"On a open thread you'll have to tolerate my bearish opinions as much as I have to tolerate your bullishness-- and somewhere in there you'll help me to keep "strong hands" on my core positions and I'll help you from becoming hopelessly gaga."
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Hi Frank,
Though I'm not in your bearish camp, I'd be foolish to simply dismiss coherent arguments from the dark side because they don't fit into my plans. <g>
I think this piece that a cyberpal just e-mailed to me should be considered as food for thought. When asking him for a link, he replied that he got it 'as is' from his anti-gold broker @ MER. C'est la vie!
I really dislike putting out text w/o a link or other attribution, but in this instance, because of it's timely nature plus the undeniable fact that it is not advancing my bullish 'side' of the story, I have decided to toss it up for the thread's perusal and commentary.
As Mr Serling was wont to say, "Submitted for your approval..........."
A Time for Caution
November 18, 2003
Many gold equities have escalated in price now that the gold price is nudging $400.
Some of these companies deserve to be trading at even higher prices, but it is important to look carefully at your holdings.
The gold market is caught in a struggle between some powerful forces that are driving the bullion price through volatile swings. The long term fundamentals remain exactly as they have for the past couple of years. The price is likely to go higher, but not in a straight line and not necessarily immediately.
The growing strength in the U.S. economy has made some of the speculators in the gold market nervous. The reason is that the reviving economy lessens the chance of a big collapse in the U.S. dollar. There is still considerable risk to the downside for the dollar: The trade deficit and the budget deficit remain huge; the debt load (government, corporate and personal) is already onerous and continues to grow. However, while the dollar is likely headed lower, concerns about a precipitous drop in its value has lessened as the economy gains strength.
Asia has always been the biggest component in the gold market. Much of that demand comes from individuals purchasing gold as an adornment and at the same time as a store of wealth. An emerging new component to Asian demand is strengthening the importance of that region in the global gold market. In essence, some institutional investors are adding gold to their portfolios, perhaps replacing some dollar denominated short term instruments with bullion.
Any investment manager who was wise enough to own gold in place of U.S. dollar denominated notes over the past year would have done a great service for investors. Dollar denominated interest bearing instruments produced negative real returns over the past year in most places outside of the United States. (The interest earned in many cases was more than offset by the decline in the value of the instrument when converted from dollars back to local currencies.) Gold at least held its own in local currency terms.
This trend to holding gold as part of "cash" balances in portfolios is likely to grow as gold is becoming easier to buy, sell and own with various electronic trading systems coming into use. For example, the roughly 10% appreciation on the balance in my Gold Money account beat the hell out of whatever pittance my bank pays on cash balances. (Check out Kitco.com and GoldMoney.com to see how easy it is now to buy gold.)
While gold is certain to appreciate in the longer term, it is important to look closely at the near term. There are any number of people who now believe that if gold can only break through the $400 resistance level it will finally be on its way. However, I'm urging considerable caution at this time.
You see, the biggest component of the gold market -- the jewellery industry -- is very price sensitive. When the gold price ratchets up, those buyers step back from the market, waiting for the price to retrench or it least consolidate. That leaves the investors and speculators to fill in a 100 million ounce per year void. The moment the investors stop buying, the price begins to retreat.
It would require a near panic situation to stimulate enough investor/speculator demand to make up for the loss of the jewellery industry in the gold market. The recent economic news makes it clear that we're past the stage at which panic may have broken out.
The other factor to be cognizant of is the gold industry itself. At this moment, hedging is generally out of favor, but that could change as the gold price moves higher. There are numerous marginal gold projects just waiting for a moment like we have now.
Company executives are itching to see their projects go into production. But, it is unlikely that they will bet the company on a new project, especially when their own salaries are part of the equation. Going into production without price protection led to a string of financial disasters in 1996-97 and bankers have long memories. Any gains from the current gold price level will almost certainly be met by forward sales.
So what does all this mean to investors?
Simply this: Gold has now had a considerable gain in the short-term and it is also in the upper portion of its longer-term trading range. The risk of a pullback in the gold price is higher now than it has been for some time.
Ultimately, gold is going higher, but it may correct first. In that case, the most vulnerable investments are those for which the value is directly linked to the gold price. In particular, look closely at the producers, which are valued as if the gold price was already in excess of $450 per ounce.
Companies with early stage gold deposits, where they are adding value to their deposits through ongoing work, will be the least affected by short-term swings in the gold price. In fact, those companies should continue to rack up gains for the simple reason that the major gold producers have a critical need for new gold deposits and will soon enough be paying big prices to get control of deposits now in the hands of juniors. My focus is going to remain on those companies that are enhancing the value of gold deposits and thereby generating value for shareholders independent of moves in the gold price.
At this time, I would reiterate the comments that I've been making for the past couple of months: lock in some profits from the big winners that we have enjoyed recently. (Keep a stake in these companies, as they will ultimately continue to appreciate.) Use the proceeds to diversify your holdings.
Also, this is a great time to begin to look at some other metals. For example, this issue includes a look at a metal that has tripled from its low point of two years ago and is up 75% this year. Investors have not yet begun to look at the smaller companies in that market and this issue discusses four companies that stand to deliver big gains as investor awareness grows.
Market Data 
Markets 
AI
