Positive signs for gold
June 25, 2004

Gold increased by eight dollars an ounce yesterday. It would be easy to attribute that increase to the violence in Iraq where, according to the Wall Street Journal, attacks against police and government buildings left more than 100 people dead and 318 wounded. Looking at other news though, I think the increase in the gold price may be more fundamental in nature.

Economic reports released yesterday showed that unemployment increased far more than expected last week and orders for durable goods fell 1.6% in May, confirming that the US economy is not in the midst of a recovery, but in a long-term downtrend that is still only in its infancy.

The slowdown in the economy will reduce the US government’s income from tax receipts while the cost of the expanding war in Iraq soars. In combination, these two items will ensure that the Budget Deficit continues to grow -- a deficit that has to be financed by issuing bonds.

In a nutshell, more bond issuances will put pressure on US interest rates to rise. Higher interest rates will stifle economic activity, increase unemployment, and cause both the bond and stock markets to decline. In light of this, there is no reason to believe that foreigners will continue to invest in US bonds and equities. They will lose money on their bonds, lose money on their equities and lose money on the currency exchange when the dollar declines as foreign capital stops pouring into the country.

As I’ve said many times recently, we have to see the dollar decline in the face of higher interest rates before gold will sustain a rally. The Federal Reserve is expected to increase the overnight rate by one quarter of a percent next week and yet the dollar declined today because of higher than expected unemployment and weak durable goods orders. This is exactly the type of market activity that I expect will continue for many more years to come. It bodes ill for the dollar and good for gold.

I am on record as saying (at conferences) that I don’t expect the gold price to rally significantly this year since it’s an election year. The current Administration will attempt to present the US economy in its most positive light and I will not be surprised to see government intervention in the bond, equity and currency markets. But if the currency markets continue to punish the dollar like today, I could be proven wrong.

On the topic of Iraq, the June issue of Richard Maybury’s Early Warning Report, dealing with the prognosis of the war, is particularly depressing. Rick’s newsletter is one of the few newsletters I read regularly ever since I first saw it almost ten years ago.

Rick Maybury is not for everybody. He says what’s on his mind and it’s seldom uplifting. But Rick did predict the fall of the Berlin Wall in 1985, three years before it came down; he predicted higher platinum and palladium prices in the early Nineties before they soared (platinum doubled and palladium increased almost ten-fold); the first Gulf War one year before it occurred and he predicted the current war between Washington and the Islamic World.

While the stuff that Rick Maybury writes is scary, it’s not nearly as frightening as how often he’s right on the mark. Subscribers who followed his advice made a mint in platinum and palladium during the Ninteties and he warned investors to get out of the US equity markets in 1998. He also lists a War Portfolio that has done incredibly well.

If you’re interested in a slightly different kind of financial newsletter, give Rick Maybury’s Early Warning Report a try. Call 800-509-5400 or 602-252-4477 (in Phoenix, AZ) and mention that you read about his newsletter in my Kitco column, and you’ll be able to subscribe for US$119 a year, forty percent off the regular US$200 annual fee.

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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