Intro B&H101 Under the Oak The Mom Chronicles Wall Street History Week in Review Glossary Financial Planning Understand Taxes   "BUYandHOLD" Tax FAQ   The 13 Steps to Investing Foolishly   Carlson on Taxes Archives Gold Update Brian Trumbore President/Editor, StocksandNews.com Years ago, when I was hanging my hat at PIMCO Funds, we marketed a precious metals offering that was sub-advised by Van Eck, one of the world's true experts in the mining sector. The Van Eck organization (formally Van Eck Global these days) is one I have been familiar with for twenty years and they are truly a first class group. Well, it's been a while since I did a piece on gold, and, in need of a little holiday break, I sought permission from my friends at Van Eck to reprint a commentary they just produced for the investment community. The opinions expressed herein are strictly their own and, in the interest of full disclosure, I do not personally own any positions in the metals sector, either individually or through a fund. But first, just a few historical notes. Gold's epic rally during the inflationary 1970s from the $35 level (1968) culminated in a price of around $850, January 1980. At this time, the market value of all gold issues exceeded the $1.4 trillion total market cap for all other U.S. stocks, and, coincidentally, the Dow Jones was also around the 850 level. Of course the situation would reverse over the next twenty years, with the Dow peaking at 11722 on 1/14/00, while gold slid to about $290 at that time. Particularly since 1982, however, this was also a period of declining inflation rates. So what does gold's solid move in 2002, thus far, tell us about the future, if anything? Sorry, no answers here from yours truly. But for an opinion from a real expert, the following are the comments of Joe Foster, portfolio manager for Van Eck. ----- The first half of the year ended with some curious excitement in the gold market. On Friday (June 28), gold drifted lower, looking to close down about three dollars at the $317 level on the nearest (August) Comex futures. At seven minutes prior to the close, the gold price plummeted to $310.50, then recovered somewhat in the final five minutes to close at $313.90, down $5.70 for the day. The late selling was not on unusually large volume, but an aggressive sell order caused bullion to drop through several stop levels when many traders were caught off- guard, thinking more of fireworks than of buying gold. This action is reminiscent of June 4, when gold was driven lower in the thinly traded aftermarket, following a day when bullion touched the critical $330 per ounce level. It seems that bull moves in gold are made on sound fundamentals - political unrest, corporate scandal and/or a declining dollar - whereas bears seem to pound the market when it is most vulnerable, when market participants are trying to relax and enjoy life. The gold market correction is now a month old, as bullion has declined 4.9% from its $330 intraday high. The XAU Gold Index was down 15.2% in June. Meanwhile, in the first half, bullion was up 12.7%, while the XAU was up 31.3%. The disparity in performance between the hedged and non-hedged producers in the XAU is remarkable. The American Stock Exchange Gold Bugs Index includes only companies that do not hedge their gold production beyond 1.5 years. It is up 94.7% in the first half. The message is clear, most investors want more leverage to bullion in a bull market. ...the gold market was in need of a cooling off period. Valuations on gold shares had risen to high levels in a relatively short period. Valuation measures, such as price/cash flow and price / NAV, were approaching levels last seen at the peak of the market in 1996. The highs reached then were at the tail end of a three-year bull market, whereas the current bull move is only 15 months young. The sector has attracted more fresh equity in the past year than in the prior four years combined. Perhaps the summer months will be a good time to relax by the pool, forget the frenzied pace, and recharge some batteries. Finally, the U.S. dollar and gold have moved in the same downward direction in June for the first time this year. This is a break from the normal inverse movement. The dollar first began to decline in January, falling along a gentle slope until mid-June, when it began to slide precipitously. These movements suggest that the dollar has been oversold and that the decline in the June gold price presages a summer bounce in the dollar. Ultimately, though, the still-growing current account deficit, along with the decline in foreign investment in the U.S., indicate that the dollar has not yet reached a bottom. [Source for some of my opening remarks, Peter Bernstein's "The Power of Gold."] ----- Wall Street History returns next week. It's time to review, again, some of the reasons, now historical ones, for the collapse in the equitymarkets since spring 2000. Brian Trumbore

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