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
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
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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