Gold Update / Dow 10000
Brian Trumbore
President/Editor, StocksandNews.com

Knowing that almost everyone has an interest in gold, and taking advantage of my long-time relationship with the folks at Van Eck Global, I just wanted to pass on some recent comments from the dean of gold investing, John van Eck. The following includes the aftermath of the huge drop in the price of the precious metal back on Friday, October 3 to the $370 level.

[This is in no way a recommendation on my part for investing in gold and I do not currently own any bullion or gold mining shares. Should I do so down the road, however, I will notify everyone through my "Week in Review" commentary.]

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Investment and speculative demand for gold continued to grow in the third quarter of the year as investors continued to seek a hedge against current uncertainties. This demand plus net producer reduction of hedges pushed the dollar spot gold price from an intermediate low of $342 an ounce in mid-July up to a seven year peak of $393 an ounce on September 25 in spite of weakness in fabrication demand. Subsequent profit-taking brought the price down to close at $385 an ounce at the end of September, up 11% since the end of June. Its price appreciated in terms of all major currencies. Net long "large-scale speculative" (including investment) positions on Comex climbed from approximately 120 metric tons in August to a record of about 360 metric tons toward the end of September. Further profit-taking after last Friday's unexpected better employment report brought gold's spot price to $369.40 an ounce.

The prices of gold mining shares rose to six year highs. The Philadelphia Gold / Silver Index also reached a peak in September. It was then up 16% since the end of June. It subsequently reflected the profit-taking in the gold market.

Fundamental and geo-political conditions remain positive for continued worldwide growth in investment demand for hedging against the following factors:

--Further Dollar Decline

The G-7 September statement calling for flexible exchange rates stimulated another dollar decline. The value of the dollar in terms of the yen fell 4.7% in September to new lows and in terms of the euro it fell 6.8% to its June lows. The U.S. current account deficit continues to rise, and it is expected to climb to more than $625 billion in 2004 (6% of GDP) - an unsustainable level. Accordingly, the risk of a brutal adjustment and further dollar decline is growing.

--Economic and Financial Uncertainty

The cut in the fed funds rate from 6.5% at the end of 2000 to 1% last June and the federal budget swing from a surplus of $295 billion in fiscal 2000 to a probable deficit of over $500 billion in 2004 (excluding growing future pension and healthcare liabilities) has raised expectations of a return to sustainable economic expansion and rising stock prices since last March. However, the Bank for International Settlements said the budget deficit has been increased so much that it raises questions about the long-term sustainability of such stimulus. Also, many imbalances since the 1990s boom (excessive industrial capacity, unemployment, lack of saving and business reinvestment) have not been corrected. In addition, new bubbles (prices of housing, mortgage refinance, junk bonds, derivatives) may burst in due course. The S&P 500 Stock Index is selling at about 30 times (trailing) earnings. Many investors have turned to gold as an alternative investment against the risks that the recovery could stall and that stocks could still be in a bear market. Two leading Swiss private banks began to recommend this year that their wealthy clients hold between 2% and 3% of their investments in gold bullion.

--Growing Financial Risks

Total outstanding business and household debt has climbed to a record $16.2 trillion (156% of GDP). Second quarter 2003 home mortgage debt grew at an annual 14.2% rate. The ratio of new consumer debt to new income is currently about 132%, compared to below 50% in the early 1980s and below 30% in the 1960s. The leveraging of U.S. debt and its servicing requirements to record levels may be unsustainable unless profits and employment pick up. Fitch Ratings anticipates that bankruptcy filings will increase about 8% this year over last year, and it warned that consumer debt quality will worsen in the fourth quarter 2003 and into 2004. Risk-averse investors have often turned to gold seeking an historic and proven default-free store of value.

--Wealth Impoverishment

For decades the Fed has followed Keynesian policies of favoring debtors at the expense of creditors. Rapid monetization of debt has meant lower than normal interest rates. Currently, all treasury bills and up to three-year maturity Treasury Notes have negative real yields with inflation at August levels. Trillions of dollars of short-term savings deposits and CDs have extremely low yields. Creditors are being penalized. With rising Federal deficits and unsolved "Bay Boom" unfunded liabilities for future pension and healthcare benefits, there is a risk that the 1970s inflationary cycle when debts were inflated away will be repeated. Gold investors were protected in that cycle as the price of gold rose from $35 an ounce to $850 an ounce.

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The following is from your editor, moi.

On a different topic, with the recent surge in the Dow Jones Industrial Average back towards the 10000 level, some have written of comparisons between today and the first time we broached the figure (and stayed there for a spell), April 1999. So since I have been collecting assorted data on the equity markets for over 13 years, a look back reveals the following comparisons.

For week ended 4/9/99

Dow Jones 10173

DJ price / earnings ratio (trailing 12 months)?25.9
S&P 500 P/E?????????????..35.8

Investor Sentiment

Bulls?56.4
Bears...31.6

Gold?$281
Oil?.$16.57

30-year U.S. Treasury?.5.46%

Tokyo (Nikkei)?16835
London (FT-SE)?6472

*Incidentally, the Dow Jones closed at 11031 just one month later, 5/7/99.

For week ended 10/17/03

Dow Jones 9721

DJ P/E??21.0
S&P P/E?.30.1

Investor Sentiment

Bulls?57.4
Bears?19.8

[Source: Chartcraft]

Gold?$372
Oil?..$30.68

30-year U.S. Treasury?.5.25%

Tokyo?11037
London?4344

In both cases, the economy was / is growing at a rapid clip. Beyond that, I'll save my predictions for "Week in Review."

Brian Trumbore

BUYandHOLD does not recommend any securities. Any opinions expressed above regarding any investment products are not necessarily those of BUYandHOLD, its officers, directors or any of its affiliates. The investment products mentioned above are being used for informational and illustrative purposes only and should not be regarded as an offer to sell or as a solicitation of an offer to buy.