December 12, 2005
The gold price is running strong -- that always makes
me nervous and I instinctively brace for a correction. That's because
markets move higher in fits and starts. While I believe that the
gold price is going much, much higher it would be na´ve to think
that we will get to the top in one long, smooth upward move. I am
not predicting that the gold price will correct, but I have already
prepared myself psychologically for it to happen so that when it
does, I will be neither surprised nor disappointed.
The real estate market has been fueling the US consumer-driven
economy for several years, and is now showing signs of petering
out. Last week we saw that existing home sales fell, that inventory
of houses for sale in the US was at its highest level in 19 years
and housing affordability at a 14-year low. This week we learn that
pending home sales have declined by 3.2% from September's level.
During the first nine months of the year, investors
accounted for almost 10% of all home mortgages. The Wall Street
Journal reports that individuals are pulling back from buying homes
and condos as investments, and that could accelerate the cooling
of the housing market. This phenomenon is recent and is just starting
to show up in national data. You can tell when the real estate market
is getting silly when individual investors buy houses with little,
or no money down, in the belief that they are going to retire rich
from the capital appreciation. This highly leveraged real estate
speculation fails when mortgage rates rise and rental income no
longer covers loan obligations. David Berson, the chief economists
of Fannie Mae, reckons that home sales could fall by more than 10%
over the next two years, largely because of the decline in investor
We can also see investors heading for the exits when
we look at condominium cancellation rates. In San Diego, cancellation
rates for new condominiums rose 47% in the third quarter of the
year versus the second quarter.
Retiring Federal Reserve Chairman, Alan Greenspan,
is worried. He has again warned Congress to restore federal spending
caps and cautioned that the federal budget deficit will substantially
worsen in coming years unless major deficit-reducing actions are
taken. When Clinton was president the US had a budget surplus, not
because he was necessarily a great president, but because the economy
and the stock market grew so much that capital gains taxes swelled
the Treasury coffers. If the real estate market softens up and the
economy slows down, then tax receipts will decline and the federal
budget deficit will soar.
While markets abhor uncertainty and ambiguity, the
Federal Reserve is doing everything it can to become more obscure.
Last month the Fed announced that it would stop producing the monetary
aggregate M3. M3 is the broadest measure of money supply and, as
such, our most reliable source of inflation data (changes in consumer
prices can be caused by inflation but are not the same as inflation;
inflation is simply an increase in money supply).
As the Federal Reserve prepares for a change in leadership,
it is also preparing for changes in transparency. The Fed moved
towards an increase in transparency over the past twelve years and
has signaled its upcoming moves in the accompanying statements to
its policy meetings since August 2003. Now it seems the Fed will
make its policy less predictable just as Ben Bernanke -- who is
an advocate of "openness"-- takes over as Chairman of the Board
of Governors of the Federal Reserve.
With less transparency into what the Fed is thinking
we can expect more volatility in interest rates and bond prices.
I suspect we will also see an increase in volatility in stock prices,
commodity prices and precious metals prices.
As long time readers of these commentaries know, I
firmly believe that the US dollar has further to fall and that means
the US dollar gold price has further to rise. A couple of weeks
ago China's central bank executed a transaction in their domestic
foreign exchange market that traders interpreted as a signal that
the renminbi might be allowed to trade higher in the coming months.
For the US dollar to fall in any significant way we will need to
see the renminbi and the yen rise. The yen has had a hard time during
the past year, but should the renminbi gain against the dollar I
would not be surprised to see the yen strengthen against the dollar
All of this bodes well for the gold price: a falling
US dollar and increasing uncertainty is just the kind of stuff that
gold bull markets are made of.
Last year I wrote about a small exploration company
called Virginia Gold in my newsletter. The stock was C$2.57 at the
time and it closed today at C$10.60 after Goldcorp announced that
it is acquiring one of Virginia's projects. One could profit from
the gold market by buying gold itself, or by buying gold mining
stocks. I prefer to buy small exploration companies. If you would
like to know what I am personally buying and selling you might be
interested in subscribing to my newsletter: I tell subscribers which
stocks I buy and which stocks I sell. Information about the newsletter
is available at www.paulvaneeden.com, under the Newsletter section.
Happy Holidays and a prosperous New Year,
Paul van Eeden
P.S. I may in future stop publishing these commentaries
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