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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.


9/19/2000: Gold undervalued and overlooked

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Gold undervalued and overlooked
Energy prices up, up, up
Trade deficit sets record
Strong dollar
Stock market pessimism grows

Gold undervalued and overlooked

In over 20 years of trading this market, I have to say, this is one of the quietest trading periods I have ever seen. It is too quiet! Something has to give, and soon! Gold remains near 20-year lows primarily because of the strength of the U.S. dollar against most major world currencies, and the perceived strength of the U.S. stock markets. Nonetheless, the rosy fašade of the U.S. economy is showing real signs of strain.

Consider the following facts. In today's delicately balanced gold market, any one of these market fundamentals could easily trigger a gold rush that would make last fall's run (from $253 to $330) look like a mere hiccup!

Gold is currently undervalued and overlooked, but probably not for much longer We're beginning to get that feeling in our gut again, like we had last summer when we told you a sharp gold rally was likely. Six weeks later, gold rocketed up from $252 to $330 in two weeks! This time the fundamentals are much more widespread and the power of a gold rally is likely to be much stronger.

At current prices, gold offers a low-risk hedge against expensive oil, a dangerous trade imbalance, stealth inflation, and precarious stocks. When the U.S. stock market weakens in the fall—and weaken it will—the dollar will follow suit. European and Asian investors are likely to flee to the safe haven offered by gold, bidding up prices. We urge you to take measures now, while gold is cheap!

Energy prices up, up, up

Crude oil prices are up 43% already this year. A barrel of oil is now over $37 and climbing! Gasoline is now regularly over $2.00 a gallon in many parts of the U.S. Natural gas and heating oil futures have more than doubled this year, and reserves are at an all-time low. If the Northeast and Midwest have a cold winter (when do they not?), a genuine energy crisis could result and prices will surge even higher. Some analysts are predicting $50 oil. As the deeply inflationary pressures of expensive oil ripple through the economy, the prices for everything are likely to spike.

We're told that increased OPEC production will pull our fat out of the fire. However, any OPEC increases will be too late to have any real effect on winter heating fuel supplies. Non-OPEC oil production is decreasing right now. Next year, oil demand is expected to go up by 1 million barrels to 1.5 million barrels a day!

Trade deficit sets record

The U.S. trade deficit hit another record in July, fueled primarily by higher oil prices. The shortfall in goods and services grew to $31.9 billion from $29.8 billion in June, according to the Commerce Department. The previous record deficit was $30.4 billion in March.

Analysts say the trade gap could damage the U.S. economy if it shows enough signs of slowing to scare off investors from outside the U.S.

"As long as the U.S. economy continues to outperform most of the world and foreign investors demand U.S. investments, the day of reckoning is postponed," said Kenneth T. Mayland, president of ClearView Economics LLC in Pepper Pike, Ohio. "But Lord help the U.S. financial markets if and when foreign investors get their fill of dollar-denominated investments, or worse yet, foreigners sour on U.S. investments."

Strong dollar

For now, the U.S. dollar rules the currency roost. Since the beginning of the year, the dollar has risen about 10 percent when measured on a trade-weighted basis against the euro, the yen and five other major currencies, Federal Reserve figures show.

The strong dollar is fueling the record trade deficit and fits hand-and-glove with the perceived strength of U.S. stocks. And indeed, the strong dollar is also one of the primary forces holding gold prices down. What happens when the dollar slips and foreigners are tempted to divest away from the U.S.?

An event like a sustained loss in stock values could easily stimulate foreign investors to start selling their dollar investments, triggering herd instinct and creating a sell cycle that pushes the dollar down far and fast. The resulting economic landscape would look very different from today, and gold prices would rise far and fast!

Stock market pessimism grows

On average, September and October are the worst months for stocks. And this fall, stock market investors have plenty to worry about.

First, there's the Euro, which has fallen more than 10% against the dollar since late June. When the Euro drops, many American companies show losses when they translate their European earnings into greenbacks. Because of these "currency losses," expect corporate profit reports to be much softer than usual this fall, hurting stocks.

Next, rising oil prices harm corporate profits in three ways. First, they raise outright production and transportation costs. Second, they reduce revenues when consumers cut back on other spending because they pay more at the pump and for heating fuel. And third, if rising oil results in widespread inflation-which is looking more likely all the time-the Fed will raise interest rates, which eats further into profits.

Furthermore, as recent oil riots in Britain and Spain indicate, Europe is hit especially hard by escalating oil prices. If these important economies falter and the Euro falls further, U.S. corporations will suffer greater losses and stocks will drop.And we won't even touch the ridiculous over-valuation of tech stocks. Many stocks are "fully valued" and cannot reasonably increase further in price without exceptionally good earnings. This recipe is ripening for serious financial consequences, and higher oil prices are cutting into earnings significantly. Watch Out!

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

Sincerely,

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

  

Metal Ask      Change
Gold $1,476.94           $0.00
Silver $17.01           $0.00
Platinum $934.12           $0.00
Palladium $1,946.20           $0.00
In US Dollars