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Client only. E-mail gold market letter.

by Michael J. Kosares

 11/22/04

USAGOLD
Centennial Precious Metals, Inc.
_________________________________
since 1973

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

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Denver, Colorado 80246

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Trading Desk
Extension #100

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Marie Ballard
Extension #106

Publications
Jill Snyder
Extension #104

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

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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.

"Anyone who has not appropriately hedged his position by now is obviously desirous of losing money." Alan Greenspan

Overview: This week's masthead quote, delivered by the Fed chairman in a speech at the G-20 conference over the weekend in Berlin, was meant as a warning about rising worldwide interest rates. It could have just as easily been delivered to a group of investors ruminating over how they might address the deepening dollar crisis in their investment portfolios. Greenspan, once a gold bug himself, could have just as easily been talking about the need for gold. Lest we forget, amidst the daily barrage of bad news on the dollar, we also had wholesale prices register an out-of-the box 1.7% gain (a 20.4% annualized rate) - no small event in itself. I found myself a bit taken back that I had forgotten that the specter of double digit inflation had loomed up in the same week. Under the circumstances, it was not difficult to understand the mood evident in the Greenspan photo (above left) displayed on the world's newspapers over the weekend. If recent activity at USAGOLD - Centennial Precious Metals is any indication, none of this has been lost on the public. Interest is strong; volumes brisk.

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

Short & Sweet: Monetary crises come and go - each with their own peculiar effect. The financial markets creak and yaw; tumble or rise. The ordinary investor is quite often whipsawed - almost always fighting the last economic war. So it is with interest that we read in this past weekend's Economist, the British-based money mag: "[T]he crisis that befell Asia seven years ago may be about to repeat itself. Only in reverse." In the previous crisis (beginning in 1997), Asian central banks emptied their treasuries trying to keep their currencies from falling over a cliff. The result was global disinflation. This time around dollar balances are soaring. So much so that they threaten to ignite a global inflation. . . . . . . . .I recall the quote from "The Dollar Crisis: Causes, Consequences and Cures" by former World Bank economist, Richard Duncan: "The economic house of cards built with paper dollars has begun to wobble. Its fall will once again teach the world why gold - not paper - has been the preferred store of value for thousands of years.". . . . . . .Duncan was prescient and those who went to gold globally are better for it - including Americans who have watched gold appreciate almost 70% since George Bush took office in 2001. . . . .The Economist article goes on to point that the European and Japanese central banks, due to self-imposed statutory and policy limitations, are hog-tied when it comes to formulating a response to the dollar crisis. . . . . . . .Along these lines, Reuters tells us that Japanese investors are flocking to gold coins and bars, not because of the a potential inflationary economy, but "because of a series of typhoons...and a major earthquake struck last month.". . . . . In Japan, it is not common practice to criticize the government policies publicly, so one wonders how much of this has to do with natural disasters and how much old-fashioned fear that the currency might rot away at the real value of the high savings base in the typical Japanese investment portfolio. . . . . . . . . As noted above, Alan Greenspan warned central bankers and finance ministers on the dollar on Friday that the nearly out of control U.S. current account deficit will cause it to drop further. The greenback reacted by tumbling gracelessly in world markets. The stock market fell sympathetically. Oil rose . . . . . . . Not stopping there, he added fuel to the inflationary fires by saying that "alternative approaches to reducing the current account imbalance by reducing domestic investment or inducing recession to suppress consumption obviously are not constructive long-term solutions.". . . . . . . . In the 1970s there was an admonition: "Inflate or die!" It seems we always come back to the same place as the markets and economy cycle. . . . . . . .Jacques Chirac, who at times invokes the historical imagery of Charles DeGaulle, would like to see Europe challenge the United States as the predominant world power. I wouldn't want to take anything away from the Gaullist tradition, but how does one reflect an image of financial solidity, while one's Finance Minister scurries about the countryside scheming to sell the national gold? Late in the week, Reuters announced that the French central bank and the Nicholas Sarkozy's finance ministry agreed that the Europe's greatest gold advocate would sell up to 600 tonnes over the next five years ostensibly "to help pay off France's euro1 trillion (US$1.3 trillion) debt and to finance long-term employment, notably in the area of research." . . . . . .The market was unmoved by Sarkozy's maneuverings as of this writing. The numbers fit within the expectations spelled out in the Central Bank Agreement on Gold. . . . . . . . . . . .Congress upped the national debt limit by $800 billion to roughly $8.2 trillion. Now the floodgates are flung open for more of the same government financing technique to which we all become accustomed, that is, an ever increasing national debt. One wonders how long it will be until Congress is forced to up the limit again? Not long would be my guess. . . . . . .15 to 18 months on the outside.. . . . . . . . . . . . .. . . . .A thought on the newly introduced gold bullion trust: If successful, this gold trust (and its competitors) will concentrate a large amount of gold in a handful of funds controlled by managers who for the most part do not have the same attachment to gold as its true-believers - those who grew and nurtured this market in the early years. These fund managers will not buy gold as an insurance, but as a "play." When it comes time to take a profit, there will be massive sales into what is essentially a very thin market. If fund managers acted independently of one and another, this would not be a problem. But as we saw during the bubble years (and in the present) fund managers and Wall Street as a whole are primarily governed by the herd instinct. In other words, they buy as a group and they sell as a group. To sum it up, what we gain in the price going in, we very well could lose going out. Gold is likely to become substantially more volatile as a result. . . . . . . We are beginning to hear reports of U.S. gold and silver eagle shortages due to the U.S. Mint's annual end-of-year production slowdown. . . . .If we see run-ups in gold bullion coin premiums, the production slowdown will be the chief feature, though, as is the case every year, some will attempt to sell it as an overall bullion shortage. Don't buy into it. . . . . .At least not yet. Premiums, if they go up, are likely to go back down once the mint gears up at the beginning of the year. . . . . . . . . .Unfortunately this comes at a time when demand is ramping up. . . . . .That's it for this week, my friends. Until next time. . . .Happy Trails.

Quote of the Week:

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

The USAGOLD Index of Historic Coins  Close 11/19/04  1184.70  +58.35 (since 11/15/04) 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 few weeks have provided an excellent example of how these coins can appreciate very rapidly in price in the right market conditions, and outperform bullion. Over the four week period October 26 to November 12 gold saw a $19 gain - or roughly 4.8%. In the same period, the USAGOLD Index of Historic US Gold Coins rose from 1016.47 to 1184.70 - a 16.2% 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

Briefs:

"Beardlsey Ruml's Road to Ruin"
by John Hathaway, Tockqueville Funds

"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."

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

"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."

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

 

 

 

"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

"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.