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

4/11/05

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

Gold Market Overview: Gold spent a see-saw week on either side of the $425 level looking for an excuse to go in one direction or the other. Though the news was for the most part bullish for gold, traders tended to concentrate on the stronger dollar and ignored most else as peripheral. Late in the week, the World Bank and International Monetary Fund released studies which put a bearish spin on the state of the world economy (see below), but these did not factor in late week gold trading. Reports continued to circulate of strong physical gold demand from the Middle and Far East. Late Friday gold seemed to turn a corner finishing up slightly after spending most of the day in retreat. As the week ended, reports began to surface that inflation sentiment might push gold higher. Stephen Leeb, president of Leeb Capital management told Bloomberg that "High inflation is inevitable, and that will eventually benefit gold. Higher prices for airline tickets or what you're paying at the gas pump: That's just flat-out inflation, and we're seeking hedges. . .Gold prices may double in the next three years."

Short & Sweet. . . . . . On more than one occasion over the past several months, I have raised the possibility that the dollar decline is being managed in a band and that this is an agreed upon strategy among key G-7 nations. When the World Bank published its warning on the dollar last week (See "Is Anybody Listening?" below), it recommended according to a Financial Times report "a managed appreciation of Asian currencies that would complement US efforts to rein in its fiscal deficit and efforts to promote faster growth in Japan and the Eurozone.". . . . . . The follow-on to that analysis is that gold itself has traded within a band over the past three years and that it will track the appreciation of the yen and euro in the future. That may be the outcome, but it might also be the case that this is the year gold breaks out of the old correlations based on an international shortage of physical metal. . . . . . . . . . . .It could be a big week for government reports. Gold could get a boost on Tuesday when the trade balance numbers are announced. Analysts expect it to come in at the minus $59 billion level. . . . Wednesday we have jobless claims and import prices will be out on Friday. . . . . . . .Our favorite Fed Watcher, Adrian van Eck (Hotline on the Economy and Money) has an idea who the next Fed chairman might be. "For months now," says van Eck, "I have reported the pro-growth thinking of Dr. Ben Bernanke, the bold and outspoken financial genius appointed to the Federal Reserve Board by President George W. Bush. I watched him become an instant superstar on the Fed. And I knew that would cause friction and discomfort, especially when his name surfaced - as I had predicted it would - as a potential candidate to replace Alan Greenspan when his final term as Fed Chairman ends next January." . . . . . . . ."[T]he Goldollar Index is at its highest level since early December 2004, which tells us that gold itself is inherently strong," says the McClellan Market Report, "and that the only weakness apparent in the dollar price of gold is from the recent strength of the dollar. If the overbought dollar ever decides to give way, and correct back toward a more neutral state, then gold prices ought to do quite nicely. Bottom Line: Gold still owes us a rally, and appears to be preparing itself to do just that. Sentiment is in the tank, and gold measured in other than dollar terms is looking strong now. That portends good things for the future of gold prices." . . . . . . . . . . . . From last Friday's Financial Times: "The world faces 'a permanent oil shock,' and will have to adjust to sustained high prices in the next two decades, the International Monetary Fund said on Thursday in the starkest official warning yet about the long-term outlook for energy supplies.". . . . . . . . Last week I commented on the lack of transparency in the European Central Bank's sale of gold earlier this year and raised questions as to its intent. This past week Claude Trichet, the ECB's chairman, praised the sale as an "appropriate way of reshaping its reserve assets." And that was about all he had to offer by way of illumination on the matter. In the same news conference, he criticized any proposed gold sales by the International Monetary Fund as "an unnecessary liquidation of monetary assets.". . . . . . . . . . Apparently, he somehow rationalizes the ECB's sale as a necessary liquidation of monetary assets. But as they say on this side of the pond: What's good for the goose is good for the gander. I find it a bit inconsistent to criticize the proposed IMF sale while praising the ECB's. Rather than the openess and transparency promised by the Central Bank Gold Accord, we just got another layer of opacity. . . . . . . . . .On a positive note, Mr. Trichet joins a growing list of opponents to the British-led IMF sales proposal. That opposition, as we've pointed out in previous issues of this report, has been led by the United States which holds veto power over the sale. The German Bundesbank has logged in publicly on the "nay" side of the ledger as has New Jersey's James Saxton, the powerful chairman of the Senate Joint Economic Committee.

Please call our Trading Desk for quotes and assistance buying gold coins and bullion. 1-800-869-5115 Extension #100 4:00am - 7:00pm MT

Is Anybody Listening?

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. Among these, they point to a new round of corporate scandals mixed with potentially devastating debt and derivative problems in some of the world's largest business enterprises. They throw in an international monetary and economic system at the brink of chaos, and a dollar which could resume its downward bias with a vengeance.

In the face of all this, they say, financial markets sustain current price levels as if they haven't a care in the world, and that is usually a prelude to major corrections. The New York Stock Exchange Bullish Sentiment chart -- now at nearly 63% of advisers and at the high end of the range -- is indicative. This very same complacency dominated market thinking just prior to the stock market collapses of 1929, 1987 and 2000.

Prudent Bear's Doug Noland offers an interesting general assessment of the shadow quietly creeping over Wall Street and the financial markets.

"Taking a step back for a moment and contemplating the financial world," he says, "one is left with a sense that 'contemporary finance,' as we have come to know it, has commenced a radical shakeout. The scope of the problem is staggering. There is Fannie and Freddie, with their combined books of business of $3.8 Trillion backed (hopefully) by a little sliver of shareholder's equity. Troubled GM and Ford have total liabilities of $740 billion with equity stated at $45 billion and absolutely dismal prospects. AIG has total liabilities of almost $700 billion (SH Equity of $83bn). Combined, these five companies' exposure of almost $5.3 Trillion is in the neighborhood of 30 times reported equity. In the best of times, there was no room for error or chicanery. These may be the worst."

"I am not comforted," says Noland, "by the general perception of the underlying soundness of the U.S. economy and financial system, while the markets' complacency with regard to the scandal unfolding throughout the U.S. financial sector is rather amazing."

This same theme of general malaise is echoed in new report published by Comstock Partners under the intriguing title Is Anybody Listening?

"The problem," they say, "is that too few in authority are worried. The U.S. budget deficit seems intractable, the EU is hinting at a subsequent tightening, and Asian nations are reluctant to allow their currencies to appreciate.  In addition the U.S. trade deficit continues to rise while consumer debt is soaring and the savings rate seems headed toward zero.  It is indeed unfortunate that the U.S. Federal Reserve as well as the vast majority of government and private economists seem oblivious to these serious problems that hold so much potential for serious economic and market damage."

In "The March of Folly" the Pulitzer Prize winning historian Barbara Tuchman shows that historically "the power to command frequently causes failure to think." She goes on to illustrate how government after government -- leader after leader -- failed to act decisively in the interest of the greater society as various threats closed in. "Folly in government," she says, "has more impact on more people than individual follies, and governments have a greater duty to act according to reason."

Late last week, the financial markets were delivered two unusually dark, Cassandra-like warnings stressing that we might be on a march of folly of our own. First, the World Bank warned that nations which have proportionately large dollar holdings (which includes most of the world) would suffer substantial economic damage if the dollar were to nosedive again. The next day, the International Monetary Fund, delivered a second ominous warning -- one perhaps even more threatening than the World Bank's. Oil market supply/demand imbalances, it asserted, could spark a "permanent oil shock" that could last decades.

These concerns from two of the world's top international financial organizations are strong arguments for gold ownership. The markets, as a whole, seemed to dismiss the reports. Stocks trundled sideways and gold barely moved. But, then again, markets aren't known for their rationale behavior. Perhaps the real reaction is coming down the road when investors -- small and large -- realize that the World Bank and IMF weren't kidding.

A new gold market dynamic takes shape

Let's assume for a moment that the predictions made above actually occur and that the gold market is suddenly faced with another wave of investor interest in physical metal. What would that really mean to the gold market?

To understand the impact, I would like to take you to the World Gold Supply and Demand Table just below (published with the permission of Gold Field's Mineral Services). You will note that all of the metal produced by the mines is already absorbed by jewelry and industrial fabrication -- and then some. Note also that investment and official sector demand in past years has been covered for the most part by official sector sales and scrap processing.

Now consider the following: In quick succession during the first quarter of 2005, Switzerland ended its sales; Germany withdrew as a seller for 2005; France reduced its selling; the European Central Bank promised no further sales this year; and, most importantly, the United States, the European Central Bank and Germany all came out opposed to British-proposed International Monetary Fund sales (which for all intents and purposes removed over 3200 tonnes from contemplated gold market liquidity). To a large extent, the official sector is out of the market.

That radical change, in my view, has not been factored into the gold price.

On the demand side, net producer hedging could ramp higher particularly if the price resumes its uptrend. Many gold market analysts now believe that implied net investment could increase as well. It is in this dynamic on the demand side of the table that most of the incentive has occurred to drive gold from the $250 range into the $400s since 2001. Now we have something new added to the mix -- a radical reduction of official sector supply.

So is the world gold market about to face a shortage of physical metal?

It very well could. The usually bearish London-based Jessica Cross, whose Virtual Metals firm advises the gold bullion banks, has suddenly gone bullish: "[W]hat we're seeing at the moment," she recently told MineWeb, "is actual phenomenal demand, physical demand in gold, very, very supportive, which is extremely encouraging. And on the supply side, obviously, you know, we have talked about the contraction of the hedge book, and this has been continuing. So, you know, the market actually looks fairly robust at the moment and we are fairly happy with it."

Ms. Cross' surprise bullishness may be signalling a change of sentiment where it matters most -- among the bullion desk traders who have produced most of the volume on the short side of the market since the mid-1990s. A new gold market dynamic is beginning to take shape. The next breakout could herald a major move to the upside.

Fleckenstein on the euro and gold

Editor's Note: Those of you who read my piece last week on the European Central Bank gold sales and the euro might be interested in the excerpt below from Money Central's Bill Fleckenstein. If you missed last week's article you can find it here.

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Now for a look at the Financial Times' April 2 editorial -- "Crosscurrents Make Currencies Choppy" -- which I think will also put pressure on foreigners left holding the dollar bag. Unlike The New York Times piece, the FT gets at the trickier problem of the dollar going down AGAINST WHAT: "The euro does not have much to recommend it, other than not being the dollar."

That's emphatically what I believe. Though willing to own euros in the past, I have owned them primarily for the same damning-with-faint-praise reasons as described by the FT. As I have said many times, most currency choices are just battles of wits amongst unarmed opponents. In other words, they are only "relatively" attractive versus each other and not genuinely attractive on their own.

The FT correctly points out that, although Europe and Japan could solve their problems without their currencies tanking, "solving the U.S. (trade deficit) problem almost certainly requires the dollar to weaken further on a trade-weighted basis."

Lastly, the paper comes to a conclusion that I have come to -- and that the rest of the world (including Asia) will ultimately come to:

"In truth, there are good reasons for selling all three of the world's main currencies. But could they all fall? Yes, against either gold or the Chinese renminbi. In recent years, gold has been a useful hedge against the dollar, but not against the euro or yen. Meanwhile, the U.S., Japan, and the EU would all like to see the renminbi revalue, but so far, the Chinese are not playing."

I think that for the FT, which has been known as a very anti-gold publication, to come to this conclusion means that people who have not liked gold are re-examining their viewpoint. I think this will be a positive for gold, notwithstanding the many down days it has endured. Often, seismic shifts in thinking unfold in slow-motion, as I have noted with respect to many of our corporate scandals.

Full article: Gold - The only currency that can't be printed

Recommended Reading

Bernanke Favorite for Greenspan Successor - (Reuters) 4/10/05 - Federal Reserve Governor Ben Bernanke has the edge in the latest betting over who will succeed Alan Greenspan as Federal Reserve chief, but sources close to the Bush administration say it is still early in the decision process.President Bush's decision earlier this month to nominate Bernanke to head the White House Council of Economic Advisers prompted speculation that the top White House economics job may be an audition for Greenspan's post.

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.

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

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.