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

4/18/05

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

Gold Market Overview

"Fear Grips Wall Street" -- That was the prominent front-page headline in Saturday morning's New York Daily News. And that describes what will likely be the the financial markets' mind-set when trading in stocks opens Monday morning.

No doubt there will be an attempt by the major trading houses to stabilize worldwide equity markets, but there are some ominous shockwaves rumbling through the economy and stock markets that may prove to overwhelm the masters of spin and black box modeling. By the end of last week, the DJIA had lost 427 points and, according to Lehman Brothers, a half trillion in market value in three days of trading.

Though the mainstream press offered a list of reasons to placate a questioning public (bad earnings at IBM, a drop in consumer sentiment, high gasoline prices, etc.) most of the wire services avoided the real issues with investors worldwide -- an out-of-control national debt and trade imbalance, an international monetary system at the brink of chaos, and a wave of inflation that is beginning to put Main Street on the financial defensive.

The G-7 and International Monetary Fund meetings in Washington D.C. over the weekend were advertised as being called to address these problems, but by the time they adjourned few believed that much of substance had been accomplished. China, the new lynch pin in the contemporary world economy, didn't even attend the meetings.

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.

Read on. . . . . . .

Short & Sweet

The news & views on the gold market this past week -- and there was plenty of it -- was most conducive to the short and sweet format (which most of you prefer anyway). So buckle your seat belt. Here we go. . . . . . . . .We've featured quite a few Paul Volcker quotes on these pages of late. That's because Mr. Volcker has been rather vocal of late on the American economy. Here's what he had to say in a recent Washington Post editorial: "The difficulty is that this seemingly comfortable pattern can't go on indefinitely. I don't know of any country that has managed to consume and invest 6 percent more than it produces for long. The United States is absorbing about 80 percent of the net flow of international capital. And at some point, both central banks and private institutions will have their fill of dollars. I don't know whether change will come with a bang or a whimper, whether sooner or later. But as things stand, it is more likely than not that it will be financial crises rather than policy foresight that will force the change." . . . . . No sooner had that quote made the rounds than the stock market was down over 400 points and newspapers were headlining the Crash scenario. Last week's USAGOLD Market Update featured the possibility of another stock market crash. Seems our timing couldn't have been better. There is a strong correlation between stock market weakness and gold demand so this week could be an interesting one for the yellow metal. . . . . . . .Here's an addendum to the "Is Anybody Listening" article as reported by Market News: "Atlanta Federal Reserve Bank President Jack Guynn warned Monday that the costs of a breakdown of confidence in the U.S. financial system due to renewed corporate scandals would be 'huge...' He warned that a repetition of such scandals could be even more damaging than before. 'We're a long way from a complete collapse of our economic system, but you can't multiply that kind of lack of trust and so forth very much before you really begin to get worried about the damage done to the larger financial system and the larger economy... If it happens enough, the effect on the larger system is just potentially huge...' . . . . . . . . . The latest from Richard Russell: "Remember, the Fed's inflation and interest rate manipulations will work only as long as the markets go along with the Fed. The minute the markets see that the Fed's machinations aren't working, then we'll get our first taste of true deflation, and the Fed's power will have evaporated. OK, let's assume that Russell's view of the future is valid. What do we do about it? My answer is that we protect ourselves as best we can with true wealth. Yes, a house (free and clear) represents real wealth, but home prices can collapse. Diamonds represent real wealth, but the diamond market is rigged, and diamond prices can fall. The same is true of great art or valuable collections of stamps or coins. But when the chips are down and the name of the game is 'every investor a survivor,' the ultimate island of safety is the only money that can't be printed or manufactured by a central bank. Of course, I'm talking about gold." . . . . . . . . Last week these pages offered a quick and easy review of gold supply-demand fundamentals in the official sector. Early in the week, news out of South Africa put some icing on the cake: The South African government announced that current production in that country is now at 1930s levels. At present,South Africa is still the top gold producer in the world but fading fast, it seems with very deep mines, currency and deep rooted labor problems . . . . . . . . . . . . The sad state of Vatican finances may weigh heavily when the conclave of cardinals convenes to select a new pope. An Associated Press article (4/12/05) reveals that the church treasury has "fallen into the red" primarily because of the rise of the euro against the dollar. A Vatican expert says that donations from around the world come in as dollars and that "has really hurt them." The article presents a litany of financial woes ranging from the Vatican bank scandals of the 1980s to the developing dollar/euro exchange rate disaster of today. Perhaps the conclave should put other concerns aside for now and bestow the papacy on someone with a financial background. (Full article) . . . . . ."The Bank of France reduced its gold reserves by 40 tonnes in 2004," Governor Christian Noyer said noting future sales of any of its 2,984.7 tonnes would depend on the central bank's judgment of market conditions. (My emphasis) The BoF has said it plans to sell 500 to 600 tonnes of gold over the next five years." Some gold market experts believe that 500 to 600 tonne commitment is now on hold or at least on the slow track . . . . . . . . Barrick Gold wants to move three glaciers in Chile to make way for the giant Pascua Lama mine (estimated production 17.5 million ounces). Barrick, according to a CBC report, plans the use of big dump trucks and hydraulic shovels to remove the ice to another glacier two kilometers away. Environmentalists are demonstrating against the glacier relocation program. . . . . . . . In the "It's Never Easy" column: If China does revalue [the yuan], it's going to have a major inflationary effect in the United States. In recent years, one leg of the U.S. strategy has been to encourage cheap Asian imports to hold down the inflation rate. That strategy would be directly threatened by an upward revaluation of the Chinese currency. . . . . . . .Here's a quiet story that could have loud implications down the road from the International Herald Tribune: "The European Central Bank said Thursday that rising asset prices could lead it to raise interest rates even if growth in the 12-nation euro zone remained sluggish this year and inflation stayed under control. The statement, made in an article in the bank's monthly bulletin, marked the clearest indication yet that the ECB might respond to soaring real estate prices in some euro-zone countries by tightening credit - a controversial step in central banking circles.". . . . . .An interest rate increase in Europe under current circumstances would slip both gold and the euro into high gear. . . . . . .If last week's fireworks weren't enough to get your heart pumping, we may have more of the same this week. On Tuesday we have the Producer Price Index; on Wednesday Consumer Prices and the Beige Book report on the economy; On Thursday Leading Indicators and Jobless Claims. And you never know, there could be a surprise or two as well . . . . . .Until next week, my fellow goldmeisters, Happy Trails. . . . . . . . . ..MK

Snip & Link

Hong Kong's top financial newspaper suggests pegging the yuan to gold
(The China Standard, 4/17/05) - A peg to gold would immediately inject flexible market dynamics into the yuan's exchange rate with the dollar without risking the political and practical repercussions of conventional currency adjustment alternatives. All that is required is for policy-makers to choose a yuan ratio that equals the current exchange rate of 8.28 against the dollar at the prevailing gold price. For argument's sake, let us assume gold is US$420. In that case, a ratio of 3,478 yuan to an ounce of gold, would result in an exchange rate that exactly matches the current pegged rate of 8.28.

Full article

Harry Schultz says get ready for "Hot Inflation Meteorites"
Oil is also political, poses constant disruption threat. Don't put a ceiling on the price! ··Inflation is boosted by the competition between the big nations for all the commodities. Eg, the US is locked out of some oil mkts by bids from India & China. ··Gold, of course, is considered the world's thermometer for monetary stability as well as an inflation reflector. Gold has been rising for several years with the pace escalating. Efforts by govts & Central Banks to restrain the price (as they did with London Gold Pool in 1970's - which failed) have been unable to do more recently than slow the pace, thus revealing the power of this inflation wave, as well as the weakness of the US$ & the inherent value of gold.

Full article

Extraordinary discovery unlocks secrets of the ancients
(The Independent, 4/17/05) - Thousands of previously illegible manuscripts containing work by some of the greats of classical literature are being read for the first time using technology which experts believe will unlock the secrets of the ancient world. (Ed. Note: Interesting non-gold story)

Full article

Archives

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 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."

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 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 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."

Holdovers

An ABCs of Gold Investing UPDATE - 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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The Coming Gold and Silver Confiscation
This is a subject of rather heated debate between precious metals investors. Will the government seize gold and silver? Will they outlaw the possession of them in various forms? The reason it raises the hackles is because some see it as a marketing ploy to persuade investors to buy numismatic coins of high value. After all, why pay $100 for a coin with $5 silver content? I agree that makes no sense at all from a silver or gold investment point of view. One is buying rarity not metal which may be a good idea, but it has nothing to do with precious metals investing. Nevertheless, New Era Investor holds to the view that such an event will happen in the years ahead as monetary crisis eventually envelopes the fiat system of world central banking.

New Era Investor

Editor's Note: The main premise of the monograph "How You Can Survive a Potential Gold Confiscation" published by USAGOLD-Centennial Precious Metals is that those concerned with the possibility of another gold call-in can hedge with pre-1933 European gold coins which sell at low premiums to the gold price. You do not have to buy high-priced numismatic coins to gain the same protection. The reasons why are much too lengthy to publish here.

We invite you to request a free copy of the monograph by contacting us: 1-800-869-5115 Ext. #106
admin@usagold.com

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Gold's annualized returns:

2002: +14.4%
2003: +17.3%
2004: +12.6%
2005: +3.0% (through 3/18/05)

2002-2004 based on average annual prices.