ground, gold prices actually fell dramatically. Since then gold has recovered substantially, and now trades within $30 or so of its pre-war high. But recent gains in the US equities market have put gold in the shade, news-wise, and you simply don’t find any mention of it these days in the popular and business press.

Yet with the current pace of dollar creation and its shaky status abroad, we are seeing a situation that may come to resemble the 1970s all over again. Then, we had Gerald Ford and his W.I.N. buttons – “Whip Inflation Now.” Today, we have the dollar already down nearly 40% versus gold in this so far short decade, and all the Fed can find to jawbone about is “deflation.” Stagflation is the likelier threat – remember that ugly relic from the late ‘70s?

The dollar is skidding, and nobody cares. We’re coming onto an election season and the goal is to get the money flowing and kick-start the economy - deficits be hanged. No one in Washington will be thinking about the inflationary consequences of fiscal and monetary policy until well after November 2004.

Of course, your challenge as an investor is to think about those inflationary consequences NOW.

 

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