"This Week..." by Paul van Eeden will be
replaced by "Commentator's Corner" starting February 6, 2006.
may find Mr. van Eeden's future commentaries and articles in the
Commentaries" section of our homepage.
Vancouver Confirms a Bull Market
February 3, 2006
The number of attendees at the
San Francisco investment conference in November last year was about
the same as it had been six years ago when gold was half the price,
and was consistent with my conclusion that we were not in a gold
bull market but in a dollar bear market. That meant that the increase
in the dollar gold price merely reflected a lower US dollar exchange
rate. But by then the gold price had already increased substantially
in many currencies, unrelated to the US dollar exchange rate. My
conclusion at the time was that if, indeed, we had entered a real
gold bull market, then the bull was still a calf (see: "Which phase
are we in?" at www.paulvaneeden.com in the Commentary Section).
After the Vancouver investment
conference two weekends ago I can confidently report that there
is no doubt we are in a gold bull market and my natural instinct,
after seeing the crowds in Vancouver, is to sell and run for the
hills. Yet my prognosis for the US economy seems to be coming to
pass. When hedge funds, mutual funds, pension funds and central
banks all stare each other in the eye, waiting for the first one
to blink so that they can unload their dollars, the beneficiary
will be gold.
Economic growth in the US during
the last quarter of 2005 was the weakest it had been in three years.
That does not say much, given how robust the economy has been: we
have to keep in mind that the US was recovering from two horrendous
hurricanes, rising energy prices and rising interest rates. Unfortunately,
the Federal Reserve just raised interest rates again this week and
energy prices are not coming down.
Ford and General Motors are cutting
about 60,000 jobs between them. Ford announced last week that it
will cut its work force by 28% and plans to close fourteen North
American factories. One could argue that the auto industry in the
US is getting hit particularly hard by rising gasoline prices and
that it is folly to put too much emphasis on it. That is certainly
true, but in conjunction with everything else I doubt the effect
will be constrained to autos and airlines.
The boom in real estate values
that kept the economy moving after the stock market peaked is now
also over. December saw housing starts decrease by 8.9%, with a
12.3% decline in single-family home starts. Housing prices also
declined in December and the inventory of homes for sale increased.
If interest rates were to start falling again now then the real
estate market could get a shot in the arm, although I doubt that
it will be sufficient to overcome the speculation that has built
up in the sector.
Still, the reason I do not see
the US economy or the US dollar recover is simply the twin deficits.
My understanding of economics is very rudimentary: I know that price
reflects the equilibrium between supply and demand. If you increase
the supply of something, without offsetting demand, then prices
will drop. The US fiscal deficit requires it to issue bonds to meet
its spending programs. Eventually bond prices will drop as a result
of the increase in the number of bonds outstanding and since interest
rates rise when bond prices fall, it means US medium to long-term
interest rates are going to go up, regardless of what the Fed does.
At the same time, the US trade
deficit is increasing the amount of dollars held by foreigners and
this will eventually cause the US dollar exchange rate to fall as
well, much more than it already has. Even though it may be counter-intuitive,
I believe there is a high probability that we will enter a period
during which US (medium and long-term) interest rates will rise
along with a decline in the US dollar exchange rate. When that happens
I also expect the gold price to increase dramatically as a result
of all those fund managers and central bankers staring at each other.
But the world doesn't always work
the way I think it should. The gold price could rise for a myriad
of reasons and there is no guarantee that it will rise at all. We
are all bullish on gold, but that does not mean we are right. The
only thing I am absolutely sure of is that volatility in the gold
price is going to increase. It will whipsaw a lot of people out
of profits and into losses and it will create opportunities for
others. I hope you are one of the latter.
Paul van Eeden
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