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Which Phase Are We In?
December 2, 2005

Standing at the podium at the international Investment Conference in San Francisco last weekend, I was struck that there were as many people in the audience when gold was within a hair of $500 an ounce, as there were in 2001 when the gold price was $260 an ounce. Why is there so little interest in gold, in spite of its price almost doubling in the past five years?

The answer is that we had not seen a bull market in gold -- until now. The increase in the US dollar gold price from $260 an ounce in 2001 was due almost entirely to the devaluation of the US dollar on foreign exchange markets, yet there was much talk during the past few years of "where we are" in the gold bull market. Some people claimed we were in "Phase 1", others said we had entered "Phase 2" and still others thought we may have gone through "Phase 3" and that they bull market was almost over. I maintained that there was no bull market, merely a bear market in the dollar.

But since July of this year the gold price has been rising for reasons not related to exchange rates (also see last week's commentary). I think the auditorium in San Francisco was half empty because the bull market in gold is so young that few even realize it has started. We are, in my opinion, only at the very beginning of Phase 1, if there is such a thing.

People instinctively turn to investments such as gold during times of uncertainty, when they perceive risks that they do not know how to guard against. Since 1982, or thereabouts, we have enjoyed a bull market in stocks, a bull market in bonds, a bull market in real estate and, until only a few years back, a bull market in the dollar. It is no wonder that the people who do think about gold are few and far between. Life has been good during the past twenty-five years.

Prudent people used to buy their cars and keep them ten years. Nowadays it seems that you need a new car every two or three years. Many people don't even own their houses more than five years before they want to "move up". It used to be that people tried to pay off their mortgages, so that they could finally own their own homes. Nowadays houses are mortgaged to the hilt, and if you don't have all the equity in your house cashed out and invested in the stock market you are looked upon as unsophisticated.

We cannot continue to spend more than we produce and borrow more than we can repay, and think that things are normal. It is quite absurd that the largest and wealthiest nation in the world has to rely on the savings of other nations to subsidize its spending and finance its wars.

The last bastion of the US consumer-driven economy is the residential real estate market. Soaring real estate prices, cheap and creative mortgages and low interest rates have enabled consumers to spend far more than they produce. If the rise in real estate prices stops, then economic growth will stop as well, and if real estate prices were to start declining we could see a whole lot of whining.

This week we saw that new home sales in October rose at the fastest pace in twelve years, and the bulls were overjoyed. However, as I mentioned a few weeks ago, homebuilders are starting to feel a softening in the market. Also announced this week was the fact that rents were rising and rental vacancies were declining. It seems that rising mortgage rates and expensive house prices have finally reached a point where people just cannot afford to buy homes any more. Even though new home sales soared in October, existing home sales fell. Inventories of houses for sale are rising and are now the highest in 19 years. Housing affordability, which is currently at a 14-year low, is expected to worsen if interest rates continue to rise.

I suspect that the gold price still has a long way to go before the bull market that just started, is over. Last week I mentioned that I expect the dollar to continue to weaken, and that alone could drive the US dollar gold price to over $800 an ounce. If we are indeed at the beginning of a "real" bull market in gold, the gold price could greatly exceed even that price. If ever there was a time to buy gold, it is now.

Paul van Eeden

 

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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.

Disclaimer

This letter/article is not intended to meet your specific individual investment needs and it is not tailored to your personal financial situation. Nothing contained herein constitutes, is intended, or deemed to be -- either implied or otherwise -- investment advice. This letter/article reflects the personal views and opinions of Paul van Eeden and that is all it purports to be. While the information herein is believed to be accurate and reliable it is not guaranteed or implied to be so. The information herein may not be complete or correct; it is provided in good faith but without any legal responsibility or obligation to provide future updates. Neither Paul van Eeden, nor anyone else, accepts any responsibility, or assumes any liability, whatsoever, for any direct, indirect or consequential loss arising from the use of the information in this letter/article. The information contained herein is subject to change without notice, may become outdated and will not be updated. Paul van Eeden, entities that he controls, family, friends, employees, associates, and others may have positions in securities mentioned, or discussed, in this letter/article. While every attempt is made to avoid conflicts of interest, such conflicts do arise from time to time. Whenever a conflict of interest arises, every attempt is made to resolve such conflict in the best possible interest of all parties, but you should not assume that your interest would be placed ahead of anyone else’s interest in the event of a conflict of interest. No part of this letter/article may be reproduced, copied, emailed, faxed, or distributed (in any form) without the express written permission of Paul van Eeden. Everything contained herein is subject to international copyright protection.


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