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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.

1/17/2002: Will gold finally break out in 2002?


Happy New Year! from Dana Samuelson, Owner of American Gold Exchange.

In this gold market update:

Argentina’s default and Enron’s bankruptcy
The lessons of Japan
Major economic cycles – boom and bust
Will gold finally break out in 2002?

Happy New Year!

Gold looks pretty resilient to me right now. The gold price has moved up in the last two weeks from the mid $270s to the high $280s, despite a rather lackluster British auction yesterday. My gut is telling me that some rather large and scared money is quietly moving into gold. Why? Well, as you probably already know, the world economic news is far from good.

Argentina’s default and Enron’s bankruptcy

The Argentinean default is now rippling through the international economy, affecting major U.S. firms. J.P. Morgan Chase alone wrote off $351 million for its exposure to Argentina, which devalued its currency and defaulted on its bonds. It is rumored that several major Spanish banks are also in big trouble. These huge problems may be just the tip of the Argentine iceberg – and it’s not the only iceberg out there.

Then, of course, there’s Enron. The respected auditing firm of Arthur Anderson is now on the hot seat along with the Enron executives who hid massive debt in order to inflate share value. What are the consequences? J. P. Morgan Chase wrote off another $456 million in trading losses and loans to Enron, and still has exposure to potential losses of $2 billion. That’s “billion” with a “b.” We can only wonder how many other major firms are caught in the Enron web of doom — not to mention all those thousands of poor 401(k) investors who have been hung out to dry.

The lessons of Japan

Our economy is looking more and more like a replay of Japan’s after their massive boom of the late 1980s and subsequent bust of the 1990s, a bust which has lasted for eleven years and counting. (If you haven’t read our “Gold at $1,700” analysis, now would be a great time to do so – here is the link. ) During its boom years, the Japanese economy created an incredibly strong yen, record high share values, and a massive spending spree by Japanese businesses and consumers. All seemed to believe that the good times would roll forever. When the inevitable downturn came the Nikkei bubble burst, falling from 38,916 to about 10,000 today, the Yen cratered, and property values plummeted. The Japanese government responded by slashing interest rates to zero, but to no avail. Eleven years later the Japanese economy is still attempting to crawl out of the basement. The yen has skidded in the last several months by some 10% and looks like it will drop further. Almost the only thing that’s increased in value during Japan’s struggles has been the local gold price in yen. Of course, the United States is not Japan. That’s what everyone keeps saying, anyway….

Major economic cycles – boom and bust

Alan Greenspan single-handedly broke a stock market rally last Friday by admitting what we all know already, that our financial system is still at risk. The U.S. economy remains weak even after the most aggressive Federal Reserve rate cuts in 30 years. Industrial output in 2001 was the lowest since 1975. Consumer spending, the engine of the U.S. economy and stock market, remains abnormally low. But of course it does. The ability of consumers to pay off their abnormally high debt burden has weakened along with the economy and stock share values. Lower interest rates, which the public has seen little benefit from anyway, seem little enticement either for refinancing debt or buying on credit. I would love to refinance my own mortgage, currently at 7%; but the best rate I can get today is around 6.5%. By the time I pay the fees, it’s basically a wash.

Any student of economic history knows that economic busts follow economic booms. The excesses built into the system during the boom get shaken out during the inevitable correction that follows. The United States is clearly in a major downward correction today, one that could last far longer than anyone expects. About 30% of the current value of the U.S. stock market is comprised of foreign money. If that money becomes scared and moves out, the bottom could literally fall out of the U.S. market, much like it did in 1987 when the Dow lost 25% in one day.

Normally around 10% of Americans own stocks. Today that figure is thought to be as high as 40-50%. The lure of fat and easy profits in the late ‘90s sucked in people who have no real experience in the stock market. This mad rush of inexperienced investors probably pushed the Dow 20% higher that it should have been at the peak. These same novices, who have never seen a full-blown bear market, are likely to panic if the market becomes really volatile. This is exactly why, when major cyclical tops and bottoms come, they tend to surge 10% to 30% beyond their rational levels. For example, a typical Dow correction of 40% from an 11,750 peak suggests a bottom of about 7,000, according to historical averages. But a panicked sell-off could easily pound the Dow to far lower than half of peak value, perhaps as low as 4,000 or 5,000. This kind of runaway decline has happened before and could easily happen again. Beware!

Will gold finally break out in 2002?

Right now, gold seems to me to be one of the few safe havens out there. At today’s prices, with no more than a 20% to 30% downside risk, gold offers a potential upside gain of 100% to 500%, perhaps more! Patient investors who buy gold now should be very well protected from declining paper assets, and are likely to be quite handsomely rewarded by their gold holdings.

The way 2002 is shaping up, it looks like this might be the year. Those of you familiar with our updates know that gold over $295 signals a breakout to the upside. Any move above $330 suggests the next stop on the way up is $410. When (not if) this breakout begins, it will accelerate very quickly. A gold move from $295 to $330 could easily occur in one day. Once gold moves over $330, we are off to the races. In my 21 years of intense gold market experience, I have never seen a better environment for this kind of major breakout. Priced at $288 today, gold is up $3 and looks like it is trying to go higher. Once gold breaks above $295 you probably won’t have much reaction time.

I don’t hold much hope right now for a commensurate rally in the price of silver. When gold was last at $400 an ounce silver routinely traded in the $5.50 to $6.50 range, not substantially above today’s price of $4.70 an ounce. I think gold could go up $100 from here and silver up $2.

And platinum has price liability at $480 an ounce. Platinum is the most industrial related of the traditional three precious metals. Should economic conditions remain weak for a prolonged period of time, platinum is likely to erode in price considerably from today’s rather high historical levels. I’m putting my money on gold and suggest you do the same.

So what should you choose for investment? We recommend the following conservative items:

Gold bullion: 1 oz. American Gold Eagles.

No IRS Reporting Requirements

European gold coins: British Sovereign “Kings” Brilliant Uncirculated.

These are the best classic European gold coin for popularity, price, and scarcity.

U.S. classic gold coins: $20 Liberty, in MS62 to MS64 condition; and $20 Saint-Gaudens, in MS63 to MS65.

These gorgeous, historic coins offer complete financial privacy, excellent leverage to the gold price, high collector and investor demand, and are downright cheap today.

If you are a bit more speculative, there are some great deals available right now. Please call 1-800-613-9323 for a personal consultation. And Best Wishes for a Happy New Year!


Dana Damuelson
Owner, American Gold Exchange


Metal Ask      Change
Gold $1,789.63           $1.87
Silver $18.26           $-0.15
Platinum $847.89           $6.19
Palladium $1,986.51           $2.67
In US Dollars