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[ThatHawaiiGuy]

GOLD:

by Jon Warner
September 24, 2003 (usagold.com)

NEW YORK:

New York spot gold settled higher at $387.00 an ounce, up $1.20 an ounce from yesterday’s close. Gold settled higher on light fund buying as the U.S. dollar slipped lower. "If worldwide dollar demands keep falling, then the new overhang of unwanted dollar liquidity circulating at home and abroad could trigger a new bout of inflation," said Erik Gebhard, president of Altavest Worldwide Trading. "Gold prices are marching toward $400, a level that some economists believe is a signal of excess liquidity and higher future inflation," he said. In terms of technicals, "the path of least resistance continues to be higher, with uptrend support near $380 and resistance at prior highs near $390," he said. "A pop above $390 will almost certainly take out stops and shoot us towards $400," Gebhard said. "Declining industry-wide exploration expenditures over the last five years supports our view that aggregate gold production will continue to decline for the foreseeable future," said Wayne Murdy CEO and Chairman of Newmont Mining Corp.

"Gold prices should be down, and gold stocks should be down, but they keep going up," said John H. Hill, a former geologist turned vice president of equity research at Citigroup's Smith Barney investment division. So what is behind all this? Analysts say there is just enough uncertainty in the marketplace to tap investors' interest. They see some kind of protection in gold, thinking they can win no matter which side of the coin they get. If the U.S. economy gets stuck in a deflationary grip that stalls the recovery, gold benefits. If there is another terrorist act, gold is good. If the U.S. government's aggressive monetary and fiscal policies -- like low interest rates and tax cuts – over stimulate the economy and lead to a rise in inflation, the value of gold goes up. If an improving global economy generates more gold jewelry demand, the price of gold increases. "Are we in for deflation or inflation? We don't know. Are interest rates on their way up? We don't know. Is the economy really back on track? We don't know," said Lynn Russell, a fund analyst at Morningstar in Chicago. "Those unknowns make gold attractive."

Comment:

Gold rose modestly in the last two hours of trade on a weaker U.S. dollar after trading most of the day in a narrow range. However, gold started to pick up strength toward the end of trading as equities sank like a rock on surprise news that OPEC would cut back oil production by nearly a million barrels per day. It appears that overoptimistic reports by analysts and government reporting agencies said that oil inventories would build strongly and in response OPEC today has effectively called their bluff in a “put up or shut up” response (maybe it’s more a matter of “oh yeah, how do ya like dem apples?”). Much of the “inventory build” projections are based on presumptions that Iraqi oil would provide an increase of nearly 2 million additional barrels per day in oil supply. However, Iraqi infrastructure remains in a horrible state of disrepair, oil reservoirs have been damaged (or even destroyed) with substantial loss in reservoir pressures, and all the while Saddam loyalist/terrorists continue to blow up the Kirkuk Pipeline on an almost weekly basis. Even then, Iraqi oil piped into Turkey must sit in “settling tanks” for several days due to contamination. Nevertheless OPEC called for a cut in production as oil prices have fallen over $3/bbl in the last month. As a result of this news from OPEC U.S. equities markets tumbled, the U.S. dollar pulled back, and gold got a modest boost before trading ended as some Funds and speculators took the opportunity to lock in more gold.

The fundamentals for higher gold prices remain firmly in place. Gold production is likely to decline for the foreseeable future as stated by many producers including Wayne Murdy, CEO of Newmont Mining at this week’s Denver Gold Conference. Exploration activity has been rather muted since 1996 when gold began to fall to recent lows of about $252 an ounce on the Clinton-Rubin “strong dollar policy” killing any incentive by miners and independents to seriously search for precious metals ore deposits. As a result it will be several years before gold production will catch up to previous levels as mature mines deplete remaining low cost reserves and leaving many higher cost reserves permanently lost due to changes mine engineers made as producers gutted the heart out of mining operations.

The U.S. dollar will (must) weaken further as the extreme imbalances of the current account and trade deficits suck the life out of the U.S. economy (aka “jobless recovery” – don’t you just love these Wall Street euphemisms?), and the soaring budget deficits keep rising will no end in sight. In response the U.S. Federal Reserve talks of “deflation” and continues pumping out dollars in a massive flood of paper in order to stimulate economic growth by weakening the dollar. This is partly to help make U.S. manufactured goods competitive in a shrinking global consumer market. The problem is how to do this without scaring off too many large holders of massive U.S. debt causing a run for the exits and therefore there is the incessant talk of a “deflation” threat when in reality “inflation” has been rising quite nicely. In a world of “competitive currency devaluation” there really isn’t any other currency choice for wealth preservation expect the precious metals.

As all currencies continue to “devalue” gold, silver, and platinum have remained the only real viable safe haven option left. Even real estate has been seen as vastly overvalued and the threat of rising interest rates put rising real estate prices in jeopardy, even a possible collapse of pricing as the bubble deflates. No Bull Market marches straight up in a vertical ascent so expect occasional pullbacks and range bound trading in the precious metals, but the trend is definitely in place for rising precious metals prices to offset the decline in the value of currencies. As long as nominal interest rates are at near zero and inflation (“official” and “real”) is higher, the resulting “negative real rates” make precious metals the place to be.

-Jon H. Warner-

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