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THE
ROCKET SCHOOL OF ECONOMICS


Gold Bugs Beware -- part 2.
by Professor von Braun

July 27th, 2002

On June 10th, concerned about the bullishness surrounding gold stocks, I wrote an article entitled "Gold Bugs Beware" and stated that one could expect a substantial retracement at some point in the not too distant future.

With the XAU now 35% of its recent peak of 89.11 this qualifies for a substantial retracement. Gold too has declined, although not as much in percentage terms.

Is the worst over or is this just the beginning of an ongoing decline, perhaps a final bankrupting low that ends a 22 year bear market?

Arguments that the fundamentals have changed, that the Central Banks have sold all their gold, that gold is the safe haven, etc, etc appear daily but these arguments did not stop the decline over the last few weeks. The same arguments will reappear in short fashion no doubt.

Central Banks have a vested interest in keeping the gold price low and they still have the means to achieve this end. The IMF has stated that a strong US dollar is needed to keep the world economy moving and they will be instructing the CB's to buy this currency. The Bundesbank is still making noises about selling gold and buying equities and bonds - it's the third time this announcement has been made, the Swiss are still sellers of gold with about 850 ton to sell and the mining companies have either stopped hedging or are attempting to unwind their hedges, which reduces demand for physical metal.

Never mind the rumours about "x" amount of ton's being leased and sold into the market, or CB's having little gold left, or Japanese grandmothers buying gold in record amounts, the bottom line is that the CB's are still in control of this market.

Will they eventually lose control? Yes, but we are not there yet. When the CRB Index begins to rise to enough of a degree that inflation and rising prices becomes obvious to the public at large then that event could be close at hand.

As for gold stocks, well lets face reality. For the last five years these companies have been struggling to stay alive. The weaker ones are already gone, mostly by way of merger, with a few bankruptcies and those that are left are far from being strong. In previous articles I have referred to these mergers as a process of cross contamination, whereby unhedged producers merge with a hedged producer and they all end up in the same boat. Or they overpay for something that was worthless to begin with, an example of this being Placerdome's purchase of Getchell Gold. Why would you buy a high cost producing gold mine in an environment of low prices and then shut it down?

These companies have little left in the way of cash reserves, their ability to either borrow, or raise additional equity is impaired (even more so with the drop in the XAU), they have been high grading their deposits, using fancy accounting tricks to hide their true cash cost and have in most cases been depleting their reserves without adding more.

Could most of these companies continue to operate in an environment of lower gold prices for any period of time? With difficulty is the answer. Is owning shares in a company suffering from ever diminishing returns a wise investment? Are these stocks really the safe havens they are supposed to be?

No doubt there are exceptions but in a bear market what difference does it make. The bear is not usually selective and sectors that get decimated rarely contain "exceptions". Better perhaps to wait on the sidelines, in cash until a final bottom has been reached, then see who is still standing and what condition they are actually in.

Another indicator that the bottom is not in is the attitude of some of the recently laid off industry professionals who have done quite well out of stock options, believe that they can go out and find support for the pet projects and get investors to back them. They too are still way too bullish and are still expecting an immediate rebound in the gold price. This is a bear market folks and the worst is yet to come.

It is becoming apparent that equity markets around the world are in trouble. It will be difficult for the Central Bankers to maintain a strong currency and a strong stockmarket at the same time, but they will try.

The only safe investment is something that is not somebody else's liability, which leaves few alternatives. Should the gold price decline further (and it will) then the buying opportunity of a lifetime is arriving. Buying gold and taking delivery of the metal at prices below $300, looking to add more if the decline continues below $250, is one of the safest strategies there is. You are insured against stock market collapses, currency collapses, bank collapses, etc and that insurance is included in your purchase! Buying gold removes the counter party risk and ALL paper investments contain counter party risk.

The next bubble to burst is most likely to be the real estate bubble as it, too, has been described of recent times as a safe haven, which is not a good sign.


The Prof can be contacted by email at profvonb2@aol.com

Copyright by Professor von Braun. All Rights Reserved. Reprinted at USAGOLD by permission.

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The Rocket School of Economics -- The Lecture Series Index

  • 22 May 2009 -- An Often Overlooked Issue!
  • 28 Mar 2009 -- Problematic Banking Systems!
  • 14 Nov 2008 -- What Exactly is an Asset?
  • 23 Aug 2008 -- Through the Looking Glass?
  • 02 Aug 2008 -- Compounding to the Downside!
  • 26 May 2008 -- Back to Basics Again!
  • 31 Mar 2008 -- The Broken Watch -- Part 2.
  • 27 Mar 2008 -- The Broken Watch -- Part 1.
  • 06 Feb 2008 -- The Financial Equivalent of Faulty Towers.
  • 10 Dec 2007 -- Monetary Systems & Productive Assets.
  • 14 Feb 2007 -- Divorced from Reality
  • 06 Sep 2006 -- Gold, Bankers, the Trade Deficit and Unsettled Transactions
  • 19 Jun 2006 -- When is a Reserve Not a Reserve?
  • 31 May 2006 -- The significance of August 15, 1971.
  • 08 Apr 2006 -- Keep Your Eye on the Ball!
  • 30 Mar 2006 -- What came first?
  • 11 Mar 2006 -- An Unanswered Question.
  • 08 Jan 2006 -- Where have all the projects gone!
  • 11 Dec 2005 -- Gorillas, Rising Gold Prices and Depreciating Paper Currencies!
  • 23 Oct 2005 -- Custodial Risk.
  • 16 Sep 2005 -- An Inherent Flaw.
  • 08 Aug 2005 -- Central Banks and 'Reserves'.
  • 31 Jul 2005 -- Central Bankers, Actors and 'We'.
  • 17 Jul 2005 -- Unintended Consequences! -- Part 3.
  • 07 Jul 2005 -- Unintended Consequences! -- Part 2.
  • 25 Jun 2005 -- Unintended Consequences! -- Part 1.
  • 14 Jun 2005 -- The Two Greater Fools Theory.
  • 03 Jun 2005 -- Real Money, Funny Money and YOU -- Part 4.
  • 30 May 2005 -- Real Money, Funny Money and YOU -- Part 3.
  • 26 May 2005 -- Real Money, Funny Money and YOU -- Part 2.
  • 21 May 2005 -- Real Money, Funny Money and YOU -- Part 1.
  • 09 Nov 2002 -- Carrying a Big Stick.
  • 17 Sep 2002 -- Wishful Thinking!
  • 27 Jul 2002 -- Gold Bugs Beware -- part 2.
  • 10 Jun 2002 -- Gold Bugs Beware!
  • 06 Apr 2002 -- Currencies versus Gold.
  • 26 Jan 2002 -- Bear Market Strategies.
  • 01 Jan 2002 -- 2002 -- A Perspective.
  • 20 Oct 2001 -- The Storm Clouds are Gathering.
  • 30 Sep 2001 -- What to Say?
  • 01 Jul 2001 -- ...Said the Fly to the Spider.
  • 14 Jun 2001 -- Upward and Downward!
  • 28 May 2001 -- Volatility Time, Again!
  • 14 May 2001 -- The Coming Bull Market in Gold Stocks?
  • 24 Feb 2001 -- High Hopes, Wishful Thinking & The Absurd
  • 20 Feb 2001 -- Who Put the Holes in the Swiss Cheese?
  • 22 Jan 2001 -- US Dollar Admits Identity Crisis!
  • 16 Jan 2001 -- Dear George W.
  • 24 Nov 2000 -- The Bubble Has Burst
  • 11 Nov 2000 -- The Media, Bull Markets & the Gold Price
  • 02 Nov 2000 -- Gold Stocks
  • 29 Oct 2000 -- Oh The Tangled Web We Weave ...When We Set Out to Deceive
  • 24 Oct 2000 -- A Mystery!
  • 16 Oct 2000 -- A Peso Here ...and a Few Thousand Pesos There
  • 10 Oct 2000 -- The Unfolding
  • 30 Sep 2000 -- What's Wrong with THIS Picture?
  • 25 Sep 2000 -- Buy Gold Now!!
  • 23 Sep 2000 -- The Times, They Are a' Changing
  • 15 Sep 2000 -- Time WILL Tell!
  • 27 Aug 2000 -- SS "Paper Assets" Begins to Take on Water
  • 06 Aug 2000 -- The Indian Summer
  • 26 Jun 2000 -- A Yellow Brick Wall
  • 22 May 2000 -- The King IS Naked
  • 30 Apr 2000 -- Goodbye Yellow Brick Road
  • 18 Apr 2000 -- Beware the Ides of March, April and May
  • 08 Apr 2000 -- Really, Sir Aldot!
  • 25 Mar 2000 -- Where To From Here?
  • 18 Mar 2000 -- The Gnomes of Zurich
  • 12 Mar 2000 -- The "New" Economy??
  • 06 Mar 2000 -- Two Questions
  • 04 Mar 2000 -- Iceberg Dead Ahead!
  • 28 Feb 2000 -- The Wizard of Oz
  • 06 Feb 2000 -- Here We Go Again!!
  • 15 Jan 2000 -- Comments on the Gold Market
  • 29 Dec 1999 -- No Raw Ingredients Required
  • 28 Dec 1999 -- No Way Out
  • 14 Dec 1999 -- Ho, Ho, Ho!
  • 07 Dec 1999 -- Greenspan's Bubble
  • 03 Dec 1999 -- Early Warning Signs


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