PRIVATE

Client only. E-mail gold market letter.

by Michael J. Kosares

 11/15/04

USAGOLD
Centennial Precious Metals, Inc.
_________________________________
since 1973

The complete gold firm.
Attuned to the times
and the needs
of the modern
gold investor.

Gold coins & bullion.

PO Box 460009
Denver, Colorado 80246

1-800-869-5115

Trading Desk
Extension #100

Administration
Marie Ballard
Extension #106

Publications
Jill Snyder
Extension #104

Small Order Desk
Jonathan Kosares
Extension #110
(Orders less than $5000.)

Gold IRAs
George Cooper
Extension #102

Questions? Comments?

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.

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

"Higher levels of inflation won't only drive capital from the dollar and conventional investments; it will drive capital into gold. It bears repeating that gold is the only financial asset that's not simultaneously someone else's liability. And that's why, as fear and uncertainties increasingly stalk the world, the world will increasingly turn to gold." Doug Casey,

Overview - a gold price prediction you can hang your hat on: As gold approached the $440 mark late last week, ominous rumblings about "a dollar crisis" began to appear in various financial publications around the world. Here at the USAGOLD Client Letter, we have been warning about the evolving dollar crisis for months buttressing that opinion with the writings of people like Fred Bergsten (The Institute for International Economics), Stephen Roach (MorganStanley) and Donald Coxe (Bank of Montreal Financial Group). The Bush administration itself pushed hard at the October International Monetary Fund meetings for a devaluation of the dollar -- reportedly in the 20% range. The dollar has already depreciated roughly 35% against the euro since George Bush first took office in January, 2001 and roughly 10% against the yen - the better performance against the yen resulting from a tenacious effort by Japanese monetary authorities to keep the dollar from cratering against the yen.

Simultaneously, gold during the same period rose from roughly $254 to Friday's 18 year high of $438 - a 72% rise. Now, the Nikkei Financial Daily steps forward to warn us that "the dollar would need to fall by up to 20 to 30 percent in order to halve the ratio of the U.S. current account deficit to gross domestic product." This sentiment echoes that of a considerable number of economic observers both here and abroad, and represents a decline beyond what has already occurred.

Please note chart correlation in the period 2001 to present.

Given the fact that the euro and gold are directly correlated - a condition that is readily apparent by a quick study of the charts above - we can make a gold price projection based on a further 30% depreciation of the dollar. That figure falls in $625 range on a straight-line basis. When you take into consideration that gold has outperformed the euro by a little over 20%, the projected price could vault into the $760 range - territory not seen since the late 1970s. This scenario is likely to evolve over a period of three years or more as central banks intervene to keep the dollar decline orderly, and hedge/commodity funds intermittently blunt the rise by taking short-term paper profits on large speculative dollar and gold bets. In other words, the ride to the $625-$760 range is likely to be bumpy.

The primary portfolio approach for participating in the unfolding gold bull market is to own gold coins and bullion. There is the possibility that a dollar crisis could steamroll the markets and financial institutions making exchange operations and the paper gold market extremely vulnerable. Better to have the metal in nearby storage - a prudent preparation for both the best and worst case scenarios, and in the event the lid blows off.

Short & Sweet. . . . . . .Robert Rubin, who watched his hopes of becoming the next chairman of the Fed (or TreasSec) go up in puff of smoke after the Kerry defeat, says "if I were still at Treasury, I'd still be a strong advocate of a strong dollar policy." Rubin fears the continuing dollar slide and "fiscal disarray" could lead to "serious disruptions in our financial markets.". . . . . . . . . . . .As far as I could ascertain, there wasn't much difference between the current administration and what John Kerry was proposing in terms of fiscal austerity, so it is difficult to see how Robert Rubin might have executed a strong dollar policy given the spending proclivity of his would-be boss. . . . . . . . .If you are wondering what China has been doing with the vast pile of dollars it has accumulated via its trade surplus with the United States, one place you might look is sub-Sahara Africa. IAfrica reports that the Chinese buy "oil from Angola and Nigeria, and gold, diamonds and platinum from South Africa." China's ambassador to South Africa Liu Gujin says "China in recent years has paid attention to the exploitation of natural resources in Africa." China is similarly involved in acquisitions and mineral development projects in Canada and South America - one way to turn paper into hard assets, and a trend to be noted . . . . . . . . .The New York Sun tells its readers: "The luster of gold will remain bright well into next year as the threat of inflation and the weak dollar will be facts of life for the American economy, [say] metals analysts and economists. Moreover, the intensified combat in Iraq will probably send more investors scurrying to own the precious metal. . . . . . .Dow Jones reports that Merrill Lynch is bullish on gold citing emerging pressures on supply and falling mine output coupled with reduced European central bank sales over the coming years. "We are definitely in a positive environment ... and that's going to remain until the fundamentals deteriorate, and we don't see that changing." . . . . . .Hambro went on to say that legal mechanics in Germany and France mitigate against large gold sales from those two countries and Italy has come out publicly that it will not be selling any of its gold. . . ." "If gold is not sold under this agreement, then the market will be very, very exciting for a number of years to come," concludes Hambro. "The market could not tolerate an absence of supply to this degree without prices having to rise." . . . . . . . . . . The accompanying chart illustrates the world-wide dollar build-up in graphic

Red = 2004 /Blue= 2003

terms. The total dollars held by international central banks is $3.4 billion with almost $2 billion (or nearly 60%) of that held by East Asian central banks . . . . Long-time market analyst Doug Casey offers a less than optimistic assessment of the current state of the economy: "The gigantic deficits the government will run to fund both the war and domestic programs (don't forget that Bush is the only president since the 1820s who never vetoed a bill) will take interest rates to levels we haven't seen for a generation. That will crush the current mania in real estate and likely cause the stock market collapse that began in 2000 to resume. Unemployment will rise. The dollar will accelerate its collapse as foreigners from central banks to the man on the street unload their dollars, causing the price of imports to skyrocket. The American standard of living will nosedive. . . . I expect we're looking at what will amount to a much more severe version of what happened to Americans in the '70s. And that's only if the current adventure in Iraq doesn't mutate into World War III." . . . . . . . . . . . . .Central Bank Insider says Harvard's Martin Feldstein is the most likely replacement for Alan Greenspan when he retires as Federal Reserve chief in January, 2006. Second, says CBI, "is R. Glenn Hubbard, 46, a former chairman of the Council of Economic Advisers who helped draft the tax-cut plans. Hubbard, 46, is now dean of Columbia University's Graduate School of Business. Several analysts described him as the most effective of the economic officials who served Bush in his first administration." . . . . . . .Freemarket Gold & Money's James Turk on the gold price: "In fact, gold looks like a rocket just starting to launch. Ignition occurred on Friday, October 29th when gold closed at 16-year weekly and monthly highs. Lift-off is now just beginning. As can be seen from the above chart, gold is moving off of its launch pad by breaking above the horizontal, dashed red line. But just as importantly, we can see from this chart that $500 is not a moon-shot away, but rather just a short chip-shot. Let's see how long it takes gold to reach that level. As I noted in my recent interview in Barron's, which has the same title as this alert, I expect gold to be at $500 by the end of this year, or early next year at the latest. . . . . . . Final Note: One wrench in the gold machinery could be reports that the European and Japanese economies are slowing down markedly under the pressure of the declining dollar. This could garner a response from the central banks in those countries which might buy dollars to weaken their own currencies and stimulate exports. Though such interventions usually cause an effect only in the short term, they can jolt the gold market. These downdrafts, if they occur, should be viewed as buying opportunities. . . . . . . . .On the other side of the coin, since the United States appears categorically opposed to efforts to drive the dollar higher, interventions on the part of the European and Japanese authorities could in turn be blunted by countervailing maneuvers on the part of the United States.

Quote of the Week

"Gold is definitely poised, and we think we'll see $450 before Christmas. This bull run has legs, and we've yet to see the best."
Ross Norman, the bulliondesk.com

The USAGOLD Index of Historic Coins

Close 11/12/04

1122.35

+105.88 (since 10/26/04)

Over the past several months, we have consistently recommended adding graded US $20 gold pieces to your portfolio for the increased profit potential. The past couple of weeks has provided an excellent example of how these coins can appreciate very rapidly in price in the right market conditions, and outperform bullion. Over the three week period October 26 to November 12 gold saw a $14 gain - or roughly 3.5%. In the same period, the USAGOLD Index of Historic US Gold Coins rose from 1016.47 to 1122.35 - a 10.5% gain and three times the return on bullion. If you are looking for a slightly more aggressive holding in gold, you can increase your potential portfolio growth by adding graded $20 gold pieces.

Note: Congratulations to those who participated in our buy recommendation in these coins in July of this year. Your investment is already beginning to pay off.

Jonathan Kosares

Worth keeping/Comments from past issues

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

"Gold hedge books are real liabilities that will continue to grow and likely sink more gold companies."
Pierre Lassonde, CEO, Newmont Mining

"While the French government announcements a few months ago to dishoard gold made headline news, a tiny article buried in the August 19th Financial Times said: 'The Bank of France has already sought to renew France's love affair with gold by rebuffing government attempts to sell some of its 3,000-tonne hoard to ease the budget deficit.'"
James Turk, Freemarket Gold & Money

"In the past there was another parallel period, between today's deficits and the deficits of the seventies. In the seventies, the deficits surged with a war in Vietnam, an oil crisis and a surge in global inflation. The Fed Fund rate increased a net 14 times from 4.5 percent to 20 percent. Inflation soared to 20 percent and the dollar fell 70 percent. Gold moved from $35 an ounce to $850 per ounce. Today, the deficits are even larger and we have only begun gold's second leg. The dollar has fallen only 15 percent so $510 per ounce continues to be only an interim target."
John Ing, Maison Placements Canada

"Let us be blunt about it. The U.S. is now 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.