Gold and Silver Potpourri

July 23, 2002

Gold Stock Funds grew $760 million in the first five months of the year, which was a 39.4% rise over year-end assets. Gold bullion coin demand was $28.7 million in the first quarter, up 13% over the first quarter of 2001. HSBC's commodity analyst Alan Williamson predicts the price of gold bullion will peak at $350 an ounce in the last quarter.

Barton Briggs, Morgan Stanley's global strategist says, "I think there is a plausible case that a professionally managed portfolio consisting of the metal itself and gold shares could realize returns of 15% real per annum in the difficult environment ahead. Large portfolios are going to have to be imaginative and unorthodox to beat 6% nominal in my opinion."

As ex-Treasury Secretary Larry Summers said in Gibson's Paradox and the Gold Standard, "the conventional wisdom is that gold is a barbaric metal, it has negative yield, and its only role is a hedge against inflation and the apocalypse." Summers and co-author Barsky argued that the relative price of gold is driven by the real rate of return from capital markets and that this relationship has strengthened since the price of gold was floated. We feel that gold is the anti-thesis of the stock market as long as currencies are not officially backed by gold. This makes gold an actual competitive currency and that is why central banks and politicians are so keen to suppress gold's price. Gold exposes the obvious and that is currencies not backed by gold are fiat and those currencies and their stock markets ultimately will reflect that. That is what we are now and will continue to experience. It's called a flight to quality. World capital markets are estimated to be $60 trillion, yet there are only $70 billion in gold stocks available for purchase. That creates enormous external leverage. At $500 an ounce gold prices, some shares, could easily go from $10 to $50. We've had inflation and we soon will have deflation and they individually cause higher gold prices for different reasons, but also to be considered is safety of assets and return over other long-term assets, such as equities and real estate. All economies are cyclical, so when excess are present in equities and real estate there is a flight of capital to an undervalued asset such as gold. Using this as a yardstick gold is worth no less than $500-$600 an ounce. Having said that we welcome Mr. Briggs to our circle. He can expect another two years of a bear market in Wall Street stocks other two years of higher gold prices.

The Coming Tidal Wave of Gold Demand

Kevin DeMeritt - June 5, 2002

It's a scenario that's taken time to unfold...but is now becoming crystal clear. At its center are gold and the dollar. The scenario is this: the dollar, the once mighty symbol of American might and global dominance, is no longer perceived internationally as being bulletproof-due largely to America's continuing role as the world's leading debtor nation-and, as a result, dollar-holders are beginning to quietly exchange their positions for gold.

It really is a case of the dollar being at the wrong place at the wrong time. The fact is our troubled world has never been in greater need of a "bulletproof" currency. With emergency flares shooting up over the planet's number two economy, Japan, with America battling hard at a seemingly everlasting war, with Israel tied in a bloody Gordian knot, and with Latin American nations crying, "Uncle!" the absolute last thing the world needs is a currency that's stumbling. But that's exactly what it's getting in the dollar. Which is precisely why gold has shot past the $318 mark.

A Green Light for Canadian Retirement Funds

And it's not going to stop there, either. Canadians, for the first time ever, can invest their Registered Retirement Savings Plan (RRSP) assets directly into physical precious metals. A new Gold Fund that invests entirely in physical gold (not gold mining companies, futures or options)...and now enables everyone in Canada to invest in the actual metal itself. This is Huge!

Prior to now, Canadians could only invest indirectly through funds that were either exclusively or predominantly invested in gold mining companies. But the Millennium Bullion Fund is only interested in investing in precious metals-so much so that it forms a brand new RRSP asset class.

We're talking about $400 billion of total Canadian RRSP funds here. And that's big. Let's say that just 10 percent of this $400 billion goes gold's way. That would buy 30 million ounces of gold...or, in other words, more than a third of gold's annual global production (irrespective of current demand).

Now consider Japan's position. That government recently cut back on depositor insurance, a direct reflection of the health of that country's banking industry. If just 10 percent of those anxious Japanese depositors turned around and invested the newly uninsured portion of their savings to buy gold, that would amount to half of all the gold held by the world's Central Banks.

These two enormous "10 percent" moves haven't happened as of yet. But it could be just a matter of time. All it will likely take is an increasing-or just a continuing-deterioration of the value of the dollar, or the state of the Japanese economy, to name just two of the world's hairline triggers, for the current gold bull market to expand to stampede status. And that's just the picture on the demand side.

Production That's Already Years Behind

The picture on the supply side, were demand to suddenly jack up, is simple: there'd be no keeping up. As it is now, there's 126 million ounces of demand...but only 82 million ounces of gold produced each year to feed it. And this is not a real fluid situation, either. The mining companies can't simply press a button to jumpstart production.

For years, due to an artificially low price of gold, there's been a contraction in exploration and new gold mine development. Most mines are geared only to make nominal profits and get by. Significant production from new mines wouldn't realistically take hold for another five, maybe ten years. So a sudden monster gold move would be compounded by unusually feeble production. Climbing gold prices would then be a lot like the driver of a speeding car...that hits a concrete wall.

Most investments are haunted by nagging questions. Gold no longer is. Not only are the fundamentals solidly in place, not only does demand already exceed supply by some 40 million ounces, and not only is there a 14 percent profit potential virtually built in, 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 weakening dollar, do you really feel comfortable not maintaining a 20 to 30 percent gold position in your portfolio? Better think about it.

THE INTERNATIONAL FORECASTER
An international financial, economic, political and social commentary.
Published and Edited by: Bob Chapman
FOR A FREE INTRODUCTORY COPY GO TO:
Robert Chapman bif4653@comcast.net

http://www.gold-eagle.com/gold_digest_02/chapman072302.html