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Volatility ahead
June 03, 2005

Traders were selling euros leading up to the French referendum and now that both the French and the Dutch have voted not to ratify the European constitution, it is time to rebalance portfolios. “No” votes were expected, and consequently so was the euro’s fall. Locking in profits therefore means buying euros and that, for most part, implies selling something else, such as dollars. So the dollar fell on Thursday and the gold price (in dollars) rallied.

Economic growth in Europe is anemic. It is not much better in the US, where long-term interest rates are still declining in spite of US Federal Reserve efforts to raise short-term interest rates. Ten-year interest rates in the US have fallen from over 4.6% in March to less than 3.9% today. Investors typically move capital to bonds when they are nervous about economic growth and equities. Clearly the bond market is warning us of slowing economic growth.

I like to watch the auto industry in the US because Americans love cars. Auto sales in the US fell 8% in May compared to a year ago. May sales at General Motors, the largest automaker in terms of production, fell 13% and at Ford sales were down 11%. In response, GM said it would cut third quarter production by 9% and slash prices. I expect that the unemployment rate will also rise.

Until something happens to give the markets direction we will see sideways trading in bonds, equities and currencies, including gold, so I would not put too much weight on what currencies and the gold price do in the next week or so. There is much uncertainty in the financial markets: the most probable result is volatility, making for interesting times ahead.

Junior mining and exploration companies issued an inordinate amount of shares during the past twelve to eighteen months and those shares will most likely continue to weigh down the junior sector, giving us some stellar buying opportunities this summer. At the same time, the prospect of weak economic growth does not auger well for base metals, and I am avoiding that sector altogether and sticking primarily to gold.

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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