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

5/2/05

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

In the many years since the creation of the Federal Reserve system as America's central bank, gold has remained as steadfast and immobile as ever. An ounce of it today buys about the same amount of goods and services as an ounce in 1913. But the dollar has gone along with every bit of political gimcrackery that has come along - the war in Europe, the New Deal, WWII, the Cold War, the Vietnam War, the war on poverty, the war on illiteracy, the New Frontier, the Great Society, Social Security, Medicare, Medicaid, the War in Iraq, the war on terror...the list is long and sordid. As a result, guess how much a dollar is worth today in comparison to one in 1913? Five cents.

Bill Bonner, The Daily Reckoning

Gold Market Overview

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.

Thus far in the United States we have been lucky. Though the conditions for a wipe-out inflation have been in place for a long time, the worst has been avoided simply because of the huge international market for the dollar as a reserve currency. The relative equanimity though has been punctuated from time to time with "inflationary events" (the 1970s was one of them) frightening enough to create a subset within the overall population which understands the value of gold as a savings vehicle.

Of late, the danger of a new dollar crisis and inflation scare has escalated. Former Fed chairman Paul Volcker, not normally the type to throw cold water on people's financial expectations, joined the growing chorus of economists registering concern about the dollar and the international economy. In a recent Washington Post op-ed piece when he observed that we are "skating on increasingly thin ice." Volcker has never been one given to hyperbole. The forex markets globally are on a hair trigger. At this juncture, it wouldn't take much to set off a wave of dollar selling particularly among Asian central banks which are loathe to experience another currency induced contagion like they did in the late 1990s.

This past week wasn't a particularly exciting one for the gold market. The important news came at the end of the week when reports filtered out of China that it was near letting the yuan float higher. Financial Times reported Saturday morning that "Bejing has been sending strong signals in recent weeks that it has completed all the technical preparations necessary to remove the dollar peg." JPMorgan currency strategist, Frank Gong, says the peg removal could come as early as next week during the Chinese May festival. The Chinese Securities Journal, a state run publication, "reinforced the sense of imminence" on its front page, reports FT, by saying the issue now was "about choosing the timing." In other words, it is no longer a question of "if" but "when." All of this could lead to an interesting week.

China's decision (lobbied-for by the U.S. federal government) folds nicely into the inflation discussion above. Unwittingly, the United States may be opening a Pandora's box -- squeezing the hair trigger. Some analysts believe the revaluation could backfire. For nearly a decade, the inflation rate in the United States has been disguised by cheap Asian imports. Now with the dollar support system in Asia about to unravel with what could be breathtaking speed, the price on those imports is about to escalate. We will see soon enough if the policy makers and financial markets are ready for what could amount to the most important structural change to the economy in a decade.

Though there is a better than average probability the United States will avoid a full-blown inflationary breakdown, the stage is set for a repeat of something akin to the 1970s. We will see what happens from there. The 1970s were a dangerous time for the average investor. Many stubbornly refused to diversify and paid the price as equities markets went into a decade long funk. The message in short is to ignore neither Mr. Volcker nor the three year up trend in the gold price. Something is brewing. MK

Read on. . . . .

Short & Sweet. . . . . .

Those wondering whether or not Warren Buffett bailed out of his forex positions as the dollar appreciated the first part of 2005 had their questions answered over the weekend. Buffett's Berkshire Hathaway has about $21 billion in foreign currency forwards -- roughly the same position he had at the end of 2004, according to a Bloomberg report. The position showed a $310 million loss in the first quarter. . . . . . . . . . . .Most of the background I have read on the upcoming Federal Open Market Committee meeting on Tuesday concludes that the Fed will be very careful. With the economy slowing down and inflation creeping up, the Fed is getting mixed signals. The consensus opinion is that it will hold the course -- a quarter point rise and no change in statement language. . . . . . . . .The yen was the biggest beneficiary of the yuan revaluation rumors last week. . . . . . . . . James Mound Trading Group says gold will "explode" next week. "The FOMC and the unemployment report in the same week," says Mound, "has been a setup for volatility in the financial markets for years, but this dynamic duo is especially worrisome next week." JMTG goes on: "The [gold] market, perhaps for the first time in years, appears afraid to make a move. A market that is historically willing to jump the gun on what will happen next is now patiently waiting. This congestion is the biggest sign of an impending explosion, and I say the FOMC meeting is the gasoline and the employment report is the lit match.". . . . . . .Oil dipped below $50 this past week. . . .There are rumors afloat that King Fahd of Saudi Arabia is on his deathbed - some say he is clinically dead. Crown Prince Abdullah, who recently visited President George Bush in Texas, is generally perceived as his successor and seen as closer to the religious element and less friendly to the West . . .Richard Russell on gold stocks and gold coins: "The disparity between gold, the metal, and the gold stocks has grown dramatic. . . [G]old, the metal, is still very much intact and it remains in its bull trend. A renewed bullish signal would come with a spot price of 448 for gold. However, HUI has broken down, which is discouraging. But there's no use fighting reality. The market is saying that investors want the safety of the product [gold] rather than the leverage (both ways) of the gold stocks. After considering the whole situation carefully, here's my thinking. If you have the stomach for it, stay with your gold shares. And certainly stay with you gold metal commitments. If you're worried, cut back on any rally in the gold shares (which are now heavily oversold). However, I still believe that before the gold bull market is over, you'll see both gold and the gold shares 'blow their tops.'" . . . . . . . . . . . . . . . . . . . . We've talked about the private pension crisis in the United States on these pages in the past. The problem is getting worse not better and the threat to large numbers of future retirees is palpable. The airlline industry seems to be particularly hard hit with United Airlines the most endangered in that industry. The bailout mechanism put in place by the U.S. government -- the Pension Benefit Guaranty Corporation -- doesn't have anything near the capital required to allay the problem. In fact there are reports that the PBGC itself is technically bankrupt. The Ed Stein cartoon suggests a novel approach to solving the problem. . . . . . . . . . .New home sales for March were up 12% -- the largest percentage gain in 12 years. Commenting on the surge Treasury Secretary John Snow said, "I don't see any evidence that there is a national housing bubble. This is not a national market. It is a series of local markets reflecting the particular issues of a local market.". . . . . . . . . Monitoring the volatility meter, we note that in 1990 there were some 610 hedge funds. Now there are more than 7900, according to a Bloomberg article. . . . . . . . . . . . In the Never-Give-It-Up-Even-If-You-Look-Like-a-Fool venue, please consider the U.S. House House of Representatives which last week authorized a new "gold-colored" $1 coin to join the unused, unpopular, disliked gold-colored Sacajewea coin. The Sacajewea coin in turn was colored gold so that the public would accept it as a replacement to the disastrous Susan B. Anthony $1 coin (which was silver colored). . . . . . . . . .In what could have major repercussions on the international stage, the United States is warning that North Korea could launch a nuclear bomb test by June. . . . . . .We will close this week's Short & Sweet with this unsettling thought from Sol Palha (The Tactical Investor): "We have sat quietly, waited and watched hoping someone out there would pay attention and make people understand the implications of what Osama Bin-Laden said last year on October.  The news media played the story once or twice but no one seemed to take time to analyse the significance of his statements and their long-term implications. Osama basically stated that he and his guerrillas bled Russia for 10 years and forced them into bankruptcy during their occupation of Afghanistan. As a result Russia was forced to withdraw because it could no longer afford to fight an unseen enemy.  He then went on to state how they had now applied the same principle with the US. The September 9-11 attack cost them roughly $500,000 dollars, but the cost to America was in excess of 450 billion." (Full article). . . . . . . Until next week, Happy Trails, my friends. . . .

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

Nuggets

Gold market survey says metal headed to $500 in 2005

(Gold Fields Mineral Services web page) - GFMS forecast in the report that there is clear upside for the gold price, chiefly stemming from investment potential. Klapwijk noted, "with the twin US deficits marching forward unchecked, dollar weakness and, eventually, a sharp slowdown in the US economy are distinct possibilities. Ally that with an event driven rally in the oil price, then gold heading for the $500 mark no longer looks fanciful". Furthermore, the consultancy believe that the down side is quite restrained, given the robust nature of physical demand and its ability to respond to a dip in the price.

The report also sets out how a combination of these two factors explained much of last year's price behaviour. Klapwijk added, "it may seem odd to claim investment was a key driver when we had implied net disinvestment and a price rise. But timing was crucial. The selling we saw early/mid year was in large measure just a bout of modest profit taking on the huge position built in 2003 and early 2004. As we approached the end of the year, investment swung strongly to the positive, in part due to the successful launch of new gold investment vehicles".

Highlights:

-- Global mine production fell by a noteworthy 5% in 2004, taking output to an eight year low of 2,464 tonnes.

Editor's Note: This is the largest production drop since 1943.

-- Scrap supply fell heavily to 828 tonnes, a three year low, despite the strong rise in the dollar price.

-- Total fabrication [demand] rose to a three year high of 3,164 tonnes, with all sectors posting gains.

-- Producer de-hedging rose to record levels of just over 440 tonnes last year.

-- Investment bullion bar purchases were up 38%.

Editor's Note: Bullion bars are popular in Asia. This increase probably reflects strong Far Eastern private investor acquisitions.

Full Article

Globalization and the American Bourgeoisie
by Bob Cheeks

(The Intellectual Conservative. com) - In the end, I think (and I am open to criticism) we must re-embrace the founding principles, return to a federated, constitutional republic, reject economic determinism as a way of life, and understand that there is a transcendent God who has provided a beautiful and mysterious place to live. We must understand that modernity's concept of internationalism (E.F. Schumacher was right, "small if beautiful"), is devoid of anything but the most base and fractious impulses, and has resulted in war, death, greed, and misery on a scale unprecedented in human history. That "Globalization" is nothing more than the effort of international corporatists, those men who have eschewed the idea of the nation/state while embracing "the Marxist dream of the global state," to manipulate the marketplace by reducing the economic circumstances of the American bourgeoisie.

Editor's Note: Mr. Cheeks' definition of the American bourgeoisie closely approximates that of the American upper middle class -- that social distinction which embodies 'an eagerness to rise in the world' while living as 'free citizens.' I was particularly struck with this essay. In recent years the publishing world has produced a string of biographies on the Founding Fathers -- Franklin, Adams, Jefferson, Madison, Washington and now the best-selling Chernow biography on Alexander Hamilton. The popularity of these founder profiles may have to do with America's attempting to regain its roots in the face of what Cheeks describes above. Who were these men who founded the Republic and why were they so different from the modern brand of political leader?

Full article

Death of the Death Tax Greatly Exaggerated

May 1 (Denver Post/John Aloysius Farrell) -- If you have lost a loved one recently, you know the IRS doesn't levy a federal capital-gains tax when you dispose of Grandpa's assets. If Grandpa bought some stock in General Electric at $2 a share many years ago, and he sold it at $70 a share while he was alive, he would have to pay a whopping tax on the $68 gain. But if Grandpa left the stock to you in his will, you inherit the stock at $70, and don't have to pay the capital-gains tax. Your family has made a tax-free profit of $68 a share. When "killing" the estate tax, the House voted to change all that. A capital-gains tax on that $68 will now be collected from thousands of middle- to upper-middle income folks, like farmers and small-businessmen, who thought relief was on the way.

Editor's Note: Farrell goes on to point out that this new tax got through the House and has been forwarded to the Senate for approval. He suggests contacting your Senators.

Full article

Rocky Mountain States Struggle for Sovereignty

May 1 (Denver Post/Walter E. Hecox) -- Are the eight states that make up the Rocky Mountain West lacking in "sovereignty" and merely an inland colony of the rest of the nation? That question arose a year ago during Colorado College's first State of the Rockies Conference and in the college's 2004 State of the Rockies Report Card. . . The harsh truth, according to Ed Marston, former editor of The High Country News, is that: "We live as Southerners did during Reconstruction, occupied by an often federal force, and for many of the same dismal reasons."

Full article

JPMorgan's Gong Predicts China Yuan Shift This Week

April 29 (Bloomberg) -- JPMorgan Chase & Co.'s chief China economist Frank Gong expects China will loosen its decade-old peg to the dollar at the end of next week's national holidays. Deutsche Bank AG, HSBC Holdings Plc and UBS AG disagree.

Gong made the prediction after China's central bank let the yuan briefly strengthen to 8.2700 per dollar, the most since the exchange rate was fixed in 1995. China currently limits movement in the yuan to 0.3 percent either side of 8.2770.

"The central bank is testing the water before the holiday, when we expect China to move,'' Gong, a former economist at the Federal Reserve, said in an interview in Hong Kong today. A spokesman for the central bank said today there is no change in the country's currency policy for now. . .

The People's Bank of China will use the week-long break to prepare settlement systems and make other technical preparations, said Gong, who correctly predicted October's first increase in Chinese interest rates in a decade. He said China may let the yuan fluctuate by 2 percent either side of the central bank's target.

Full Article

Dearth of new projects, permitting problems could grind production lower

TORONTO (Reuters) - With few major gold projects coming on stream, increasingly tight supplies of the precious metal will play a bigger role in driving prices higher, Barrick Gold Corp.'s founder and chairman said on Thursday. "It's going to be a gradually increasing factor that will be more and more realized and become a really important determinant of the gold price," Peter Munk said after Barrick's annual meeting.

"If you cannot come up with significant new mine development, which I simply don't believe you can, and if demand stays constant, it can become a significant contributor to an upward spike in the gold price."Most industry experts consider the U.S. dollar as the key driver of gold prices at the moment. A higher greenback makes gold more expensive for buyers holding foreign currency as bullion is priced in U.S. dollars.

Part of the reason for the current dearth of new gold projects has been the difficulties many companies encounter when trying to get permission to develop mines in areas where they have already found deposits. Munk went as far as pointing a finger at countries like Argentina, Romania, Turkey and Spain which he said have refused to approve major developments.

"When you do have an ore body discovery, in half the countries today you cannot get them permitted," he said.

Full Article

UK's Gordon Brown desperate to suppress gold price

(International Gold Forecaster/GoldSeek) - Starting in 1999, British Chancellor Gordon Brown began his quest to dispose the IMF of their gold holdings via sales.  After his initial failure for such a program to "fund debt relief", the UK came forward with news of their gold sales agenda, which led to the disposal of half of their gold reserves in which they received a sub-$300 an ounce for it.  Timing could not have been more shocking for the British people, which saw the theft of 12 their gold at almost the precise bottom of the gold market over nearly 3 decades! (It is still surprising that Mr. Brown is still given a public voice to any matter related to gold as his authority has led to only terrible results.)
 
It is therefore necessary to be, at minimum, suspicious of his ambitions (again) to dump IMF gold onto the market and for what reason?  The most obvious and reasonable answer is to help satisfy the dangerous gold short position and thus vulnerability of derivatives in jeopardy by a rising gold price, with very little product able to satisfy a very immense shortfall.
 
Mr. Brown's agenda appears rather clear by taking a deeper look into his history, only briefly looked into above.  His new rhetoric of gold sales appears to be a growing desperation to suppress the gold price by scaring of market participants.  Such a frantic act only mimics that of the former (German) Bundesbank president, Mr. Ernst Welteke, who too repeated his wish for German CB gold sales. Mr. Welteke never had the needed majority support from the Bundesbank's board and the sales never materialized, he later left after a political scandal. 
 
It is therefore advisable to understand the intentions of these influential figureheads, but realize why their calls for such programs are nothing more than deceitful, desperate moves to intimidate gold investors.

Full Article

Stephen Roach's controversial essay: Original Sin

(Morgan Stanley) - In all my years in this business, never before have I seen a central bank attempt to spin the debate as America's Federal Reserve has over the past six or seven years. From the New Paradigm mantra of the late 1990s to today's new theories of the current-account adjustment, the US central bank has led the charge in attempting to rewrite conventional macroeconomics and in making an effort to convince market participants of the wisdom of its revisionist theories. The problem is that this recasting of macro is very self-serving. It is a concentrated effort on the part of the Fed to exonerate itself from the Original Sin of failing to address asset bubbles. The result is an ever-deepening moral hazard dilemma that poses grave threats to financial markets.

I am not a believer in conspiracy theories. But the Fed's behavior since the late 1990s is starting to change my mind.

Full article

Gold's annualized returns:

2002: + 14.4% 2003: + 17.3% 2004: + 12.6% 2005: + 1.6% (through 4/22/05)

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

 

An ABCs of Gold Investing Update

A is for Asset Preservation:
Disturbing Trends - Is Now the Right Time for Gold?

Updated 4/28/05

From time to time I update this essay - the nuts and bolts of which first appeared in my book, "The ABCs of Gold Investing: Protecting Your Wealth Through Private Gold Ownership" almost seven years ago. Some might find it odd that I update the same essay on a regular basis, but the fact of the matter is that the message hasn't changed since the book was written, and the remedy for most investors - gold ownership - still outweighs all other remedies available. Judging also from the number of requests for reprint permission, this short analysis remains a popular educational tool with a great many investment advisors across a spectrum of specialties.

Since the last time Disturbing Trends was updated - in September, 2004 - it has become evident that the tendencies summarized did directly affect the U.S. economy (though at the time only a handful realized just how pervasive those conditions would become), and many of the outcomes predicted did actually come to fruition. For one, the government fiscal and trade deficits did intensify as predicted until the phrase 'twin deficits' became part of the daily financial vernacular. The decline of the dollar did "prove to be the most dangerous and devastating disturbing trend for the average American investor and the one most directly linked to a bull market in gold." And the strong dollar policy did become "a thing of the past" right down to Alan Greenspan's apparent and very public abandonment of it in his Congressional
testimony of February 11, 2004.

In short, these disturbing trends did not go away like many politicians, Wall Street analysts and university economists predicted, but marched relentlessly on. Former Chairman of the Federal Reserve Paul Volcker recently put it this way: "[U]nder the placid surface, there are disturbing trends: huge imbalances, disequilibria, risks -- call them what you will. Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot. What really concerns me is that there seems to be so little willingness or capacity to do much about it." He also remarked that the nation is "skating on thin ice."

We invite you to delve into this latest version of Disturbing Trends: Is Now the Right Time for Gold? Though the analysis and the uncertainties it underscores should be cause for concern, there is a commonly available remedy - gold ownership - which has a long history of balancing such risks and offering protection against the uncertainties to which they give rise.

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

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

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 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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