Danger Sign. . . or Worse?

By John Doody The Gold Report March 05, 2004 www.theaureport.com

Gold Stock Analyst has long believed the current gold bull market to be a mirror image of February ‘85 to December ‘87 bull market, when gold soared from $284 to $500/oz. But, if the current is an exact duplicate, the top has been made.

The chart below aligns the start dates of each bull market. The similarities are quite remarkable in terms of the general shapes, length in time, and the percentage gains. The driver of each bull market was/is the soaring U.S. Current Account Deficit (CAD) that flooded foreign markets with more dollars than they desired, leading to the dollars’ sale and its fall in value.

On the next chart, “U.S. Current Account Deficit vs. Gold vs. Dollar: 1982 to Date” the data reported on 12/14/87 for 3Q87 showed the CAD, as a percentage of U.S. GDP, had been flat to lower …

since 4Q86… for 12 months the CAD did not worsen, indicating the dollar “flood” had stabilized. The dollar’s fall had cut U.S. demand for imports, made U.S. exports cheaper, and made purchase price of U.S. assets attractive to foreigners, who stopped selling and began recycling dollars back into U.S. investments. Beginning mid- December 1987, gold fell, and the dollar rallied; when 1Q88 CAD data was reported mid-June 1988, the deficit had shrunk to 2.67% of U.S. GDP, confirming what the markets were already saying. Now we are in a similar position. The U.S. CAD maxed at 5.19% of GDP 1Q03, was slightly lower 2Q03, and lower again at 4.86% of GDP in 3Q03, reported December 16, 2003. The next CA report date is March 12, 2004. If the data continues to show CAD flat or lower, this gold bull market may be over. GSA is well aware of all the arguments for higher gold and a weaker dollar. But they all boil down to one issue: Do foreigners want to hold dollars and dollar-denominated assets, or not? A “Yes, they do” answer would be evidenced by the U.S. Current Account Deficit shrinking (reducing the dollar supply) and the dollar rising versus Yen and Euro (as it has last few weeks, indicating higher demand for dollars), then this bull market is over, or at least paused, for now.

Key Question for gold stock investors: Once a gold bull market was over, how long did it take for investors to realize it and sell, sending gold stocks lower? In the last bull market, which was not driven by the CAD, gold topped at $415 on February 5, 1996 (London PM fix); gold stocks, as evidenced by the XAU, also topped at 152.70 that day. But while gold never made another run at $415, the XAU neared its high four more times (3/27/96: 149.53; 4/11: 149.70; 5/7: 148.78; and 5/31: 148.89) before finally giving up early in June ’96 and heading lower. (This pattern is also confirmed by the much broader GSAI, an index we used to calculate based on all the stocks (~50) GSA followed at the time; this is important as it means all stock held up for months after gold’s peak, not just the big cap XAU stocks) So, if 1996’s history repeats, there’s plenty of time to wait for more Current Account data (certainly for March 12, 2004 and maybe the mid-June report) to confirm or deny this bull market’s end. (3/5/04)

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