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
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
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
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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