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Client only. E-mail gold market letter.

by Michael J. Kosares

 12/07/04

USAGOLD
Centennial Precious Metals, Inc.
_________________________________
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.

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

"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

Overview: Much of this issue is centered around information first appearing in the Financial Times.The pink pages from across the water have become a primary source for the developing gold and dollar story, so it isn't surprising that a whole issue of this newsletter would revolve around the news and opinion printed there. Those of you wishing to gain a better understanding of the forces at work in the modern political economy would be well-served with a subscription. In Denver, it comes to the door with the local newspaper, and the day just doesn't start right if for some reason, the Financial Times doesn't arrive.

The Gold Market: As for gold's performance over the past week, the most inspiring activity came in the last hour of Friday's COMEX trading when gold shot up almost $7 after retreating during the two previous sessions. Dip buyers of unknown origin are putting a floor under this market. The result has been rising, stair-step support which gives the charts a very positive look technically. You can bet this market action hasn't been lost on the professionals. Gold Newsletter's Brian Lundin made an interesting comment along these lines recently. "A salient feature of this bull market," he says, "has been gold's habit of rising precisely when the bulls expect a fall. So while a correction would not be surprising to me, neither would a continued rally."

So who is providing this highly noticeable support? No one knows for sure, but it could be related to gold producers squaring their hedge books and/or hedge funds playing the long side of the market. In either instance, the strong correlation between the dollar, gold and the euro is still the bottom line - coupled with the strong supply-demand fundamentals. With rumblings from economists of a further devaluation ranging between 15% and 30% over the medium to long term, the prognosis for gold remains very good. Gold has been rising about 1.25% for every 1% the euro rises. For the studied currency speculator, the yellow remains the best game in town. That bodes even better for physical holders going into what are traditionally some of the best months of the year for gold anyway.

Bullish Gold Charts: I couldn't resist showing you the charts on gold as they appeared this past Sunday at our chart page at USAGOLD offered in conjunction with Gal Marley. In virtually every instance, the charts portray a strong bull market -- weekly, monthly, annually, 5-year and most importantly on the 20 year chart which shows gold in a long-term breakout from a rounded bottom -- a sign of a secular bull market. If you haven't book-marked our gold chart page, you might want to. The grouping shown immediately below is quite impressive.

Special Note: Investors turn to gold for protection
By Timothy Green

Editor's Note: The following is a letter to the editor of Financial Times from highly-regarded gold expert and author, Timothy Green. In it he advocates a philosophy on gold very similar to my own as expressed in the first chapter of The ABCs of Gold Investing: How to Protect and Build Your Wealth with Gold." MK

Sir, The fact that gold mining shares have not risen in tandem with the gold price (report, FT Money & Business, November 27-28) could be one of the healthiest signs for the gold market in many years.

Once again investors are buying gold to preserve their declining dollar assets, just as they did in the 1970s.

But the key difference in that era was that, apart from South African gold mining shares (then often out of favour for political reasons), there were relatively few other gold mining groups, output in the United States and Australia then being minimal. Anyone eager to "get into gold" bought the metal.

The resulting high prices of the early 1980s triggered a gold mining boom. Suddenly there was a plethora of new gold shares into which many of those keen on gold put their money.

Then they wondered why the price of the metal itself did not continue to go up. In fact, they were enabling miners to produce ever more metal for a market from which they themselves were absent.

Today, with a weak dollar, investors are turning to gold itself, not for profit but protection. That was the basis on which its historic reputation as "bedrock" was founded.

The return to gold must be good news for miners too, as it broadens the market for their product.

Timothy Green

December Buyers' Group Denmark 20 Kroner Date Collection

The Denmark 20 Kroner ten coin sets featured at our online Coin Shoppe are worthy of your consideration both as gold investments and collectors' items. These are complete sets in that all ten years minted from 1908 through 1917 (during the reigns of Frederich VIII and Christian X) are represented. Housed in presentation collector boards, they would make excellent Christmas gifts and represent an opportunity to buy an historically important grouping of coins at modest premiums over the gold value.

This is the type of item recommended in "Collecting Historic European Gold Coins for Fun, Profit and Asset Preservation" to be put away for future profits as collector items. The mintages from 1908 through 1912 are very low with only 184,000 minted in 1912. Presentation pieces were minted in 1926 through 1931 but the general mintages did not make circulation. Those mintages (1926-1931) sell in the $4500 to $5000 price range if you can find them.

To learn the details, please visit the link above. If you wish to make these a Christmas gift, it is important for to place your order as soon as possible.

Briefs:

"How far might the dollar fall? By as much as 50 percent from its peak, in trade-weighted nominal terms, suggest two distinguished international economists, Maurice Obstfeld of the University of California at Berkeley and Kenneth Rogoff of Harvard. Up to now, the fall has been just 17 percent, on a broad trade-weighted basis. More, it seems, is on the way."

Martin Wolf, Financial Times

___

"Above is the hard-core, totally realistic view of the situation. Either the US takes a severe recession (which will result in a major reduction in spending) or the dollar must take the fall. At this point, it appears almost certain, to me, that the Fed and the Administration are willing to let the dollar take the fall. This will mean ultimately higher interest rates, and then the question is whether higher rates will bring on a recession anyway. In the meantime, US consumers continue to spend while their saving rate drops to almost zero. It's a barrel of fun while it lasts!

What does it mean for you and me when the dollar falls on a trend basis? It means that on an international or global basis, you and I are getting poorer. You don't believe it? Take a trip overseas and see what your dollars buy today, compared with what they bought a year or so ago.

What about stocks? Right now stocks are considered assets -- and the market is saying, 'Buy anything, buy gold, buy silver, buy a house, buy stocks, buy diamonds, buy a Picasso -- buy any damn thing but get out of dollars!'

But what about declining stock profits? The hell with that -- just get out of dollars, and stocks are assets.

Amazing. It's come almost as a shock. What, the Fed and the Administration are giving their blessing to a collapse in the dollar's international value! How can they do that? How could it happen? And me, sitting here with cash. Quick, tell me where to spend it. What should I buy?"

Richard Russell's reaction to the Martin Wolf article

Quote of the Week:

"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

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:

Worth keeping/Comments from past issues

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, Tockqueville 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

 

 

 

"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.