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

3/19/05

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

"The dollar's value and status as reserve currency cannot forever stand the trade and budget deficits that are now part and parcel of America's economic policy. Unless there are major changes soon, America's economic future is a third world work force with a banana democracy's worthless currency."

Paul Craig Roberts, Former assistant secretary of the Treasury and Wall Street Journal editor

Overview: Short term gold continues to trade in a range between $435 and $455 with physical buyers appearing in force around the $435-$440 level and institutional paper sellers entering the market at the $450 level and higher. A strong breakout over the $450 level could force short-covering and fuel a push toward $500. For the longer term, gold market pricing reflects a strong undercurrent of buyer interest associated with a number of factors -- the on-going dollar devaluation, the trade and budget deficits, oil-based inflation, stock and bond market weakness, America's eroding prestige overseas, and concerns over expanded military involvement in the Middle East. Buyers' interest is international in scope with American investors being joined by their counterparts in East and South Asia, the Gulf states and Europe.

Some analysis of the long term gold chart: 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. A strong (albeit brief) rally took gold from the $260 level to the $320s. A sell-off followed which forced gold back to the $260s. From there gold has been in a protracted upward trend with the recent peak of $457 being its highest price since the mid 1980s. (Note: Those of you familiar with Elliott Wave analysis will recognize the "One" wave in 1999; the "Two" wave correction which bottomed in 2001, and the strong "Three" wave still in progress.) Since 1999, investors have treated price dips as buying opportunities. This trend is likely to continue. Similarly, the developing trend of large-scale hedge, pension and commodity fund gold acquisitions could act as an offsetting counter-balance to institutional bullion bank selling. In addition, mining companies squaring their hedges and financial institutions covering their shorts tend to buy on the dips as well. The net result of this activity has been a gold price chart with a four year history of rising bottoms -- a strong technical indicator for a long term bull market.

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.

Short & Sweet: The Federal Reserve has acted to prohibit Citigroup, America's largest financial institution, from making major acquisitions until it cleans up its corporate culture. Will leashing Citigroup put a positive spin on the gold market? It could. One of the incidents that tarnished Citigroup's reputation was getting caught red-handed manipulating the European bond market. At the same time, Citigroup is widely believed to be among the group of bullion banks that has acted over the years to check the gold price. Their derivative stake in the gold (and most financial product) markets is enormous. With the Fed using the acquisitions ban as the big stick to discipline Citi, gold and financial traders there might be forced to lay low for the interim. On-going market operations, including those in the gold market, could see a sudden reversal. We could have an interesting next week or two in the financial markets . . . . . . . .Combine Citigroup's woes with those of General Motors and you have the prescription for further drops in the DJIA (down nearly 300 last week). . . . . . . .On Thursday the U.S. national debt went to $7,773,614,003,547.15. (Gotta love that 15¢ tacked at the end of this extraordinary number). That figure alone would not be enough to raise an eyebrow in this era of mega-government debt. But when you consider that $18.5 billion was added since Wednesday, and over $72 billion has been added since the first of March, one's thinking begins to drift dreamily in the direction of the Weimar Republic. . . . . . . . . . According to the Saudi Economic Survey annual gold trade in Saudi Arabia has surpassed the $1 billion mark. Saudi Arabia, says SES, is the fourth largest market for gold after India, China and the United States. . . . . . . . . . .A New Orleans judge has ordered Barrick and JP Morgan to begin settlement negotiations with Blanchard & Co., the Louisiana-based coin dealer suing the two companies for alleged collusion to suppress the gold price. The judge's order, we are told, is standard operating procedure. So ordering a negotiation does not necessarily have to translate to a settlement. It will be interesting to see if Blanchard will make a statement at this juncture as to what its real goals in this lawsuit might be. From the beginning, Donald Doyle, the firm's CEO, has stated that he wants to get to the bottom of the potential market manipulation, so a trial with all the attendant publicity, and the spotlight sure to be focused on the relationship between Barrick and Morgan, might be in Blanchard's long term interest. . . . . . . . . . . . . . . . There are reports this weekend that over 100,000 demonstrators are expected to gather in London to protest the invasion of Iraq. The protest marks Sunday's second anniversary of the invasion. . . . . . . . . . . . In what has to be a less than veiled message to third world debtors, President Bush will reportedly recommend the hawkish, neo-conservative Paul Wolfowitz to head-up the World Bank. Why do I think Wolfowitz would make a good debt collector?. . . . . . . Looking at this from another angle, could it be that perhaps this is Bush's way of moving Wolfowitz out of the defense/foreign policy milieu, i.e., promote him out of the White House? . . . . .In the sound and fury signifying nothing category, economist Joseph Stiglitz has an interesting take on the nearly continuous pressure on China to "revalue" its currency. He says that it won't solve the structural problem in the United States of low savings and high trade deficits. Reuters quotes him as saying: "A revaluation of the renminbi might narrow the U.S. trade deficit with China but it will just show up in the trade deficit with someone else." In other words, by allowing its currency to rise, China would lose a portion of its market in the United States with little to show for it. And the United States? It would just keep borrowing and buying. Same old and same old. When you look at yuan revaluation from this perspective, it is easier to understand why the Chinese might be reluctant to cave-in to the nearly constant pressure . . . . . .Over the past several weeks, Fed chairman Alan Greenspan has increasingly played the role of Jeremiah forecasting doom should America fail to mend its wastrel ways. He is particularly concerned about rising budget deficits saying they pose a threat to the American economy. . . . . . . . . . The long hibernating Russian bear is back on the prowl. Joint Sino-Russian military exercises on the Chinese mainland opposite Tawain. Arming Venezuela with Migs and Kalashnikov rifles. And now rumors of entente with Syria and Iran in which Russia would act as weapons supplier. Withdrawal from nuclear arms treaties with the United States. Not to speak of its threat to price its own oil and natural gas production in euros instead of dollars. Does all this suggest a resumption of the Cold War? At the very least, it signals a new arms race and even more U.S. federal government red ink. . . . . . . . . . . . Swiss gold sales (which amount to about one tonne per day) are near completion. It will be interesting to see how the physical gold market reacts once this steady source of supply is removed from the equation. . . . . . . . . . . . .As published in the Central Bank Insider: "Receiving an honorary degree in Edinburgh on February 7, Alan Greenspan admitted that he had long found inspiration in the wisdom of Sir Arthur Conan Doyle's famous creation Sherlock Holmes. As an economic detective of sorts, I find kinship in the words written by this university's world-renowned alumnus, Sir Arthur Conan Doyle, whose Sherlock Holmes ­ while speaking of the art of detection ­ unknowingly unlocked the well kept secrets of monetary policy making. Greenspan said that Conan Doyle's famous character spoke of 'balancing probabilities' and the 'scientific use of the imagination. He sounds like a stock portfolio manager of one of Edinburgh's premium investment houses. What is true for detectives and financial risk managers is true for monetary policy makers, and is, I am certain, also true for the young minds taking shape here on these grounds.'" . . . . . . . .The Central Bank Insider also says Fed governor Ben Bernanke will soon become chairman of President George Bush's powerful Council of Economic Advisers. . . . . . .

Of interest:

Iditarod to award gold nuggets to winners. (MSN/3-11-05) Interesting short essay on gold nuggets, their value, marketability, etc.

America smells the coffee by Stephen Roach / Morgan Stanley (3-18-05) "In my view, March 16, 2005 could end up in the running as a possible tipping point for America.  Suddenly, the US has taken on a very different aura in an increasingly unbalanced world: The confluence of a record current account deficit, a disaster from General Motors, and yet another new high for oil prices all speak of an increasingly precarious role for the global hegemon.  World financial markets have barely begun to sniff that out."

Secretary of the Treasury Alan Greenspan? by Carolyn Baum / Bloomberg (3-18-05) "Single-handedly Greenspan could restore the post of Treasury secretary to its former glory."

Final Thought: Though there is no public documentation as such, there appears to be at present a de facto agreement among the G-7 nations to let the dollar fall in a controlled band. As the dollar falls within that band, so gold rises. With much of the support for the dollar still coming from overburdened holders in East Asia, the greenback could wither quickly should that support be withdrawn. A likely corroborating event would be a strong rise in the gold price with commentators on the low end of the scale suggesting $500 to $600 as a likely target, and the more aggressive analysts predicting prices in the $850 to $1200 range. China, Japan and South Korea -- the three largest holders of dollars in Asia -- have all warned that diversification out of the dollar is an option they are considering. Some economists and financial commentators have gone so far as to say that if the United States does not do something to rein in its deficits, it could experience a currency and financial crisis not unlike the one suffered by Argentina in the 1990s, hence the quote from Reagan administration assistant secretary of the Treasury Paul Craig Roberts at the top of the page.