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Wow, What a Week for Gold!
(December 21, 2001) The winter solstice finds gold making a 5-year high this week, punching through $330, $340, even $350, in a panic buying surge that peaked at $355 in the early morning hours on Thursday, finally settling at $340.50 on Friday’s New York close. War prospects are a factor, but this gold rally has much deeper roots…
Is there any doubt now that gold has decisively broken out into bull market territory? In US dollars, gold is now up $100 from the lows of 2001 to this past Thursday’s peak.

Tim Wood of summed up gold’s recent bullish moves in his article of 12/20/02, “Did Gold Need a Lawyer to Get Past $350?”:

“Gold is in motion as a result of long run monetary shifts, medium-term demand and supply pressures, favourable technical patterns and a tiny war premium.”

The US dollar has gotten pounded in the past few weeks, and gold looks like a snug and safe harbor in uncertain times. Gold stocks have been the vehicle for most investors’ participation in gold, and the precious metals equities this year have outperformed all other segments of the stock market.

Yet demand for physical gold hasn’t yet overwhelmed the gold markets. And it’s a good thing, too, with only some $26.2 billion dollars worth of gold (at $340 per ounce) coming out of the world’s mines each year. To make a small comparison, mutual funds managers in the US collected some $85 billion dollars in fees alone last year for managing the trillions of dollars that they hold in US equities.

The imbalance between the tiny stock of gold in the world and the sea of US dollars sloshing around is striking. And the traditional equities investor who did so well in the 1990s has been faced with an entirely different kind of market since the turn of the millennium.

Philip Coggan of the Financial Times summed up this year in investing in his column “The Long View” in today’s (12/21-22/02) edition of the FT:

“It was a year that seemed to break the rules. Investors are supposed to be rewarded for thrift; in most cases, they lost money. They are also supposed to be rewarded for taking risks; but for the third year running, riskier equities heavily underperformed risk-free government bonds.”

“The clucking sound you hear is a flock of chickens coming home to roost. In the 1990s, investment returns far exceeded both the growth in profits and the growth of the economy. In a sense, investment returns were borrowed from the current decade. Those who argue that the recent performance of the markets is disproportionate, given the relatively modest economic downturn, are thus missing the point. Markets are returning to the mean.”

“…When investors become risk averse, whether because of corporate shenanigans, economic turmoil or war talk, they cling to assets that they perceive as reliable. That explains why it has been such a good year for cash, government bonds (US Treasuries have returned 10.5 per cent, global government bonds 14.9 per cent), and gold bullion (up 16.8 per cent on the year).”


Alan Greenspan, chairman of the Federal Reserve Board, spoke to the Economic Club of New York on Thursday, 12/19. On that morning, gold had just achieved a 5-year high, and naturally was on the chairman’s mind. And here is how he began his speech:

"Although the gold standard could hardly be portrayed as having produced a period of price tranquility, it was the case that the price level in 1929 was not much different, on net, from what it had been in 1800. But, in the two decades following the abandonment of the gold standard in 1933, the consumer price index in the United States nearly doubled. And, in the four decades after that, prices quintupled. Monetary policy, unleashed from the constraint of domestic gold convertibility, has allowed a persistent over issuance of money. As recently as a decade ago, central bankers, having witnessed more than a half-century of chronic inflation, appeared to confirm that a fiat currency was inherently subject to excess."

As Jim Sinclair remarked, “You have just heard the Chairman of the Federal Reserve speak the Gospel of Gold. It was not said randomly.” This was from Sinclair’s article posted on entitled “Federal Reserve Chairman Greenspan Confirms Governor Bernanke’s Reintroduction of the Subject of Gold as Relevant to Present Economic Circumstances.”

Divining the meaning of Chairman Greenspan’s statements is never a simple thing. Sinclair and other commentators see in this speech a hint by Greenspan that the Fed is considering a return to some form of gold backing for the US dollar.

Obviously, other interpretations could also be put forward. But, as Tim Wood said yesterday, “We should at least be grateful that the third word out of Alan Greenspan’s mouth in his speech to the Economic Club of New York was ‘gold.’”


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