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Why Gold is Going Up Even More

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Mr. Ed Member Level  Monday, 12/16/02 08:00:20 PM
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Why Gold is Going Up Even More

by: John Mauldin - Millennium Wave Advisors, LLC

There may be more than meets the eye with the recent change of the Secretary of the Treasury. John Snow is an influential member of the Business Roundtable. They have openly advocated a weaker dollar. Former Secretary O'Neill more or less favored a strong dollar. While the major emphasis of Bush's appointment is to get someone who will argue for his tax cuts and other policies, a weaker dollar is also the prescription that the Fed (see Bernanke's speech) advocates as well. If the administration wanted a strong dollar, they could have found someone who believed as much who also would forcefully argue for tax cuts.

My long standing view is that gold is a currency, nothing more or less, and thus floats in concert with whatever the relative value of any given currency is. Gold has dramatically risen in terms of yen as the yen has dropped 50% against the dollar. As the dollar begins to drop, we see gold rise. I became a gold bull early this year as I predicted the drop in the dollar against the euro. I suggested the dollar and the euro would be at parity at the end of 2002. We are now slightly past that point.

Given the Fed desire for a lower dollar, our trade deficits, a business desire for a lower dollar and now even a willingness at Treasury for the dollar to decline, it is likely the dollar will drop even more against the euro.

[Still expect an attack on GOLD but the bears will ultimately lose this fight...]

Every time we have approached $320 gold in the past, there has been selling on the part of central banks which has knocked it back. Today it seems that those sell orders have been lifted. Are central banks now gold bugs? Hardly. But they are money managers, and are obligated to try and get the best returns for their reserves as possible.

My guess is they still think of gold as a barbarous relic. They still want to sell. But the signals from the Fed, the appointment of a man at Treasury who likely will let the dollar drift and the trade deficit all suggest to them they can get more for their gold if they sell later. They read the charts, and the charts say wait.

The key for the price of gold, in my opinion, is the price of the euro in terms of dollars.

In a preview of my 2003 forecast, I will give you my likely prediction on the euro today: I think the euro and dollar will approach the original levels of the euro when it was introduced -$1.17 or so. That is another 15-17% from here, and could easily take gold to $380.

Ian McAvity, one of my favorite gold curmudgeons, and chartist par excellence, points out that we are now in a very important point in the technical charts of gold. If we move up over the current area, the next "resistance" is at the $380 level, which not coincidentally corresponds to a 15% or so drop in the dollar against the euro.

I could launch into why the dollar dropping will be harder than it looks, why the Fed minutes confirm my opinion that we are in a Secular Bear Market and the recent rally is a bear trap, but it's time to go home, so I will quit here. I will save a few bullets for the 2003 preview. I can confidently predict, however, that sushi and sake are in my very near term future.

John Mauldin - Millennium Wave Advisors, LLC


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