Special Report

Current Events, the Market, and Gold.

By Paul van Eeden
October 12, 2001

Short term US interest rates (3-month T-Bills; US Federal Reserve) have declined from around 6% in June last year to under 2.2% currently. Simultaneously, US inflation (CPI) increased officially (Bureau of Labor Statistics) by 2.72% for the twelve months that ended in August 2001. This means that dollar denominated cash now has a real 0.5% negative yield and that cannot be good for the US dollar.

One of the reasons why the dollar has not declined substantially more than it already has could be because there is worldwide government intervention in foreign currency markets to maintain a strong dollar.

We believe that the gold price is inversely correlated to the US dollar exchange rate and the recent 9% increase in the gold price concomitantly with a 6.5% drop in the dollar seems to validate that assertion. The fact that the gold price increased in percentage terms more than the dollar declined could just be and artifact of the dollar index used (DXY; Bloomberg), or it could indicate that there is speculative interest in gold over and above what would be expected based solely on the dollar's decline.

From the above assumptions we can conclude two things:

1.) The gold price is not rising as fast as one might expect under the current circumstances because the dollar is being artificially propped up.

2.) At some point the dollar should start to fall and that in turn should cause the gold price to rise.

I think that we now have a situation that can best be described as a very, very rare buying opportunity in gold and gold stocks. Most of what we have been saying for the past several years regarding the economy, the dollar and gold have been shown to be correct. If events continue to unfold as I think they will, then I have a high degree of confidence that a substantial rise in the gold price is imminent.

The US government has already seen its budget surplus evaporate and the economic stimulus package, in conjunction with the War on Terrorism, is likely to result in a substantial deficit going forward. I also do not believe that the government is capable of stimulating the economy sufficiently to prevent further, steep declines in the stock market. A slowing economy and a declining market should also have a negative impact on government receipts, further exacerbating the budget deficit, not to mention the impact that both will have on US consumers.

With the exception of Japan and some smaller South East Asian countries, very few countries are likely to have much of an incentive to maintain a strong dollar. In fact, a weaker dollar may well be in the best interest of the US, so I would not be surprised if the US government changed its stance and supported a weaker dollar in order to stimulate exports and revive the US manufacturing industry.

The benefit of owning gold is that it doesn't really matter which currencies benefit from a declining dollar. Gold should respond very well since the US-dollar gold-price is, among other things, inversely correlated to the US dollar exchange rate. If capital moves out of US dollar denominated assets, gold should benefit and if capital starts to move into gold assets as well, the potential rise in the gold price could be much greater.

I cannot reiterate this enough; the time to buy gold is now. As Doug Casey is fond of saying: "If I could call your broker for you, I would."

A word of caution: Even though I believe a decline in the dollar and hence an increase in the gold price are both inevitable and imminent, you have to consider that I may be wrong and that my idea of imminent may be vastly different from your idea of imminent.

Paul van Eeden

Paul van Eeden is a widely respected financial analyst who has written extensively about the relationship between the U.S. dollar and the price of gold. For more information, please visit Paul's website at: http://www.pve.net/.