Gold is starting to look attractive again, but the worst may not be over
July 30, 2004
The dollar has been strong over the past two weeks.
Greenspan says everything is okie dokie: the US economy is not in
trouble. According to him the economic recovery in the US is broad-based
and sustainable, in spite of rising interest rates, war, a soaring
budget deficit and declining retail sales.
Well, Greenspan did his part in talking up the economy
and the market did its part bidding up the dollar. The dollar gained
and the gold price lost. But this is not altogether a bad thing,
because the gold price had gotten ahead of itself earlier this year
and now it’s starting to get back into attractive territory.
Last year I wrote an article illustrating how to calculate
gold’s theoretical value (you can find it on my website at
www.paulvaneeden.com
in the Library Section, titled: The Gold Price [April 2003]). By
updating the data I used then, and making a few assumptions, it’s
possible to get a rough estimate for whether gold is undervalued
or overvalued.
During March this year the gold price became quite
overvalued, which is why, on March 26, my column here on Kitco was
titled: Is the current rise in the gold price sustainable? As you
know, the gold price has been falling since then. The good news
is that the price of gold is now much more in line with its theoretical
value although that does not mean it cannot, or will not, go any
lower. But it does mean that there is substantially less risk in
the gold price now than four months ago.
In contrast to the upbeat news about the economy we
have been receiving lately, today’s Wall Street Journal reports
that US economic growth decelerated to a slower-than-expected pace
in the second quarter as consumer spending fell to its weakest rate
in three years.
It may have been slower than what the average mainstream
economist expected, but we have been expecting the economy to slow
down as interest rates rise, equities languish and bond prices fall.
In response to today’s economic report the dollar
fell and the gold price jumped to life. But just like the decline
in the past two weeks should not be disconcerting to gold investors,
today’s jump is not yet time for celebration.
As I’ve said before, the price of gold is unlikely
to sustain a meaningful rally until the US dollar falls in the face
of higher interest rates. Yes, I know it’s counter-intuitive;
and I know that currencies strengthen when interest rates rise --
it's what’s been keeping the dollar from plummeting this year
-- but, at some point, the increase in interest rates is going to
strangle the US economy because of all the debt, and the poor quality
of the debt. When that happens I doubt that foreign investors are
going to continue to send five hundred billions dollars of their
savings to be invested in declining stocks and bonds.
For us it means… patience.
Paul van Eeden
Paul van Eeden works primarily to find investments for his
own portfolio and shares his investment ideas with subscribers to his weekly
investment publication. For more information please visit his website (www.paulvaneeden.com)
or contact his publisher at (800) 528-0559 or (602) 252-4477.
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