The Quiet Bull Market - Gold!

Nov. 12, 2003
Sy Harding

The new bull market in gold has been quietly more spectacular than the noisy new bull market in stocks. Gold ended its 18-year bear market in 1999, just as the stock market was ending its 18-year secular bull market.

Since then, while the stock market was suffering its severe 2000-2002 bear market, gold has been enjoying three years of an impressive new bull market. From its low around $250 an ounce in 1999, gold has surged up 59% to its recent high of $397 an ounce.

The move in gold mining stocks has been even more spectacular than the move in gold bullion. For instance, the XAU Index of Mining Stocks, which consists primarily of North American gold mining stocks, has soared 130% since its low in 2000.

Gold has continued its bull market even after the general stock market ended its bear market. While the S&P 500 has risen 34% since its low last October, the XAU Index of Mining Stocks gained 65% during the same period.

Often perceived as a safe haven in times of economic, currency, inflation, or political worries, gold has hardly been without one or two of those supportive worries since 2000, and has often been supported by all four concerns at the same time.

Gold first began to rise in anticipation that world economies and stock markets were in bubbles that had burst. As that scenario began to play out, terrorist and war fears were added. Then came turmoil in international currency markets, including the plunge in the U.S. dollar, and the battle by world trading partners to instead force their own currencies lower to jump-start their own economies.

This year, hopes for a stronger economy added another potential positive for gold, since economic growth frequently creates rising prices and inflation (although that did not happen in the boom times of the 1990s).

Regarding inflation, while the Producer Price Index and Consumer Price Index have remained benign, and are keeping most economists unconcerned about inflation just yet, the Commodity Research Bureau's Index of key commodity prices has been rising significantly over the last two years. The CRB Index tracks the prices of 22 sensitive basic commodities including energy, grains, livestock, and agricultural products. Most housewives would side with the CRB, that inflation has been obvious in their weekly shopping costs, no matter that the government's Consumer Price Index says inflation is nowhere to be seen.

However, after such a substantial run up, what are the prospects for gold going forward from here? Let's take another look at its usual driving forces.

Turmoil in the currency markets is not going away anytime soon. Japan is making no effort to hide its manipulative activities, periodically selling Yen and buying U.S. dollars to try to halt the dollar's decline and weaken its own currency. China paid only lip service last week to President Bush's, and Treasury Secretary Snow's personal efforts to get China to stabilize its currency, saying it will do so, eventually, but giving no timetable.

Meanwhile, with the addition of ten more countries next May, the European Union will grow to 25 European nations. Its combined population and economy will be roughly 50% larger than those of the U.S. Its currency, the Euro, is growing in stature. Already Russia has agreed to begin pricing its oil production in Euro's, rather than U.S. dollars. It's also interesting that the world's richest investor, Warren Buffett, revealed this week that for the first time in his life, he has invested in foreign currencies.

Political uncertainties regarding terrorism, the situation in Iraq, between Israel and the Palestinians, the international criticism of U.S. policy favoring pre-emptive strikes, etc., are also far from going away.

Economic uncertainties may be lifting - or not. The growth in the 3rd quarter that Washington promised all summer did take place, proving once again that fiscal stimulus does work. However, the announcement Thursday that Gross Domestic Product grew by a huge 7.2% in the 3rd quarter, had no affect on the stock market, which closed flat on the day. The market is probably now worried about whether the economy can sustain growth on its own, now that the effects of the summer tax refunds and government spending have been used up.

The relevance of that question was emphasized with Friday's report that consumer spending fell 0.6% in September, after surging up in July and August, while real disposable income (after taxes), plunged 1.2% in September, once the effect of the summer refunds were gone. It was the sharpest decline in disposable income since the 2001 recession. Further, the unexpectedly high 7.2% GDP growth in the 3rd quarter, did not change the consensus estimate of economists that GDP in the 4th quarter will be around 4%.

Either way the economy can be a positive for gold. Gold would likely benefit as a safe haven if the economy turns down again, or as an inflation hedge if the economy grows and inflation concerns begin to rise.

Meanwhile, the probability is high that currency, political, terrorist, and international uncertainties will remain. Additionally, the media has yet to notice gold's bull market, and so has not yet pumped up investor excitement, as happened in the early 1980s once gold rose above $800 an ounce, That is also supportive of the thought that gold's bull market has further to run.

The only problem with it has been the extreme volatility, so we continue to prefer to go after the intermediate-term moves within the bull market, as some of the declines have been dramatic. In doing so we have managed to be ranked in the top 7 Gold Timers in the U.S. since 1999, and bouncing back and forth between #1 and #3 since early 2002.

http://www.gold-eagle.com/editorials_03/harding111203.html