Centennial Precious Metals, Inc: Serving Gold Coin & Bullion Investors Since 1973

5/16/05

A publication of USAGOLD-Centennial Precious Metals
Serving gold investors since 1973

Overview

The madness of crowds can pop up anytime, anywhere. No era is immune; no individual beyond its unflinching grasp. And crowd madness pays no heed to intelligence or experience. In 1841, Charles MacKay wrote an important book titled "Extraordinary Popular Delusions and the Madness of Crowds -- the book that Bernard Baruch called the secret to his incredible wealth. In it MacKay points out that Roger Bacon, "by far the most learned man of his age" believed that the philosopher's stone could turn lead to gold.

On national mania MacKay said:

Money, again, has often been a cause of the delusion of multitudes. Sober nations have all at once become desperate gamblers, and risked almost their existence upon the turn of a piece of paper. To trace the history of the most prominent of these delusions is the object of the present pages. Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.

Last week we watched incredulously as the stock market rejoiced at stronger retail sales with a morning rally, and then dropped over 100 points in the afternoon when WalMart, the giant retailer, announced weaker than expected results. Meanwhile, genuinely disturbing news -- like the downgrading of General Motors and Ford debt to junk status -- is first taken seriously then blithely ignored. Herd behavior, rather than rational analysis based on longer term expectations, increasingly governs Wall Street market action. Who knows which way the herd will turn tomorrow.

The message of Extraordinary Delusions is both timeless and universal. There are times when the book seems more appropriately brought off the shelf than others. This happens to be one of them.

Here then is the link to the complete book:

Extraordinary Popular Delusion and the Madness of Crowds

A solemn crowd gathers outside the New York Stock Exchange, October, 1929

Financial Panics and Stock Market Crashes in U.S. History 1819 1832 1837 1857 1869 1873 1893 1901 1907 1916-17 1919-21 1929 1937-38 1939-42 1973-74 1987 2000-2002 __ "The possession of gold has ruined fewer men than the lack of it." Thomas Bailey Aldrich

Short & Sweet. . . . . .

"With less than a year to retirement," says Dow Jones' Michael Derby, "the bloom continues to come off the Greenspan rose.  A new survey released by the Gallup Poll News Service says that confidence in Federal Reserve Chairman Alan Greenspan is at its lowest ebb since 2001." . . . . . . . . Picking up where we left off last week, hedge funds found themselves the center of attention in the financial media -- a position they neither seek nor relish . . . . . . .The most unsettling headline (from the hedge fund point of view) appeared on the front page of Saturday's Financial Times: "Germany to probe hedge funds." German president Gerhard Schroder said the focus should be whether or not "their [hedge fund] philosophy was compatible with German society". . . . . . .On the opinion page, a John Plender editorial echoed many of the concerns raised in USAGOLD's Market Update last week -- under-regulation, undue market influence, the possibility of greater systemic risks, opacity, short-termism, lack of accountability, etc. . . . . . . . . . . . "In reality," says Plender, "hedge funds are the flawed and faddish product of a freakish economic cycle.". . . . . . .I should add that it isn't just the hedge funds that present problems for the financial system as a whole. It goes much deeper than that to similarly inclined bank trading departments, financial firm trading desks, pension funds and even, at some level, the central banks themselves which have in recent years decided that they too must invest capital to garner a return. . . . . . . . .The Wall Street Journal summed it up: "As hedge funds book losses and the prices of corporate securities and the derivatives based on them move in unusual ways, investors are waking up to troubling questions. One is whether the hedge funds, some of which have made big bets on complex trades involving credit derivatives, could spark a larger contagion that would affect all markets." . . . . . . . . . . From the Boston Globe: Democratic US Representative Jan Schakowsky of Illinois was recently quoted as warning that 'taxpayers had better buckle up because we will be in for a bumpy ride of bailout after bailout, as more and more corporations dump their pension plan obligations on the Pension Benefit Guaranty Corp.'". . . . . . . . . . . . "[A]s the economic puzzle comes together," says The Daily Reckoning's Bill Bonner, "it looks more and more as though asset prices will be deflated. Stocks will go down. Real estate. Commodities. And gold? Yes, even gold could go down. But we don't buy the metal because we know it is going up. We buy it because we don't know what is going to happen and gold is a good thing to own when you can't foretell the future and don't have much confidence in those people who think they can." . . . . . . . . . . ..Given the statistics on inflation and unemployment of late, I thought it might be worthwhile to resurrect the old Misery Index which was popularized in the 1970s. As you can see, the MI bottomed in early 1998 and has been on the rise since. . . . . . . . .Richard Russell, the sage of San Diego, whose newsletter Dow Theory Letters remains one of the most highly respected in the nation, often says survival is the objective in times like these not getting rich. The name of the game is to be among those left standing after the smoke clears. He firmly and consistently recommends gold ownership. . . . . . . . . . . . . .In the latest Disturbing Trends table [see below under Archives for download], one can see that, since 1970, the stock market has risen a total of 1364%. Gold during the same period has risen 1208%. So when critics say that gold lacks upside potential, they should be made aware that it has performed on roughly the same level as the stock market over the long run. At $470, gold's performance will have been equivalent to that of stocks, and some gold analysts are predicting tops far in excess of that number. . . . . . . . . . There is one more important difference between stocks and gold a this juncture: Gold seems cyclically to be at the beginning stages of a bull market. Stocks seem cyclically at the beginning stages of a bear market. . . . . . . . . . I had the good fortune to be interviewed by David Morrill of the Oakland Tribune some weeks ago. I say "good fortune" because Mr. Morrill is a fair reporter who was willing to allow the positive story for gold to be heard. He called asking for a rebuttal on a couple opinions he had received on the value of gold to the average investor. Those opinions came from a local Oakland financial advisor who said that gold wasn't worth investing in these days because no one knew where it was going (as if he might know where stocks or bonds or Oakland real estate were going). Morrill also cited a Kiplinger report in which the author declared that gold had only modest potential for "big returns." My response can be found in the article linked immediately below

Oakland Tribune features article on gold controversy
USAGOLD's Michael J. Kosares rebuts gold critics

Nuggets

The Yuan Revaluation
by Julian Phillips/Gold - Authentic Money

Hong Kong Financial Secretary, Mr Henry Tang said this week, "The question now is not if (China will revalue the Yuan) but when. Our speculation is that it will move to a basket system. The contents or propositions of the basket system of course will not be known." He commented on the timing of any revaluation, "China might revalue its currency at a time when it was least expected."

Full article

Letter to the Editor

Michael:

The latest is an excellent update, even better than most of the others.

But you considerably understate the downsides of a yuan revaluation. Added inflation at the CPI level is the least of the problems. In my opinion, the Bush
policy of continuing to devalue the dollar everywhere is courting disaster, most of all with the YUAN.

In a traditional "J" curve effect, a devaluation initially INCREASES the trade deficit as the imported goods require more domestic currency to purchase, and exports fetch less. Eventually, domestic US capacity is re-opened and competitive prices (in theory) bring the trade deficit down. However, we have yet to see this with traditional competitors like Europe, Japan, etc. At least in theory, however, it still is possible.

Where a currency is extremely "cheap" in purchasing power terms, however, like the Yuan, and goods are not substitutable (We make Microsoft software and they make cheap toys and clothing...) the devaluation will sharply, and perhaps semi-permanently, INCREASE the trade deficit. For example, a 10% revaluation makes all Chinese exports to the US 10% more expensive (e.g a USA $200 Billion import bill from China becomes $220 billion) and Chinese imports from the US less expensive (e.g. $50 billion of imports becomes $45 Billion). So a 10% revaluation adds $25 billion to our trade deficit with China, overnight.

But this isn't the most sinister and dangerous effect. Since the YUAN has not been convertible, and has been perceived as undervalued, there has been a flood of
hot money into China. Plebians like you and I cannot do this but thousands of corporations have. If the Yuan is floated more than a little, the immediate effect may be for the Yuan to rise, but if it rises enough hot money will start to go the other way, sinking the Yuan (at least temporarily), exacerbating the effects of an overdue Chinese recession (which will feed into the US recession), multiplying currency volatility worldwide in all currencies, risking defaults and worse in the Chinese banking system, and, finally, perhaps triggering the derivatives' nightmare which is obviously coming.

The Chinese are right, Bush wrong. And, oddly, just as Bush I was sunk by a weak dollar policy, Bush Jr. will be sunk (at least partially) by a similar policy.

Name withheld by request

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Gold suffers from an instant gratification culture
by Dr Richard Appel/321Gold

I believe that it is to the advantage of all those who believe in gold's Bull Market to recognize and accept the following: it will not be for a few years at minimum that the masses will realize that gold is even in a Bull Market. Yes, there will be trickles of newcomers attracted to each major price advance. Yet, until that time arrives, and the gold price is far higher, we will continue to benefit from the periodic, short-lived rallies in gold and silver. However, we will also be forced to persevere a number of similar sharp or extended price collapses.

Full article

Even if the French vote 'yes', their Euro-dream has soured
by Charles Moore/The Daily Telegraph

It has often been pointed out that the reason why many French dislike the constitution is the opposite from the "no" camp here in Britain. The French, it is said, hate the thing because it imposes "Anglo-Saxon" free-market ideas on them and undermines their "social protection", whereas British nay-sayers want to be free of all those social chapters and maximum working weeks. True, in part, but not contradictory. What voters resent, in both cases, is being forbidden by people they did not and cannot choose from organising themselves as they would prefer. Jean may want to knock off on Friday morning while Jack may want to work all Sunday: both agree that they should be able to make up their own minds about it.

Full article

Editor's Note: A good overview of the upcoming vote on the European constitution.

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An ABCs of Gold Investing UPDATE

C is for Choosing a Gold Firm

With oil moving higher and stocks in trouble, we are receiving a steady stream of inquiries on buying gold. First-time buyers need to be careful in choosing a gold firm. In talking with a number of clients who are in contact with some of our competitors, we are hearing stories of aggressive telephone sales tactics and item pricing. Long ago, we decided to keep our staff small, our pricing competitive and our relationship with prospective clientele more laid back. You can contact us without worrying about being put on a call list. We are happy to answer questions and discuss your gold purchase in full, but we leave the ball in your court with respect to the follow-up.

That might cost us a client now and then, but those who become clients do so in their own time and without being constantly bothered by one of our brokers. By this they become better clients who tend to stay with the firm for many years. (We have clients who started with us in the 1970s.) Most of our clientele are business and professional people fully capable of making up their own minds. They tend to gravitate to us because they find out we know what we are doing in the gold market and can apply that expertise to their gold portfolio. Contact us and discover the difference. And don't be like some who have caved in to the pressure and found out later that the great deal they thought they had wasn't so good after all. We have been a part of the gold business for over 30 years. We were just certified by the Better Business Bureau for over ten years of membership. Our volumes are large; our clientele well positioned based on their needs and goals. We look forward to working with you.

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Archives

NEW Disturbing Trends: Is Now the Right Time for Gold?

2005 Gold Market Forecast - "I foresee two potential scenarios for the gold market in 2005. One involves a see-saw market which culminates with a roughly 20% gain on the year in keeping with the average over the last three years. This would take gold to the $525 level. The other involves a substantial price spike resulting from an uncontrolled deterioration in the value of the dollar. In that scenario, gold would threaten and probably exceed the $600 level."

MarketUpdate 5/09/05 - Last week systemic risk was in the air. General Motors and Ford's bonds reduced to junk status. Rumors of at least one hedge fund and possibly others on the ropes. Talk of several major American corporations in financial trouble. Amidst all of this, the Chairman of the Fed raised the specter of systemic risk citing Adam Smith's "invisible hand" and the forces of chaos and creative destruction in the market.

MarketUpdate 5/02/05 - The brief history outlined in this week's masthead quote speaks volumes why gold makes sense for the average investor. The graph to your immediate right supports Mr. Bonner's reference to the "5¢ dollar." Modern nation states have a way of running their currencies into the ground. Germany, Turkey, Argentina, Mexico, Brazil, Russia, Poland, Greece, Hungary, China, Austria, Thailand, Chile and Yugoslavia (just to name a few) experienced wipe-out inflationary episodes in the 20th century. The damage was significant enough to leave an indelible mark on the indigenous population for generations to come.

MarketUpdate 4/25/05 - Day to day we sometimes get lost in the heat of the daily market battle only to lose sight of our progress with respect to the war. This short essay is about the progress of the war.

MarketUpdate 4/18/05 - "Perhaps the reality is that the current crop of problems defy easy answers and short term solutions and when all is said and done, that is probably the real message delivered by last week's stock market plunge. If the down trend gathers momentum in the weeks ahead, 2005 could turn out to be a more harrowing year for investors than most anticipated."

MarketUpdate 4/11/05 - "This past week was a quiet one for gold, but it could very well have been the calm before the storm. A vanguard of highly regarded analysts have begun to voice concerns that there is too much complacency in the face of some of the most far-reaching threats to stock market stability in memory."

MarketUpdate 4/4/05 - "Europe doesn't have a huge balance-of-payments problem as the United States does. It's not at war. Europe doesn't have a lack of currency reserves to tap for foreign payments. So why liquidate gold when the dollar is in severe trouble and gold is on the rise?"

MarketUpdate 3/28/05 - "The old school will tell you that inflation needs to be weighed in a larger context -- one that encompasses real rate of return. (A yield bearing asset shows a real rate of return when its interest rate exceeds the inflation rate after taxes.) Currencies with a positive real rate of return attract investment capital, and they rise. Currencies with a negative real rate of return experience an exodus, and they fall."

MarketUpdate 3/19/05 - "This is a good starting point for those of you who are new to the gold market. The current bull market trend began in late 1999 when Europe's primary central banks signed an accord limiting gold sales and leases of the yellow metal. This proved to have a liberating effect."

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