Last Chance for Gold and Silver Stocks? August 25, 2003
Last Wednesday, the Philadelphia Gold and Silver Index recorded a new five-year closing high, confirming the breakouts in gold, silver, and the Gold Bugs Index. The next three months could well be the last opportunity to buy these stocks and commodities, in this range in our lifetimes.
Nothing is more tricky than trying to stay aboard a primary gold bull market, yet if the fundamental gold bull case is understood, it should be more widely recognized that there have been few times in history that a sector has had potentially more upside than the current situation in precious metals. Gold stocks and the precious metals have a history of violent pullbacks after breaking out, so if one occurs, as could be expected, don't lose sight of the fundamental picture. We highly recommend the book, "The Invisible Crash" by James Dines, which traces the progression of the early stages of the last major bull market from January 1961 to October 1975. By the peak in 1980, gold had climbed more than 24 times.
Among the most important fundamentals to the bullish case are:
1.) A worldwide effort to debase currencies against the dollar, to maintain a competitive advantage in trade by export-dependent nations;
2.) An unprecedented money-printing campaign by the US itself.
3.) The dependence of the US on foreigners, (largely the Chinese), to continue funding our trade and budget deficits;
4.) A war mentality is rising as nations act in their own interest to flight deflationary pressures at the expense of others.
The US Government is under extreme pressure to jump-start the economy ahead of next year's election. Accelerating war costs, tax cuts, and additional giveaways in the healthcare area, will continue to be funded by money printing, through ballooning Government debt offerings that are being met by decreasing demand as evidenced by the declining cover ratios. This is causing increasing upward pressure on interest rates and a lower dollar. The Fed finds itself in the precarious position of juggling expectations between deflation to generate interest in fixed income, and a strong recovery to keep the dollar from collapsing under the burden of increasing financing needs. While many estimate gold production is likely to decline through at least 2007, the gold bears are missing the point that in a true gold bull market, jewelry demand will increasingly be displaced by investment demand as jewelry demand is priced out of the market.There is little doubt ALL investors should now have a position in gold and gold stocks as an insurance policy due to its negative beta characteristics in protecting a diversified portfolio.
Richard J. Greene