Late last week, while most Americans retreated to their homes to celebrate Thanksgiving, investors around the world came out in droves to buy gold and dump the dollar.
The price of gold smashed the $450 barrier on Thursday and surged to an intraday high of $455 on Friday, the highest level in 16 1/2 years. Gold market observers talked about a quick run-up to $460, $470, even $500.
Meanwhile, fears of a dollar collapse spread like wildfire. The immediate reason: One central bank after another hinted at plans to shift from dollars to other currencies:
* The first deputy chairman of the Russian central bank said it might increase the proportion of its reserves held in euros … and the dollar was slammed.
* The deputy governor for monetary policy at Indonesia’s central bank said Jakarta might reduce its reserves of dollar assets if the currency fell further … and the dollar plunged some more.
* Professor Yu Yongding, a central bank committee member in China, said China had cut its holdings of U.S. government debt … and the dollar dropped like a rock, only to recover later in the day when Prof. Yu said he was merely quoting from Federal Reserve data.
But throughout it all, the U.S. authorities did nothing to stop the dollar decline. Nor did they say much to dissuade international investors from the prevailing view that the United States actually WANTS the dollar to fall.
Consider, for example, some of the comments of market observers in the last 72 hours:
Financial Times: “Investors have taken the [recent] comments as a signal that the Chinese and Japanese central banks might also be reconsidering their asset holdings. If either began to shift into European or Asian assets, the dollar would plunge and interest rates on U.S. government debt would rise sharply, damping U.S. growth prospects.”
ABN Amro: “The rising gold price is telling us that there is now great uncertainty in the marketplace. It is telling us the U.S. dollar is again in trouble and the world economy may be in trouble.”
The Guardian: “The markets have finally lost patience with the laxity of Washington towards the twin trade and budget deficits, pumped up by cheap money and tax cuts. … Washington is relying on a soft landing for the dollar. History shows that there is a better than even chance of this process ending in a full-scale crisis, as it did in the mid-1980s, when the weakness of the dollar culminated in the stock market crash of 1987.”
What Next?
One person who has been warning about this for a long time is my associate Larry Edelson, editor of Real Wealth Report. So I gave Larry a call to get an idea of what he sees next.
“Finally, overseas investors are waking up and smelling the coffee,” he said. “Since the end of 2001, the Dow Jones Industrial average is up by only about 4%. That’s pretty lousy to begin with. But for European investors, it’s actually much worse. For them, the decline in the value of the dollar translates into a 30% loss. Is it any wonder they’re beginning to sell?
“They see the handwriting on the wall and they’re heading for the exits. But not in the United States! In the U.S., most investors still don’t get it. They think the falling dollar will actually be good for the U.S. economy. They figure the only pain they may suffer is a more expensive European vacation next year. The fact that foreigners are now getting ready to dump U.S. assets en masse doesn’t seem to faze them … yet!”
I asked Larry what the implications were for other financial markets, especially stock and bond markets. His response:
“The world’s financial markets still revolve around the U.S. dollar, like electrons around the nucleus of an atom. They are all dependent in some way upon the value of the dollar remaining stable. If the nucleus decays, other financial markets will implode, starting with the world’s bond markets.
“Just look at what happened in 1987,” he continued. “Back then, as the dollar went into a tailspin, overseas investors cried uncle and began to exit U.S. financial markets in droves. This set off a panic by U.S. investors as well. First they sold bonds. Then they sold stocks.”
What’s driving gold higher?
“Three big factors!
“FIRST, of course, is the long-term decline in the dollar. “Have you had a chance to study the long-term chart of the U.S. dollar index against a basket of currencies? Not recently? Then you’d better take a look.
“The dollar has already plunged by about 30% in the past two and a half years. It’s close to busting through its lows of the mid-1990s … and then through the all-time low it made in 1992. Plus, look at the SPEED of the decline. See how it’s similar to that of 1987?”
“SECOND, the fall in the dollar’s value abroad is lighting a fire under inflation.”
I interrupted Larry for a moment, noting that a lot of people still think inflation is under control. I asked Larry what he thought about that.
“Hogwash! Washington says not to worry about inflation. That’s because they advertise the so-called “core inflation rate” which excludes food and energy costs
“Maybe THEY don’t need energy to heat their homes and drive cars. Maybe THEY don’t need food to feed their families. But the rest of us do.
“Look, with the dollar’s international purchasing power falling so rapidly, inflation is surging higher. The full Consumer Price Index report jumped 0.6% in October, at an annual rate of 7.2% inflation. And that – in my opinion – is still a conservative measure of inflation. More and more companies are beginning to pass their increased costs on to the consumer. I have no doubt in my mind that inflation is heading even higher and will become entrenched in the economy.”
What Else Is Driving Gold and Inflation Higher?
“Besides the falling dollar, there’s been a massive, unbridled boom in consumer borrowing and spending in this country. Since 2000, household liabilities have grown 65% faster than the growth in America’s GDP.
“That means we’re spending like a drunken sailor. Eventually, American households will buckle under the weight of all that debt. But first, they will experience a sharp increase in inflation.
“If we were saving money, it wouldn’t be as frightening. But the personal savings rate in the United States fell to 0.4% in the second quarter. Think about how atrocious that is! For every $100 earned, Americans are saving just 40 cents!“
I asked Larry if he himself was spending at that rate.
“Heck no! I have three kids. Two are in college, and one is close. Tuition bills are staggering. If I don’t save, they’re out of luck. So when I see people mobbing the stores for plasma TVs, like on the day after Thanksgiving, I shake my head.
“Until now, people living in the United States had some rich friends overseas bailing them out – in Germany, in Japan and even in China. But no more! They now see the U.S. dollar falling. They see U.S. inflation surging. They see gold’s surge to as high as $455 last week. And they know it’s not going to end unless there’s a big change in the way we run our economy, in the way we do business, in the way we live.
“Another HUGE factor for gold: The introduction of the new gold ETF, symbol GLD on the New York Stock Exchange. It’s one of the most exciting developments I have ever seen in the gold market. Just in its first day of trading, its net asset value soared from zero to nearly $600 million.
“Each share of the GLD ETF represents one tenth of one ounce of gold. Because blocks of 100,000 shares are redeemable into physical gold, bullion must be kept in reserves. And since it launched trading on November 18, the new gold ETF has already taken 1.3 million ounces of gold off the market and placed into storage.
“Think about the ramifications. You can effectively purchase gold without all the hassles of owning physical gold bullion. This is going to open up the gold market to millions more investors, taking millions more ounces off the market. I’ll give my subscribers a full update on the new gold ETF in my next issue of Real Wealth, including my recos on how you can profit from it.”
How High Can Gold And Gold Shares Go?
“I believe that the forces you already see in motion today could soon drive gold to $500 – and then, even higher. Longer term, I see $1,000 gold. But that won’t come for a few more years. In between now and then, you can expect to see gold make a stair step climb higher – with lots of rallies, and some pullbacks along the way.
“As for gold shares, they too have a long way to go on the upside. Take a look at the monthly chart of the Philadelphia Gold and Silver Index, or XAU. You’ll see that in 1996, the XAU topped at over 155, nearly 50% higher than current levels.
“I expect the 1996 high to be taken out sometime in 2005 and the index to head even higher in 2006. Translated into individual gold companies like Agnico-Eagle, you could be looking at additional gains of well over 100% in the next one or two years.
“Also, take a look at the Agnico-Eagle chart. It hit a high of $38.38 in 1987. Today, the stock is at less than half of that price. If I’m right on where gold is heading – I have absolutely no doubt whatsoever that the share price of Agnico will more than double. Same for many of your other gold shares.
“But this phenomenon is not limited to gold. In my Real Wealth Report, I recommended Yanzhou Coal and in a recent flash alert, I told subscribers to bag gains of up to 55%.
“Then, last week, another one went ballistic. Ionics, one of our core natural resource holdings, surged on the news of a GE buy-out. That was a gift. I had no idea GE was going to make that announcement. So I said to myself, ‘let’s grab it.’ And I sent out still another flash to take up to 78% gains on Ionics. The combined Real Wealth portfolio, all positions including losers, is showing a 36% annualized gain!
“Those particular opportunities are past now. But it just goes to show you how excitement in gold and other natural resources is heating up like crazy right now. So you can expect similar opportunities ahead.”
What Should Investors Buy Right Now?
“If they’ve been following my Real Wealth Report, which specializes in natural resources, or your Safe Money Report, which is also heavily into gold and energy, they should already be loaded with investments that are soaring. So for them, my message is: Wait for a correction in gold and a rally in the dollar, such as the one that just began this morning. Then add to your positions.”
“But,” I interjected, “suppose they have not been following us … and suppose they’re afraid they’ll miss the market. Then what should they do?”
“Then dip a toe in the water with a few small positions. But for most of the money you intend to invest, hold your fire until you get our signal.”
“For example?”
“In the gold area, I like Agnico-Eagle Mines (AEM), Goldcorp (GG), Lihir Gold (LIHRY), Newmont Mining (NEM), Richmont Mines (RIC), plus a couple of funds like Scudder Gold & Precious Metals Fund (SGLDX) and Tocqueville Gold Fund (TGLDX).”
“And in other areas?”
“I’ve got my subscribers in natural resource stocks like McDermott International (MDR), Anadarko Petroleum (APC). For good income, I also recommend Permian Basin Trust (PBT) and Teekay Shipping (TK). The worst one is up 29% since I recommended it.”
“I assume investors can get more details on exactly when and how to get into these in your Real Wealth Report.”
“Of course. Or, if they don’t want to pop for a subscription quite yet, they can stay up to date with my free weekly e-letter, Real Wealth Dispatch.” To sign up, just go to LarryEdelson.com and click on the link for Real Wealth Dispatch under the Publications menu. Then enter your email address in the box provided and submit.”
“Any last comments?”
“These markets are just BEGINNING to go berserk. What you’ve seen so far is merely a sneak preview of the fireworks ahead. But remember: Investing is never a slam dunk. You also have to keep plenty of cash in reserve. You’ve got to know when to buy on weakness, when to hold on to the bronco despite a rocky ride, and when to take out profits. I don’t have all the right answers all the time. But it pays to stay in touch.”
Sounds like good advice.
Good luck and God bless!
Martin
Martin D. Weiss, Ph.D.
Editor, Safe Money Report
Chairman, Weiss Ratings, Inc.
martinonmonday@weissinc.com
