Wall Street History

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Wall Street History

10/24/2003

Gold Update / Dow 10000

Knowing that almost everyone has an interest in gold, and taking
advantage of my long-time relationship with the folks at Van Eck
Global, I just wanted to pass on some recent comments from the
dean of gold investing, John van Eck. The following includes
the aftermath of the huge drop in the price of the precious metal
back on Friday, October 3 to the $370 level.

[This is in no way a recommendation on my part for investing in
gold and I do not currently own any bullion or gold mining
shares. Should I do so down the road, however, I will notify
everyone through my “Week in Review” commentary.]

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Investment and speculative demand for gold continued to grow
in the third quarter of the year as investors continued to seek a
hedge against current uncertainties. This demand plus net
producer reduction of hedges pushed the dollar spot gold price
from an intermediate low of $342 an ounce in mid-July up to a
seven year peak of $393 an ounce on September 25 in spite of
weakness in fabrication demand. Subsequent profit-taking
brought the price down to close at $385 an ounce at the end of
September, up 11% since the end of June. Its price appreciated
in terms of all major currencies. Net long “large-scale
speculative” (including investment) positions on Comex climbed
from approximately 120 metric tons in August to a record of
about 360 metric tons toward the end of September. Further
profit-taking after last Friday’s unexpected better employment
report brought gold’s spot price to $369.40 an ounce.

The prices of gold mining shares rose to six year highs. The
Philadelphia Gold / Silver Index also reached a peak in
September. It was then up 16% since the end of June. It
subsequently reflected the profit-taking in the gold market.

Fundamental and geo-political conditions remain positive for
continued worldwide growth in investment demand for hedging
against the following factors:

--Further Dollar Decline

The G-7 September statement calling for flexible exchange rates
stimulated another dollar decline. The value of the dollar in
terms of the yen fell 4.7% in September to new lows and in terms
of the euro it fell 6.8% to its June lows. The U.S. current
account deficit continues to rise, and it is expected to climb to
more than $625 billion in 2004 (6% of GDP) – an unsustainable
level. Accordingly, the risk of a brutal adjustment and further
dollar decline is growing.

--Economic and Financial Uncertainty

The cut in the fed funds rate from 6.5% at the end of 2000 to 1%
last June and the federal budget swing from a surplus of $295
billion in fiscal 2000 to a probable deficit of over $500 billion in
2004 (excluding growing future pension and healthcare
liabilities) has raised expectations of a return to sustainable
economic expansion and rising stock prices since last March.
However, the Bank for International Settlements said the budget
deficit has been increased so much that it raises questions about
the long-term sustainability of such stimulus. Also, many
imbalances since the 1990s boom (excessive industrial capacity,
unemployment, lack of saving and business reinvestment) have
not been corrected. In addition, new bubbles (prices of housing,
mortgage refinance, junk bonds, derivatives) may burst in due
course. The S&P 500 Stock Index is selling at about 30 times
(trailing) earnings. Many investors have turned to gold as an
alternative investment against the risks that the recovery could
stall and that stocks could still be in a bear market. Two leading
Swiss private banks began to recommend this year that their
wealthy clients hold between 2% and 3% of their investments in
gold bullion.

--Growing Financial Risks

Total outstanding business and household debt has climbed to a
record $16.2 trillion (156% of GDP). Second quarter 2003 home
mortgage debt grew at an annual 14.2% rate. The ratio of new
consumer debt to new income is currently about 132%,
compared to below 50% in the early 1980s and below 30% in the
1960s. The leveraging of U.S. debt and its servicing
requirements to record levels may be unsustainable unless profits
and employment pick up. Fitch Ratings anticipates that
bankruptcy filings will increase about 8% this year over last year,
and it warned that consumer debt quality will worsen in the
fourth quarter 2003 and into 2004. Risk-averse investors have
often turned to gold seeking an historic and proven default-free
store of value.

--Wealth Impoverishment

For decades the Fed has followed Keynesian policies of favoring
debtors at the expense of creditors. Rapid monetization of debt
has meant lower than normal interest rates. Currently, all
treasury bills and up to three-year maturity Treasury Notes have
negative real yields with inflation at August levels. Trillions of
dollars of short-term savings deposits and CDs have extremely
low yields. Creditors are being penalized. With rising Federal
deficits and unsolved “Bay Boom” unfunded liabilities for future
pension and healthcare benefits, there is a risk that the 1970s
inflationary cycle when debts were inflated away will be
repeated. Gold investors were protected in that cycle as the price
of gold rose from $35 an ounce to $850 an ounce.

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The following is from your editor, moi.

On a different topic, with the recent surge in the Dow Jones
Industrial Average back towards the 10000 level, some have
written of comparisons between today and the first time we
broached the figure (and stayed there for a spell), April 1999. So
since I have been collecting assorted data on the equity markets
for over 13 years, a look back reveals the following comparisons.

For week ended 4/9/99

Dow Jones 10173

DJ price / earnings ratio (trailing 12 months) 25.9
S&P 500 P/E ..35.8

Investor Sentiment

Bulls 56.4
Bears...31.6

Gold $281
Oil .$16.57

30-year U.S. Treasury .5.46%

Tokyo (Nikkei) 16835
London (FT-SE) 6472

*Incidentally, the Dow Jones closed at 11031 just one month
later, 5/7/99.

For week ended 10/17/03

Dow Jones 9721

DJ P/E 21.0
S&P P/E .30.1

Investor Sentiment

Bulls 57.4
Bears 19.8

[Source: Chartcraft]

Gold $372
Oil ..$30.68

30-year U.S. Treasury .5.25%

Tokyo 11037
London 4344

In both cases, the economy was / is growing at a rapid clip.
Beyond that, I’ll save my predictions for “Week in Review.”

Wall Street History will return 10/31.

Brian Trumbore

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