| |
|
Wall Street History
https://www.gofundme.com/s3h2w8
|
12/06/2002
Update on Gold
About twice a year I like to deviate somewhat from the norm for
this space and supply you with a little update on gold, courtesy of
my friends at Van Eck Global.
As I noted in my last “Week in Review,” gold has been stuck in a
very narrow range for the past 3 months, really all the way back
to April. For the week ending April 26, gold closed at $311.
Just viewing the price on a weekly basis, it has been below that
level only 3 times since then, while also not closing above $326.
I bring this up because with the recent rumblings on both the
inflation/deflation front, investors are once again beginning to
sniff around in the sector, particularly after the comments of
guru’s like PIMCO’s Bill Gross, who has now moved to the
“reflation” camp.
What follows are some comments made by Van Eck portfolio
manager Joe Foster about ten days ago. This is in no means an
investment recommendation on the part of yours truly and I do
NOT personally own any gold shares myself at this time. But
Foster’s remarks do supply you with a good general background
on the economy, as well as some historical context.
---
“Gold has been in a holding pattern, moving sideways within
the $310 to $325 range. Likewise, the trade weighted U.S. dollar
has drifted sideways Hopes of near-term prosperity endure and
it looks as though the markets will need some sort of jolt to give
them direction in one way or the other. Our bet is the other way,
as most of the jolting candidates are negative in nature, from war
to economic collapse, from Iraq to Japan, from Israel to Brazil.
And from the Federal Reserve to the White House, low interest
rates and ballooning budget deficits have policy makers in a
bind
“From a very broad perspective, the global economy is now
suffering through an historic period of post-bubble economic
weakness. During the nineties, speculative excess infected
nearly every aspect of investing by individuals and corporations.
Expectations of a perpetual rise in the stock market and a
seemingly unending supply of capital caused individuals to pay
inflated prices for stocks and businesses to over-build. Much of
this investing was financed with debt, causing households and
businesses to become more leveraged than at any time in history.
Excessive speculation and spending creates imbalances in the
economy that can take a very long time to correct
“ past post-bubble markets have under-performed over long
periods. As one of the few asset classes that historically has little
or no correlation to either general equities or bonds, gold and
gold shares may outperform during such periods of general
market malaise. Over the past ten years, the correlation
coefficient between gold and the S&P 500 is a negative 0.11
“The Federal Reserve recognized the negative ramifications of
an economic slowdown brought on by the historic stock market
collapse. Shattered investor confidence, excess manufacturing
capacity and foreign competition has created a potentially
deflationary environment. An economy where business and
household debt totals a staggering 145% of GDP (as of June)
cannot afford an environment of falling prices (and falling
profits). In order to avoid the fate of Japan since 1990 or the
U.S. in the 1930s, the Fed undertook unprecedented cuts in the
Federal Funds rate in 2001, while increasing the money supply at
rates not seen since the inflationary era of the 1970s. No
government in history has been able to avert a painful post-
bubble economic collapse, and it is by no means certain whether
the current government will be the first.
“It is likely that the U.S. government will continue its aggressive
easing to reflate the economy. This attempt to avoid a deflation
could be inadvertently sowing the seeds for onerous levels of
inflation in the future. While it is not clear how the economy
will ultimately respond to government policy, it is clear that we
are currently in a rare and unusual period of monetary and
economic instability. Such periods have been marked by
excessive deflation, as in the 30s, or excessive inflation, as in the
70s
“The geo-political situation that the world has come to know
since 9/11 has inflicted costs and threatened our sense of security
in ways not experienced since the Cold War. Acts of war
typically have a short-lived impact on the gold price; however, a
lasting conflict can take its toll on the economy and place stress
on government budgets. This, along with low returns on interest-
bearing accounts and stock market losses have combined to
cause investment psychology to change. Rather than chasing
stock market returns, investors have turned to alternative
strategies that include hedge funds, real estate, and gold. While
no one knows how long such trends will continue, the recent Fed
rate cut indicates that interest rates will remain low in the
foreseeable future. Meanwhile, the Bush Administration has
made it clear that the war on terrorism is a long-term
commitment. Under such circumstances, rather than a return to
the investment attitudes of the 90s, investors are likely to
continue the trend towards capital preservation and investment
alternatives.
“In addition to a macro-economic and political environment that
is favorable towards gold, fundamentals within the gold mining
industry are also supportive of the gold price. Gold Fields
Mineral Services Ltd. estimates that newly mined gold
production will decline in 2002. Many analysts agree that this is
the start of a trend that will last through the decade if gold prices
remain in the low-$300s. Companies cut back on exploration
during the late 90s as gold sank to 20-year lows. The current
gold price is not high enough to begin a new cycle of exploration
and discovery and there is not enough new production coming
on-line to replace the mines that have entered their declining
years. Also, many gold companies are reducing their gold hedge
books, which results in gold production being returned to central
bank vaults, rather than sold into the market. Both production
declines and de-hedging will restrict the supply of gold in the
near-term. The industry has also come to realize that it must
actively market gold to increase market share. A new, dynamic
management within the industry-sponsored World Gold Council
has begun an exciting program to market gold both as jewelry
and as an alternative financial asset.”
---
Wall Street History returns next week with the tale of the Erie
Lackawanna Railroad.
Brian Trumbore
|
|
|
