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AGE Gold Commentary is our regular report analyzing trends in precious metals and rare coins. We monitor domestic and international markets and extrapolate from our 30 years in metals to place current events into a hard asset perspective. View archives.


7/10/2000: Gold holds in range

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Gold holds in range
Dollar prospects dimming
Stocks lose while oil gains
Fight inflation and win
New website up and running!

Gold holds in range

Over the last few weeks gold has continued to trade in a fairly narrow range, with spot prices vacillating between a low of 283.40 and a high of 292.50. The market has been influenced primarily by professional trading houses who appear to be buying the low end of the range and then selling the high end of the range for short term gains.

The good news here is that both the upside and downside limits of gold's trading range have been stepping progressively higher for several months now. Gold continues to test upside resistance levels more frequently than downside, a positive sign that the market is straining to move higher. The period from late June through August is typically quiet for gold, as is the case this year. Strong market advances are usually recorded in the last four months of the year due to much stronger physical demand during that time. Last year gold was $252 in August and $325 in September. We believe the fundamentals for gold are much better now than they were last year at this time. Please see oil and inflation below for more.

Dollar prospects dimming

The gold market continues to be strongly influenced by the value of the dollar relative to other major world currencies. When the dollar rallied in May, gold tested down to $270; as the dollar weakened against the euro and yen, gold rapidly forged its way back towards $300.

This week the yen posted its biggest gain in more than two weeks against the dollar, as the Japanese economy showed signs of rebounding and Bank of Japan Governor Masaru Hayami revived expectations interest rates will rise. A stronger yen makes gold an attractive investment among traditionally gold-hungry Asian investors, and promises to have a strongly bullish effect on gold prices.

The recovery of other East Asian economies continues to pick up steam, promising even greater strength of foreign currencies against the dollar and adding to bullish sentiment for gold. Year-over-year GDP growth is up 13 percent in South Korea, 12 percent in Malaysia and 7 percent in Thailand. Elsewhere, Mexico's economy has been growing at a robust 8 percent clip, and the only disappointments among the emerging economies are Brazil and Indonesia, where growth has been around 3 percent.

Keep in mind that from 1995 to 1999, the dollar and gold were the only two truly safe havens for foreign investors when currency devaluation in Pacific rim countries, along with Mexico and Russia, cost investors billions of dollars virtually overnight. The strength of the dollar, however, has made gold relatively expensive to these buyers. Now that these economies are recovering, real competition for their investment monies is once again possible. The overpriced (and increasingly precarious) dollar is losing its attraction. Gold, however, remains undervalued and a truly safe haven for investors.

The relentless strength of the dollar over the last decade has artificially suppressed the price of gold while simultaneously 1) creating a credit bubble that must pop soon, and 2) nourishing a bull market in stocks that simply cannot be sustained. The dollar clearly seems headed for downturn, and soon. When the greenback erosion begins, foreign investors will flock from the U.S. stock market, further weakening the dollar. Under these conditions, gold becomes a favored haven for foreign investment and gold prices will certainly bid up.

Stocks lose while oil gains

U.S. equities markets continue in their schizoid behavior, over-reacting to the smallest stimuli in either direction. The astronomical gains of recent years now seem out of the question, while substantial loses appear likely. After April's free-fall, investors are now far more likely to clip a rally before it takes flight by taking profits. And of course, when the dollar weakens, the bottom could simply drop from the stock market as foreign investors move into more attractive havens like gold.

Finally we have some good news to report about oil: Crude oil fell more than 2 percent this week, extending last week's losses, after Nigeria and Venezuela signaled that OPEC may back Saudi Arabia's call to raise output for a third time this year to trim prices and avoid hurting worldwide demand.

While falling crude prices of any amount are a positive sign, it should be remembered that oil is still hovering around $30 per barrel, which is around 50% higher than one year ago. Higher oil prices are only now beginning to percolate into the costs of consumer goods, etc. Once the full ramifications of increased energy costs find their way into government reporting, inflation is likely to be substantially higher than the figures published so far.

Fight inflation and win

There is little doubt that inflation has been creeping up. For the 12-month period that ended in May, inflation as measured by changes in the consumer price index was up 3.1%. That was higher than the 2.5% year-over-year change in consumer prices that economists had expected for the period. Many economists believe the inflation picture could get worse, not better, as time goes by. Diane Swonk, chief economist at Bank One Corp. in Chicago, believes that "Growth will slow, but not enough to derail inflation."

According to May's Consumer Price Index, prices are definitely on the rise. Food is up 2.7%. Transportation is up 5.4%. Medical care is up 4.6%. Other goods and services are up 5.3%. Maintenance costs on homes, including mortgage payments and general upkeep, have risen in line with rising interest rates at the nation's banks — a direct result of the Fed's recent spate of rate hikes.

And despite this week's minor dip in crude oil, energy prices are going through the roof! In the CPI report for May, energy costs have increased 14.6% in the past twelve months and the rate is climbing steeply. Steven Strongin, commodities analyst at Goldman Sachs, said earlier last month that crude oil prices could hit $40 a barrel, which would cause further increases in gasoline prices. It bears repeating that once expensive oil percolates through the manufacturing and distribution processes for other goods, including food, it will make everything more costly.

Equities, bonds, and most other financial instruments will certainly lose value in an inflationary economic scenario. Gold, however, gains in value during periods of inflation. Indeed, throughout recent history, no asset has performed as well as gold as a long term store of value, especially during periods of inflation.

Gold market fundamentals are clearly pointing to a major upside movement sometime this year. Gold prices are nearing a 20-year low. The dollar is weakening against foreign currencies. The stock market, already on a slow descent into sanity, is showing signs that a precipitous drop could occur at any moment. And inflation is definitely here, despite the Fed-engineered economic slowdown. Under these conditions, gold is an outright steal, the proverbial "no-brainer"! Indeed, we see gold testing the $400 level as clearly within reach and reason.

We urge our readers to take advantage of today's unusually low gold price and continue to accumulate the world's oldest and safest form of currency while it remains so decidedly undervalued.

New website up and running!

In talking with many of you over the last month, we've discovered that some of you have not yet visited our revised and extremely informative web site at www.amergold.com. To those of you who have visited and offered your kind compliments, thank you! We've worked very hard to develop what we consider to be the premier hard asset web site in the country. Our site is updated daily with market-specific information and analysis, and special reports to help you maximize your investment potential. Our classic coin list is updated several times a week, and now includes great photos and expanded descriptions of many of our classic coins. We will continue adding new and valuable information, taking our responsibilities as your reliable hard asset advisor very seriously. Please bookmark us on your computer and visit often!

We've just added some very informative articles on investing in rare coins. The rare coin market is extremely under-priced right now and is offering some of the finest opportunities for collectors and investors in years. If you are interested in purchasing or have already bought a shipwreck coin from the S.S. Central America you need to read our analysis of previous coin hoards. Please click on the link just below.

That's it for now. As always, thinks for your time!

Sincerely,

Dana Samuelson, Owner and President
Dr. Bill Musgrave, Vice President

  

Metal Ask      Change
Gold $1,461.04           $-0.31
Silver $16.63           $-0.01
Platinum $897.57           $-2.98
Palladium $1,881.71           $-5.95
In US Dollars