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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.


2/18/2004: Gold building pressure, dollar losing

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Greeting from American Gold Exchange. In this issue of Gold Market Commentary:

Is the recovery running out of gas?
Euro intervention on Friday the 13th?
Gold is more bullish than ever
Silver, platinum, palladium gain
Classic U.S. gold coins disappearing

Since our last Gold Market Commentary of January 27, gold has been mostly range-bound between $405 and $415. After a dollar-related bout of weakness in early February that pushed it briefly under $400, gold has been grinding steadily higher, closing today at $412.10 and surging to over $416 yesterday.

For the past few days gold has been pushing the top of its trading range, building pressure for another substantial run-up. Given a series of troubling economic indicators and a rapidly eroding dollar, we firmly believe that gold over $500 is not a matter of if, but when!

Is the recovery running out of gas?

Since our last update, new financial data has been released suggesting that the widely advertised U.S. economic recovery might not be all that it appears.

In second half of 2003, the economy was on an artificial high fueled by another round of tax cuts and an unprecedented boom in mortgage refinancing. With mortgage rates at their lowest in 50 years, homeowners couldn’t refinance fast enough, increasing mortgage debt by an incredible $940 billion annual rate in Q3 of 2003. As a result, at the end of last year the economy received a huge but temporary shot in the arm. Homeowners didn't use cheap mortgages merely to buy homes or lower their monthly payments, they also borrowed against their home equity to buy cars, home electronics, clothing, etc., or to pay for vacations and home improvements. This manic spurt of consumption, understandable after three years of belt-tightening and economic malaise, led to an unbelievable 8.4 percent GDP growth in the third quarter.

While the administration trumpeted this huge gain in GDP as undeniable evidence that the economy has recovered, in reality few jobs have been created and workers are now running out of mad money. Where would our economy really be today without tax cuts and, more importantly, abnormally low interest rates? We should all ask ourselves that question, and a couple more: if the economy is recovering, where are the new jobs? If approximately 70% of GDP is dependent on consumer spending, how can growth continue when Americans are losing more jobs than we’re gaining?

President Bush has promised the creation of 2.6 million jobs in 2004. To achieve this target the economy must generate 215,000 jobs a month. The problem is, only 115,000 jobs have been added per month for the past two months. The reality is that layoffs continue, American jobs continue to be outsourced to lower wage-paying countries, and huge budget shortfalls are trickling down, forcing state and local governments to slash payrolls and raise taxes.

So despite all the positive spin around recovery, the prospects for the average worker do not seem so rosy, and without including the average U.S. worker, the recovery simply cannot last. As if to prove the point, consumer confidence dropped by a dismaying 10 points in February, according to the University of Michigan index, squarely because of employment concerns. Hardly what one would expect in a recovering economy!

Euro intervention on Friday the 13th?

An odd thing happened last Friday and we want you to be aware of it. First let us set the stage. Following the G7 meeting last week, during which Alan Greenspan stated that he was comfortable with the ongoing decline of the U.S. dollar, the latest figures on the record U.S. trade were released. Shocking many analysts, who expected a reduction of the trade deficit because of the cheapening dollar, the deficit actually increased by nearly 11% in December. The explanation seems to be that “strong economic growth” (that is, mad money from tax cuts and mortgage refinancing) sucked in record imports, while exports inched lower despite the weaker dollar.

One of the reasons that Greenspan is amenable to a weak dollar is because he hopes it will offset our unsustainable trade gap by making U.S. exports cheaper and driving up foreign demand for our products. But this strategy, so far, does not appear to be working.

Despite the fact that the dollar declined more than 20% last year, the U.S. trade deficit for 2003 reached its highest level ever, surpassing the 2002 deficit by 17%. As we reported last month, a report released by economists at the International Monetary Fund explicitly concludes that our exploding budget deficit and trade imbalances are running up a foreign debt of such record-breaking proportions that it threatens the financial stability of the global economy and paves the way for a greater and even more chaotic drop in the value of the dollar.

Now back to the strange occurrence of Friday the 13th. In the first hour of New York trading, when the news of the record trade deficit hit the financial markets, the dollar began to collapse against the euro and gold was up almost $5, reaching $417 on a bullet. Then the reversal came: suddenly the dollar rebounded against the euro and gold fell to a low of $405.90. Apparently, just as the euro approached its all-time high of $1.29 against the dollar, a huge sell-order for euros was executed in the currency market, which effectively underpinned the tumbling dollar and capped the burgeoning euro rally As the euro fell and the dollar rallied, gold also fell.

In the midst of this abnormal market behavior, I called one of my trading partners to ask what on earth was going on. He had just called a major currency-trading house with the same question, and received a one word reply: intervention.

News stories about possible intervention in the currency markets by the ECB were discounted as simply a clumsy execution of sell orders by an ECB bank. The explanation was that when the euro approached but failed to exceed its previous high against the dollar, the sell order was given to take advantage of the suddenly higher euro price. In our world of fast and furious computer trading, this explanation does make some sense. The financial markets were, after all, on the verge of a 3-day weekend and its associated U.S. market closure; trading was admittedly thin, as many normal market participants had already started their long weekend.

Did the ECB intervene on behalf of the dollar? We may never know for sure, but many gold market professionals, ourselves included, believe they did. But even if they did not (this time), the events of last Friday had the earmark and the effect of intervention in support of a currency that appears to be unable to support itself. Why would intervention occur? Because above all else, Central Bankers and Financial Ministers hate violent, uncontrolled fluctuations in currency values. Why would they keep it hidden? Because it would be a clear signal that the dollar is weaker than most people think and could go into a relative free-fall. While that is great news for gold, and could drive it into the $500 range soon, it is bad news for the U.S. and world economies.

So while we may never know with certainty whether Friday’s action was indeed ECB intervention, we do know that the dollar is so weak that intervention was a viable option and perhaps the only truly plausible explanation. And it might yet happen, so be aware.

In our 24 years as gold traders, almost every instance of currency intervention has ultimately failed, just like the proverbial finger in the dyke. Intervention in free markets, especially ones as large as the international currency markets, can only stem the tide for a short time. Like water, money flows where it wants to go. George Soros built his vast fortune by betting against intervention in the currency markets. If Friday’s market action was due intervention in the dollar market, we believe it, too, will ultimately fail and the gold price will benefit.

Gold is more bullish than ever

Our economy remains sluggish at best, despite assurances to the contrary. U.S. debt of all kinds is already at record levels, yet continues to grow unabated. The dollar’s decline in value is far from over, and might continue in a far less orderly fashion. And there’s no light at the end of the jobless tunnel yet to be seen. Based on these financial facts alone we remain extremely bullish on gold and bearish on the dollar.

Clearly there will be strong resistance at key trading levels, as Friday’s trading activity revealed. However, judging by the gold market’s initial, extremely bullish reaction to the news of the record U.S. trade deficit, we now believe that the gold market may prove to be even more explosive than we imagined, once key trading levels are broken. Again, we expect gold to buck higher in the near future and rise to the $500 to $550 level within the next 12 to 24 months. Buy aggressively on weakness!

Silver, platinum, palladium gain

Since our last update we’ve seen improvement in the prices of silver, platinum, and palladium. Yesterday silver approached break-out mode at $6.77 an ounce, pressing its previous high of $6.79. Today silver is down a little at $6.69. After climbed back to $865 yesterday, platinum settled a bit today, closing at $858; and palladium is moving higher, too, trading at $250. The weakness in all precious metals that we saw at the beginning of February has now passed. The next 3 to 6 months could prove to be quite interesting for all of the metals.

Classic U.S. gold coins disappearing

After the heady market of early January, when gold surged up to $430 and demand for classic U.S. gold coins exploded, we’ve had a bit of a pause in the market. Gold has settled back down for breather, and the record demand we’ve seen for classic U.S. gold coins has slowed a bit, too.

Despite this slowdown, which will certainly be short-lived, the national supply of classic U.S. gold coins remains as low as we’ve ever seen it. In the future, most likely, we will not have the luxury of picking and choosing in the market like we’ve had in the past. Although prices have declined slightly, there are no coins to be found!

We strongly urge you to take advantage of this lull in the market to buy whatever you can afford in the classic U.S. gold coin sector. The tiny supply of classic U.S. coins will only grow smaller as gold continues to surge, and prices will surely continue to increase. We have a small window of opportunity available now for savvy buyers. Please take advantage of it!

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

Sincerely,

Dana Samuelson, Owner
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