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Client only. E-mail gold market letter.

by Michael J. Kosares

 1/10/05

USAGOLD
Centennial Precious Metals, Inc.
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since 1973

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Michael J. Kosares is the founder of USAGOLD - Centennial Precious Metals, Inc., the author of "The ABCs of Gold Investing: How to Protect and Build Your Wealth with Gold" and numerous magazine and internet articles and essays. He is frequently interviewed in the financial press and has over 30 years experience in the gold business.

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It your purchase of gold from USAGOLD-Centennial Precious Metals that nourishes these pages.

"Since bottoming in 2001, gold has moved up in stages that have been interrupted by short, but sharp, corrections. These corrections wipe out much of the excessive optimism seen at each peak. So the latest correction from the December giddy highs appears to have once again set the stage for the resumption to higher levels. . .The factors that have sustained this bull run in gold have not changed. That bodes well for those of us who believe $500 gold is not a question of if, but when."

Peter Grandich
_____________________________________________________________________

Overview: I think most gold market analysts were surprised not so much that the yellow dropped last week but by how far it dropped. Explanations vary with three making enough sense to pass along for your consideration: (1) a sympathetic decline with the euro; (2) an overdue correction within the confines of a greater bull market; and (3) one aspect of an overall decline in commodity prices across the boards. The one week drop amounted to $18.90 or a little more than 4%. But as gold registered its worst week in quite some time, the U.S. federal government was posting some numbers of its own. The federal debt went over the $7.6 trillion mark -- adding over $220 billion in red ink to the government balance sheet in just the first three months of the fiscal year. At that rate, we can project that the government could very well add $1 trillion to the national debt in a single fiscal year (which ends September 30, 2005). The monthly trade deficit for October registered an all-time high of $55.5 billion. In other words, as Peter Grandich points out in this week's masthead quote, the incentives for buying gold haven't changed. Value View's Ned Schmidt said it best in Friday's CBS MarketWatch report: "investors should be aggressive buyers next week."

The Gold Market: Those of you who read these pages know that we try to stay ahead of the curve in bringing trend developments to your attention which we believe will have a profound impact on the gold market. Here's an unsettling consideration. I don't have to tell you that the war in Iraq is going badly. More and more Americans are beginning to be concerned that the United States might lose this war, or become intractably bogged down in a fiasco that slowly grinds away at the economy and body politic.

I have known on a personal level for a long time that many conservative Americans were not very enthusiastic about this war, simply because those buying gold were telling me as much in our telephone conversations. Conservatives have been asking for a long time how the neo-conservatives managed to carry so much sway within the Bush administration and why they pushed so hard for this war. Now those same concerns have surfaced in both the right-oriented National Review with references to the same in this past weekend's Sunday talk shows including Meet the Press.

Eventually, concerns abut this war will seep into mainstream investment activity. More and more investors will begin to consider whether or not U.S. withdrawal in the Gulf would ignite the Mid-East tinder box, including a revolutionary war in Saudi Arabia. Oil could become an even bigger issue than it is now. With these thoughts in mind, I expect investors to add soon the possibility of a disaster in the Middle East to their list of primary reasons for buying gold. (Right now the dollar is most often mentioned as the primary concern.) The collective mindset among Americans surrounding that war has changed markedly over the past two weeks.

I came across this insightful comment from the New York Times' Thomas Friedman last week. It's a cut above the typical analysis and begs the question why we got involved over there in the first place:

"Each day we get closer to the Iraqi elections, more voices are suggesting that they be postponed. This is a tough call, but I hope the elections go ahead as scheduled on Jan. 30. We have to have a proper election in Iraq so we can have a proper civil war there.

Let me explain: None of these Arab countries - Lebanon, Syria, Iraq, Saudi Arabia - are based on voluntary social contracts between the citizens inside their borders. They are all what others have called 'tribes with flags' - not real countries in the Western sense. They are all civil wars either waiting to happen or being restrained from happening by the iron fist of one tribe over the others or, in the case of Syria in Lebanon, by one country over another.

What the Bush team has done in Iraq, by ousting Saddam, was not to 'liberate' the country - an image and language imported from the West and inappropriate for Iraq - but rather to unleash the latent civil war in that country. Think of shaking a bottle of Champagne and then uncorking it. "

Thomas Friedman, columnist New York Times

Dollars to gold. . . .1-800-869-5115 Trading Desk Ext#100

Short & Sweet. . . . . . . . . . . We are often asked what would happen to gold if the unthinkable were to happen -- a deflationary depression: "If deflation does enter the picture," says veteran market analyst Richard Russell, "I believe we would see an absolute panic for real money -- gold. With everything around us going bankrupt because of unsustainable debt, gold would shine like, well, like gold." . . . . . . . . . . Deutschebank thinks oil prices will be kept high by Iraq elections, policy chaos in Russia, Iran's nuclear plans and Chinese demand. "Oil-directed sabotage," they say, "both ahead of, and after, the election could have a significant impact on Iraq's production. The uncertainties surrounding Yukos and the oil business in Russia could have important implications.'' Gold will be "an attractive alternative", says the German bank. . . . . . . . . . .Notable comment from Adrian van Eck on China: "The new Congress is getting mighty antsy about the way this situation has been set up to make a few hundred greedy executives VERY rich while millions suffer here. If China does flood America with more products, perhaps made in China by American-owned factories, you could see high tariffs and other vengeful actions against China in places where they can be hurt. Yet American big business, big banks, big brokerage firms, big mutual funds, big-name economists working for the federal government and yes big media are almost all caught up in the Enron-like fantasy that China's 1.3 billion people will put up with Party control and accept like lambs low American corporate-ordered wages for the next 30 years. My advice to investors is this: Don't you bet even one nickel on this scenario." . . . . . . . . . . . . . . . .J.P. Morgan's Laurie Cameron "The credibility problem in the U.S. due to the growing deficits and the current administration's unwillingness to coordinate its economic policies globally is big enough to send the dollar to new lows over the next 12 to 24 months." . . . . . . . . . . Bill Bonner says, "Five years ago, we announced our 'Trade of the Decade.' Just sell the Dow and buy gold, we said. We are now halfway into the decade. Our trade is up comfortably...but not spectacularly. We see no reason to change."

Two Feet of Rain in California January 9, 2005

Quote of the Week: Is it just gold bugs espousing voodoo to try to scare us into buying the glittery stuff? Or is a financial Armaggedon really upon us? Read the book of Revelation, then compare it to recent plagues terrifying Earth. Tsunamis, deadly hurricanes, 9-11, war, greed, fraud and blasphemous wickedness in world markets. It all makes a compelling case that Babylon the Great is falling. In the case of gold bugs, it's the mighty U.S.A. whose walls are about to crumble under the weight of its insatiable appetite for debt and lust for power. The numbers are staggering. Total U.S. debt sits at $34 trillion or 300% of GDP, which eats up $80 million an hour in foreign lending, absorbing 80% of the world's savings. At the same time, the U.S. trade deficit sits at $5 trillion, growing by an alarming $600 billion in 2004 alone, while the U.S. dollar index fell by 35%, which wiped out $3 trillion for foreign investors. 'The day of reckoning must eventually come,' warned Nick Barisheff, founder of Bullion Marketing Services Inc. The Toronto Sun

Note: Some of you may have missed the recent Dow Jones article by Jim Hawe covering my expectations for the gold market for year-end and beyond. If so, here is the link:

The Armchair Economist:

James Turk says 2005 is likely to shape up a lot like 1973:

"I would like to make another comparison to the 1970's, because 2005 I think is likely to shape up a lot like 1973. That was one of those years that are not easy to forget. The key points are that like today, gold began 1973 still early in its bull market, and finished that year with a 71.9% gain (no, that is not a misprint).Commodities and inflation were about the only things that went up that year. Crude oil for, example, climbed by 21.6%, which proved to be just a warm-up for its spectacular 258.9% climb in 1974.

The stock market topped in January 1973, and the Dow Jones Industrial Average fell by 16.6% (which was then followed by a horrific 27.6% collapse in 1974). The dollar didn't do well in 1973 either. For example, it dropped 13.8% against the Swiss franc, 7.1% against the Japanese yen, and 18.4% against the Deutschemark. . .

In the 1970's the Federal Reserve was willing to raise interest rates to at least give the impression that it would help preserve the purchasing power of the dollar. In contrast, the Fed today will do everything it can to avoid higher interest rates. The reason of course is the leveraged American economy and today's debt mountain, which makes the accumulated debts in 1973 look like a molehill. There is so much debt ­ today the US is the world's largest debtor compared to 1973 when it was the world's largest creditor nation ­ any significant rise in interest rates (to say 8% on Fed funds) will surely sink the economy because of the debt burden (i.e., paying interest on the debt) and will also perhaps precipitate a serious banking crisis (e.g., from derivatives going wrong, or housing prices collapsing because of defaults on adjustable rate mortgages, etc)."

Why Incorporate Gold in Your Retirement Plan: With the $5.7 billion bailout of the United Airlines pension plan last week and problems with several other major plans in the news, many are beginning to question whether or not their retirement savings are going to be there when the time comes. "Those of us still working," says the Rocky Mountain News in a sobering editorial over the holidays, "will have to take more responsibility for our retirement. Your employer could easily run into trouble, and you can't count on the government to cover all failing pension plans." The old knock on gold is that it doesn't pay interest and therefore it doesn't make sense in growth-oriented retirement plans. But gold doesn't pay interest for good reason. It is not an asset which is simultaneously someone else's liability. Gold in other words cannot be defaulted on. In the present financial environment, investors are increasingly viewing this unique quality to be a plus. Using your retirement plan to purchase gold makes a lot of sense in these precarious times. USAGOLD-Centennial Precious Metals offers a tried and true IRA program for retirement planners.

Worth keeping/Comments from past issues

"As I write, Japanese and European authorities are deploring the unwanted appreciation of the yen and the euro. They are weighing joint intervention to stop it. Such talk underscores a vital fact. In 2005 a strong currency is the Old Maid of the monetary deck. Nobody wants it, not even George W. Bush. But I observe that the universal yearning for weak currencies is tantamount to a yearning for a strong gold price. I believe that these complementary longings will be fulfilled. Count me as bullish on gold--still."

James Grant, Grant's Interest Rate Observer

"Thus, it's difficult to envision a bright future for the dollar," says Dow Theory's Richard Russell. "This is the real reason for holding gold. To put it simply, the reason for holding gold can be stated in three words. We hold gold 'just in case.' One more thought -- this is early in the gold bull market. At some point ahead, the rise in gold will accelerate. 'What do we do then?' you ask. My answer -- 'What we'll be doing then is that we'll probably be buying more gold at much higher prices. We'll be buying more gold because the dollar will be in its death throes, if not as a currency, at least as a reserve currency.'"

"As I said, it is very difficult to make any economic calculations or financial calculation or estimates if you have a government that manipulates the markets. Under a planning economy, we had central planners planning the economy and steering the economy and it ended in disaster. I suppose that today's equivalent of the central planners of the communist regimes are the central bankers like Mr. Greenspan in that they can steer the economy with just one tool, monetary policy. I think the same way the planning economies ended in disaster, central banking as we know it today, will end in disaster. If there was a tribunal whose laws or criteria were sound money, Mr. Greenspan would be hanged."

Marc Faber

"As time passes and seeing how events are unfolding, we're more inclined to believe this bull market in gold is going to be a big one, which could surpass the old highs at $850. If that proves to be true, then this mega bull market will likely be composed of three psychological phases. The first phase is when the so called
smart, big money buys. In the second phase, mutual funds and some investors start moving in, attracted by rising prices. The third phase is when the public jumps in, which pushes prices up to levels higher than most expected. That's what happened to gold in 1980, Japan in 1990 and tech stocks in 2000.

Interestingly, our dear friend Chris Weber was at a barbecue near Monaco several months ago where several billionaires were present. When the conversation turned to investments one of the party goers wondered what to invest in these days. Almost in unison, the billionaires all said gold. They obviously bought in the first phase of this bull market. Another dear friend Richard Russell believes we're now in the early second phase and this tends to be the longest phase. These psychological phases are different from our own technical steps, which show the upside targets as the bull market progresses. The bottom line is, gold is headed higher and you should continue to hold."

The Aden Sisters: www.adenforecast.com

"Career gold bulls may wince at the new found popularity of the orphan they alone once cherished. But we believe they should choke back the impulse to exit the market on the grounds of it being overcrowded. If we are right about the problems facing the dollar--and indeed, about those confronting most of the managed currencies that compete with the dollar--the bull side of the gold market is destined to become far more crowded than it already has."

James Grant (Grant's Interest Rate Observer) citing gold's 16-year high and record Comex open interest

I'm going to revise my thinking on the phase gold is in. I've stated that gold is still in its first psychological phase. I've revised my thinking on that. Often the first and second phase of a bull market is divided by a severe correction. I believe that the July 2004 correction was the correction that ended the first psychological phase of gold, and that we are now in the second psychological phase. The second phase of a bull market is usually the longest (in duration) phase. It's in the second phase that the public begins to be interested in an item. And it's in the second phase that the funds start to take their initial positions in an item. I believe we're at the start of the second phase in gold. The sharp July correction followed by a second correction in August -- these two corrections, served, I believe, to knock out late-comers and "in-and-out traders" and solidify the technical position in gold. Only the "believers" held on, and in many cases bought more. All of which takes us to the second psychological phase of gold. Let the second phase begin.

Richard Russell, Dow Theory Letters

"We conclude with ardent conviction, the more so for our isolation, that the dollar's role as the global reserve currency has run its course. The transition to a new basis for international credit will be lengthy and difficult.  The repercussions of a transition are not reflected in the financial markets.  For this reason, gold is inadequately priced.  The best strategy, under these circumstances, is to own as much as possible of what so few have in their possession, physical gold. While gold mining shares will perform well along the way (and should certainly be owned), they are much easier to manufacture than the metal is to extract. The same is true for derivatives, or paper gold.  A private banker recently told us how he had protected his clients with gold-indexed notes issued by his employer, and that this practice was widespread in his department.  We hear similar stories from Asian and European investors.  No institution contemplating gold in four digits would issue such paper."

John Hathaway, Tocqueville Funds

"In an age of increasing concerns about market volatility and political upheaval, at a time when the largest segment of the US population is approaching a potentially prolonged and expensive retirement, the preservation of wealth is paramount. A virtually indestructible asset, gold offers investors a potential, tangible hedge against unpredictability. Since time immemorial, from the ancient Sumerian civilizations to the present day, gold has shaped the evolution of humanity in our quest for freedom, sustainability and wealth. As it has been for thousands of years, so it remains today; gold, as a store of value, is universal and enduring."

"The Case for Gold: Preserving Wealth in an Age of Uncertainty"
State Street Global Advisors

The price of a fine suit of men's clothes can be used to show anyone who is not familiar with the price history of gold just how very cheap gold is today. With an ounce of gold, a man could buy a fine suit of clothes in the time of Shakespeare, in that of Beethoven and Jefferson, and in the depression of the 1930s. In fact, this statement was still true in the 1980s, but not in the late 1990s. The suit standard now implies a gold price of perhaps $1000 per troy ounce. Today, a really good man's suit can easily cost 4 ounces of gold, and that is without a vest, which once was standard."
The United States Geological Survey

 

 

"It is beyond belief that we know so little about how people get rich or poor, about how it is they come to dwell in comfort and health or die in penury and disease. Financial markets are the machines in which much of human welfare is decided; yet we know more about how our car engines work than about how our global financial system functions. We lurch from crisis to crisis; so little is our knowledge that we resort not to science but to shamans."
Benoit Mandelbrot

Investors should never forget the lessons of the South Sea Bubble and John Law's experiment with paper money. The Mississippi Scheme in particular is relevant to the current situation in the United States; in fact, there are several lessons contemporary investors can learn from John Law's rise and ultimate demise.
 
It is true that Law's policies were initially a great success, boosting the French economy considerably. In fact, at his peak in 1719, Law was one of the most admired personalities in continental Europe. But the Mississippi Scheme failed, and Law fell from grace because the Banque Royale held for too long the firm belief that it could solve every problem simply by increasing the supply of paper money. When Law finally realized that the enemy was a loss in confidence in paper money and accelerating inflation, the damage had already been done.
 
There will surely be a time when the present "chain letter" type of fiat money operation practiced by the U.S. Federal Reserve Board will similarly no longer work and lead to a sharp depreciation of the U.S. dollar. The other possibility, of course, is that the dollar begins to depreciate, not compared to foreign currencies, but -- as was also the case at the time of John Law -- against commodities and real assets."
Marc Faber

"I want to say something about owning gold and gold shares. Personally, I have an easier time owning gold over gold shares. Wife Faye, who has a different personality, has no trouble holding gold shares, and she has held many for years. I don't view gold, the metal, as a trading vehicle or something akin to stocks. I view gold as pure wealth. The economic world can roll over on its fannie, my house can burn down, any stock can crash and burn (think MRK) -- but gold as wealth is as old as civilization. Gold is pure wealth -- it was wealth in 2000 BC, it was wealth in the 1400s and the 1600s, and it's wealth today. The people at the Fed may tell you that gold is just an ancient "relic," but gold will be accepted as wealth when these yo-yo's at the central banks are gone and forgotten along with the whole un-Constitutional Federal Reserve system and its currency-printing operations."
Richard Russell, Dow Theory Letters

"Although there are only a few reserve currencies, an appalling lack of discipline is demonstrated by the US dollar. As things stand today, the United States is indebted to the external world to the tune of $3 trillion. This sum actually exceeds the total official currency reserves of all the nations of the world -- including the USA. . . The evolution of the reserve role of the American currency in recent years gives grounds for a pretty pessimistic prognosis. The relationship between the state of the dollar and the value of gold is obvious. In relation to our discussion today, this means that gold continues to have particular monetary attraction in the minds of all prudent financial investors."
Oleg Mozhaiskov, Deputy Chairman, Bank of Russia

"Evidence of the government's 'active hands' in the markets continues to grow. First, there is the manipulation of the gold market that has been solidly documented but not widely disseminated in the press. Beginning under the Clinton Administration, the dollar has been made to look strong by holding down the price of gold. This legal and logical market manipulation has been accomplished by central bank gold sales and by lending gold to bullion banks that could, in turn, sell the gold to earn carry trade profits. You might wonder why our government is so actively involved in keeping the price of gold down. Well, a logical reason would be that when the price of gold takes off, even the investment masses will focus attention on the real problems of massive trade and federal deficits and world-wide money creation. For investors with a long-term view, the price of gold is being subsidized and held well below market. If you like government subsidies, you can get one by buying gold."
Richard Benson, Specialty Financial Group, LLC

"FIVE major risks threaten the world economy. Three centre on the United States: renewed sharp increases in the current-account deficit leading to a crash of the dollar; a budget profile that is out of control; and an outbreak of trade protectionism. A fourth relates to China, which faces a possible hard landing from its recent overheating. The fifth is that oil prices could rise to $60-70 per barrel even without a major political or terrorist disruption, and much higher with one. Most of these risks reinforce each other. A further oil shock, a dollar collapse and a soaring American budget deficit would all generate much higher inflation and interest rates. A sharp dollar decline would increase the likelihood of further oil price rises. Larger budget deficits will produce larger American trade deficits, and thus more protectionism and dollar vulnerability. Realisation of any one of the five risks could substantially reduce world growth. If two or three, let alone all five, were to occur in combination then they would radically reverse the global outlook."
Fred Bergsten, The Economist

"Let us be blunt about it. The U.S. is now on the comfortable path to ruin. It is being driven along a road of ever rising deficits and debt, both external and fiscal, that risk destroying the country's credit and the global role of its currency. . .What cannot last will not do so, as the late Herb Stein famously remarked. But we can choose now it changes. The U.S. authorities can allow things to take their course or they can develop a policy to reverse these trends. The essence of the needed changes is quite clear: a further substantial devaluation of the dollar. . ."
Martin Wolf, Financial Times

"The reality of horrific multiple U.S. deficits, a worsening energy crisis, a geopolitical landscape that must get worse before it can get better, and a polarizing national election [will]give the support gold needs to go to new highs and challenge $500 in the next 12 months or less."
Peter Grandich/The Grandich Letter.