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Gold is starting to look attractive again, but the worst may not be over
July 30, 2004

The dollar has been strong over the past two weeks. Greenspan says everything is okie dokie: the US economy is not in trouble. According to him the economic recovery in the US is broad-based and sustainable, in spite of rising interest rates, war, a soaring budget deficit and declining retail sales.

Well, Greenspan did his part in talking up the economy and the market did its part bidding up the dollar. The dollar gained and the gold price lost. But this is not altogether a bad thing, because the gold price had gotten ahead of itself earlier this year and now it’s starting to get back into attractive territory.

Last year I wrote an article illustrating how to calculate gold’s theoretical value (you can find it on my website at www.paulvaneeden.com in the Library Section, titled: The Gold Price [April 2003]). By updating the data I used then, and making a few assumptions, it’s possible to get a rough estimate for whether gold is undervalued or overvalued.

During March this year the gold price became quite overvalued, which is why, on March 26, my column here on Kitco was titled: Is the current rise in the gold price sustainable? As you know, the gold price has been falling since then. The good news is that the price of gold is now much more in line with its theoretical value although that does not mean it cannot, or will not, go any lower. But it does mean that there is substantially less risk in the gold price now than four months ago.

In contrast to the upbeat news about the economy we have been receiving lately, today’s Wall Street Journal reports that US economic growth decelerated to a slower-than-expected pace in the second quarter as consumer spending fell to its weakest rate in three years.

It may have been slower than what the average mainstream economist expected, but we have been expecting the economy to slow down as interest rates rise, equities languish and bond prices fall.

In response to today’s economic report the dollar fell and the gold price jumped to life. But just like the decline in the past two weeks should not be disconcerting to gold investors, today’s jump is not yet time for celebration.

As I’ve said before, the price of gold is unlikely to sustain a meaningful rally until the US dollar falls in the face of higher interest rates. Yes, I know it’s counter-intuitive; and I know that currencies strengthen when interest rates rise -- it's what’s been keeping the dollar from plummeting this year -- but, at some point, the increase in interest rates is going to strangle the US economy because of all the debt, and the poor quality of the debt. When that happens I doubt that foreign investors are going to continue to send five hundred billions dollars of their savings to be invested in declining stocks and bonds.

For us it means… patience.


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.

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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