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Welcome to USAGOLD's "Gilded Opinion" pages. We invite you to browse our index of outstanding gold-based commentary. Each article or essay is selected on the basis of its long-term relevance for understanding the role gold plays in the individual's portfolio, the overall political economy, or both.
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Gold's Upward March
by Paul van Eeden
"I cannot reiterate this enough; the time to buy gold is now."
[Paul van Eeden is a top gold market analyst whose commentary has gained a wide following. Below he tells why the shrinking real rate of return on dollar-based investments matters and how it is likely to affect gold demand in the future. Mr. van Eeden believes we are poised for a breakout. This is his second appearance at the Gilded Opinion. -- Editor]
Short term US interest rates (3-month T-Bills; US Federal Reserve)
have declined from around 6 per cent in June last year to under
2.2 per cent currently. Simultaneously, US inflation (CPI) increased
officially (Bureau of Labor Statistics) by 2.72 per cent for the
12-months end-August. This means that dollar-denominated cash
now has a real 0.5 per cent negative yield and that cannot be
good for the US dollar. One of the reasons why the dollar has
not declined substantially more could be because there is worldwide
government intervention in foreign currency markets to maintain
a strong dollar.
I believe that the gold price is inversely correlated to the US dollar exchange rate and the recent 9 per cent increase in the gold price combined with a 6.5 per cent drop in the dollar validates that assertion. The fact that the gold price increased in percentage terms more than the dollar declined could just be an artifact of the dollar index used (DXY; Bloomberg), or it could indicate that there is speculative interest in gold over and above what would be expected based solely on the dollar's decline.
From the above assumptions we can conclude two things:
1. The gold price is not rising as fast as one might expect under the current circumstances because the dollar is being artificially propped up.
2. At some point the dollar should start to fall and that, in turn, should cause the gold price to rise.
I think that we now have a situation that can best be described as a very, very rare buying opportunity in gold and gold stocks. Most of what we have been saying for the past several years regarding the economy, the dollar and gold has been shown to be correct. If events continue to unfold as I think they will, then I have a high degree of confidence that a substantial rise in the gold price is imminent.
The US government has already seen its budget surplus evaporate and the economic stimulus package, in conjunction with the War on Terrorism, is likely to result in a substantial deficit going forward. I also do not believe that the government is capable of stimulating the economy sufficiently to prevent further, steep declines in the stock market. A slowing economy and a declining market should also have a negative impact on government receipts, further exacerbating the budget deficit, not to mention the impact that both will have on US consumers.
With the exception of Japan and some smaller South East Asian countries, very few countries are likely to have much of an incentive to maintain a strong dollar. In fact, a weaker dollar may well be in the best interest of the US, so I would not be surprised if the US government changed its stance and supported a weaker dollar in order to stimulate exports and revive the US manufacturing industry.
The benefit of owning gold is that it doesn't really matter which currencies benefit from a declining dollar. Gold should respond very well since the US-dollar gold-price is, among other things, inversely correlated to the US dollar exchange rate. If capital moves out of US dollar denominated assets, gold should benefit and if capital starts to move into gold assets as well, the potential rise in the gold price could be much greater.
I cannot reiterate this enough; the time to buy gold is now. As Doug Casey is fond of saying: "If I could call your broker for you, I would."
by Paul van Eeden
October 23, 2001
Copyright © 2001 by Miningweb. All Rights Reserved.
Reprinted by USAGOLD with permission of the author. Further use without consent is prohibited.
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