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BACK UP THE TRUCK ON GOLDBy Doug
Casey
Since reaching a recent peak of $427.25 on April 1, gold has dropped
about 7%, with most of the action happening in the last few days. Silver,
which peaked at $8.29 on April 2, has come down even more, losing about 14%
to $7.15 as I write. These moves have apparently scared a lot of people
(mostly latecomers in the market) and they're wondering if the steep
drop signals an end to the metals bull market.In my view, the fall
shouldn't concern anybody but a futures trader who was long and who didn't
have a close enough stop-loss. Markets fluctuate more or less randomly
in the short run, which helps account for why 95% of futures traders
walk away losers. People with such a short time frame shouldn't be in the
markets; they should go to casinos.The skilled speculator and the
experienced investor, however, take a longer view. The key is to identify
major trends in the markets, understand why they're occurring, and stay
with them for as long as possible. Jitterbugs that worry about daily
movements will eat their capital up with commissions, fees, taxes, and
bid/ask spreads in the process of whipsawing their accounts to death with
the vagaries of their own psychology.I don't have a crystal ball,
but I do have a sense of market history. Most of the people that were active
players in the last real gold bull market, from August 1971 to January
1980 (which took gold from $35 to over $800) are now either dead or retired.
Most of the players in today's markets only know of gold as a dog, dropping
from over $800 to under $253 in July of 1999. Those few who even watched
it came to see every rally over a 22-year slide as nothing more than a
selling opportunity. Understandably, people tend to predict the future
by the past. So they expect both bull markets and bear markets to go on
forever. Right now, most of those who've even noticed gold has moved from
$252.80 at the bottom to its present levels see it as just another rally in
a never-ending bear market.How do I know they're not right? Well,
nobody can know that until long after the fact. But I've been long both the
metal and gold stocks since the late 90's (I was early; generally
speaking only liars buy at the exact bottom), and I'm planning on staying
long for the indefinite future, but at least several years. Why am I so
bullish? The purpose of this article isn't to make a definitive case for
gold, but I will list six outstanding factors worth noting. 1. THE
FOREIGN TRADE DEFICIT. The U.S. is currently importing about $500 billion
more than it exports every year. That's been going on for many years, so
there are trillions of U.S. dollars now held outside of the U.S. Since
U.S. dollars are only "legal tender" within the U.S., whether foreigners
continue holding them depends on whether they have confidence in the dollar.
Confidence can vanish like a pile of feathers during a hurricane. I would
suggest that they're becoming increasingly aware that the dollar is, in
fact, an "IOU Nothing" on the part of the U.S. Government, which is itself
bankrupt.2. U.S. GOVERNMENT DEFICITS. The U.S. Government is also
running $500 billion domestic deficits, and that number is not only
grossly understated - because of (a) off-balance-sheet spending; (b) cash
rather than more appropriate accrual accounting; and (c) the adding of
Social Security funds into the general revenue - but it's likely to go way,
way up. Why? It's being financed with some of the lowest interest rates
in history, and when rates cyclically rise to more normal levels (forget
about the 15% long rates of the last generation - which I expect will be
exceeded), the deficit could reach a trillion. That's not counting greatly
diminished tax revenues and the greatly increased government spending
that always accompany a recession. And I think we're heading for something
worse than a recession.3. THE WAR. My guess is that the adventures in
Iraq and Afghanistan are, for reasons I won't go into now, going to get
much, much uglier. And likely spread to other parts of the Islamic world.
The U.S., which has troops in over 100 countries, isn't going to withdraw;
it's going to become more involved. This could be a $200 billion-per-year
drain, on top of the regular Defense Department and Homeland Security
budgets, for many years to come.4. SUPPLY/DEMAND. Although most of the
gold that's ever been mined is available (either as bullion, coins, or
jewelry), the fact is that more is being consumed than is being mined
each year by a substantial margin - by about 640 tons in 2003 alone. Most of
this deficit has been made up by sales and loans from Central Bank
inventory, compounded by forward sales from gold mining companies. The
loans and forward sales constitute a short position of substantial size
that will have to be covered. And my suspicion is that, at some point in the
next few years, Central Banks will go from being net sellers to net
buyers.5. THE REAL PRICE. At $35 in 1971, gold was artificially
suppressed in price by government edict. By the time it reached $800 in
1980, it was caught up in a speculative mania. Since then it's been able to
achieve something of an equilibrium. But $400 today is really only worth
about $75 in 1971 dollars - so it's quite under-priced. And, in real
dollars (whatever they may be), gold isn't down just 50% from its 1980
peak; it's still down about 85%. I expect the conditions that drove the bull
market in the 70's are going to be much, much stronger this time
around.6. GOLD AS A CURRENCY. Take your pick: a piece of paper with
less than zero intrinsic value, or a tangible and relatively rare metal that
has been viewed as a store of wealth over thousands of years? In addition to
holding the physical metal, new services such as GoldMoney.com that
offer electronic transaction services based on gold will revolutionize
the ways you can buy and sell the metal.In essence, you want to own gold
because of all these reasons. But above all, you want to own gold because
it's the only financial asset that is not simultaneously someone else's
liability - which is why I expect Central Banks around the world will
increasingly be selling dollars and buying gold in the future.I
believe we're looking at a gold bull market of historic proportions in the
years to come. Retrenchments such as we're seeing now are not only normal,
but trivial. You should use them to buy bullion and aggressively add to your
mining share positions. Despite returns of 5-to-1 almost across the
board in these stocks, there's every reason to believe that when the gold
bull really gets under way, these stocks will be wilder than Internet stocks
were in the late 90's.
Regards,Doug Casey,for The Daily
ReckoningEditor's note: Doug Casey, author of bestseller Crisis
Investing, has been seeking and finding incredible opportunities around
the world for over 25 years. He has lived in seven countries and visited
over one hundred more, actively - and successfully - speculating in
international stock, bond, commodity and real estate markets.If
you're interested in gold and other natural resource stocks, take a moment
now to learn more about Doug Casey's International Speculator - for over 25
years one of the world's most respected monthly newsletters on natural
resources:International Speculator<A
href=""><FONT
size=3>http://www.internationalspeculator.com/p/?20040216.php&ppref=DRAU0404
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