Six Reasons to Count on Gold

July 8, 2002

Okay, it's about halfway through 2002 and, so far, gold has done what it was supposed to do. Its higher price has made honest men of those economic experts forecasting $325 gold this year. In fact, the metal is now testing the $330 mark...when, just a year ago in June 2001, the price was a distant $56 cheaper at $274.

But if the past is any prologue to the future, gold isn't done yet. By any stretch. Here are six reasons why gold is not only setting a torrid pace, it's about to get even better. 

1/ A Bedrock of Industrial Demand. Sad to say, most currencies-like the dollar-are only money because people believe they're money. There's certainly no industrial use for a paper dollar. And no longer anything the dollar can be redeemed in that's of any inherent worth. On the other hand, there's gold. And gold has tremendous industrial and aesthetic demand. So much so, that the trend is for demand to keep setting records over the upcoming months. That's especially significant because there's...

2/ A Supply-Side that Can't Keep Up. A few months ago, the physical supply-side of gold told quite a story. That's when South Africa, the world's largest gold producer, announced that its output had dropped to the lowest level since 1954. That just reflects the fact that gold mining production around the globe is nearing an all-time low. The gold industry needs to discover 80 million ounces of gold every year just to stay in place. Remember the elementary economics you had back in school? Remember what happens when demand exceeds supply?

3/ The Cost of Borrowing Gold is No Longer a Bargain. One of the ways the gold market has been torpedoed over the past decade is that cheap gold has led to an unscrupulous $4 trillion derivative industry...which has, in turn, worked to keep the price of gold down. It's a vicious circle that's about to be interrupted. Now, with gold on the rise, the cost of borrowing the precious metal is rising, too. That has "motivated" European central banks to reduce the amount of bullion available for lending. And all this effectively puts the breaks on all
that unprincipled gold borrowing.

4/ The Alternative to Troubled Currencies. Respected economic forecaster and former EU policy-maker, Bernard Connolly, made waves at a San Franciscan gold conference recently when he predicted a total collapse of the euro and the European Union, the yen and the Japanese economy, and a "hammering" of the dollar. His views aren't as outlandish as they may seem-they all have roots in disturbing current events. Should worldwide currencies continue their dismal downtrend, investors will have no choice but to turn to gold-the currency of last resort-until the tumult ceases. Which could be quite some time.

5/ Defecting Foreign Investors. If you're starting to see the stock market as this giant balloon drifting across America, think of foreign investors as the pressurized air keeping the thing inflated and aloft. Now imagine that the balloon has just sprung a leak. Those foreign investors, who were so keen on the high-flying market throughout the 90's that they bought an estimated $1.5 trillion in equities, are beginning to liquidate their stocks in significant numbers. If this rivulet grows into a flood, the dollar will further cheapen, the current account deficit will mount, the feeble recovery will evaporate, and gold will look downright cheap to overseas investors.

6/ The Historical Performance of Gold Following Interest Rate Hikes and Cuts. A recent article in the Wall Street Journal outlined how lower interest rates and the price of gold have a "cause and effect" relationship. It gave several instances when Fed rate cuts were followed by gold jumps, including the 34 percent increase in the six months following the rate cuts between 1990 and 1992. Now, after the historic rate cuts of the past year, gold is beginning to repeat this pattern.

Interestingly, when rates are first raised after a period of cuts, gold has taken off as well. This is another reliable pattern repeated throughout modern economic history. So, it should dawn on you that both of these conditions have either happened or are just about to happen, providing an unusual kind of assurance as to where gold prices are headed in the next six months.

There are other solid fundamentals for gold, too. Not only is there a 14 percent profit potential virtually built in to a precious metal investment, and a Dow/gold ratio that's still way overbalanced at 27 to 1 (in 1980, that ratio was "normal" at 1 to 1), but with peaking world tensions, rising oil prices, and a crashing Japan, it just doesn't make sound fiscal sense to keep ignoring gold. After all, to survive the new markets, people have to learn to adapt...and that's never more true than with today's investors.

Lear Financial http://etools.ncol.com/a/jgroup/bg_lear_wnd_15.html