December 4, 2003
Gold Holds

When Pimco’s Bill Gross went on a cruise earlier this year he said that rest and relaxation helped him gain a fresh perspective on the financial markets. Still pounding his bearish drum – Mr. Gross is not enthusiastic about owning U.S. stocks or bonds – he jotted down a simple investment idea while at sea; buy TIPS (Treasury Inflation Protected Securities).

While on vacation over the last week I searched for a fresh perspective on the financial markets -- but what I found was more of the same. Still pounding my bearish drum, I jotted down a simple note: ‘$400 an ounce’. This note – passed to a bullion dealer while driving through New Hampshire - represented the tax free price I was willing to pay for some more gold eagles.

Suffice it to say, accumulating more gold around $400 an ounce could prove perilous in the short term.  After all, gold’s surge above $400 is largely being supported by speculators and funds that crave momentum – any tiny push lower and these players may start locking in profits. Moreover, since gold’s historic rise is catching all the headlines it is easy to forget that gold is denominated in U.S. dollars.  For example, Canadians that perfectly timed an entry into gold in August 2003 at $350 an ounce would not be doing much better today than if they had simply held the Canadian dollar (which hit a low of 70.66 versus the dollar in August compared to more than 77 cents today).  In fact, if you take into consideration the premiums Canadians pay on their gold purchases, the roughly 1.5% advantage of owning gold versus holding the loonie since August 21, 2003 (the low for the Loonie) quickly disappears. 

The point to these ramblings is not to suggest that the run in gold is over. Rather, with the U.S. dollar likely to encounter further weakness in the future gold is likely to reap the benefits – this is not only the case because of currency translation considerations, but also because a weakening greenback threatens to rattle confidence in the global financial markets and send more investor’s into gold. However, with the U.S. economy rebounding strongly the argument could be made that a weaker dollar is not all that bad…this is especially the case given that the stronger the U.S. gets the less intrusive the next Fed rate increase will be (a rate increase that may be more about supporting the dollar than fighting inflationary pressures). If the Fed can sell a rate increase to the markets in early 2004 the dollars decline could be managed, or so the story goes.

In short, the reason why I recently purchased more gold is because I believe central banks will become increasingly reluctant in allowing their currencies to appreciate versus the dollar.  Moreover, I foresee the U.S. Fed putting on the breaks quicker than most think – or as soon as, and if, the employment picture improves. What this means, in my mind, is continued volatility in the FX markets, and higher U.S. interest rates. I cringe at trying to pick the winners under such a scenario, so I favor gold.

As for stocks, no new perspectives were had during vacation. Unless U.S. interest rates are caught in a permanent vacuum chasing solid dividend yields now could prove dangerous.  Moreover, tech stocks are, once again, pricing in a perfect future even though capital spending is expected to increase next year, by most estimates, by less than 5%.  Yes, with the Dow and Nasdaq near psychologically important trading levels Friday’s jobs report is proving to be extra important…if the jobs numbers surprise to the upside the bull may continue!  But no, buying into these types of momentum gambles today is no more appealing than it was in 1999. 

Christmas Wish List: We will be finalizing our research and selecting companies before the end of the year, and any ideas members have on this front are both welcomed and encouraged.

BWillett@fallstreet.com