Gold - The Big Picture
By Thomas G. Cloud - May 8, 2002

As gold continues to soar, we are seeing more and more price positions taken out that just six months ago did not seem possible for gold. When gold closed above $305 per ounce for three consecutive days in late April, many short positions began to be filled and the price of gold broke out hitting $313 per ounce. Gold is officially in a bull market and we believe we have entered an era similar to the 1970's when gold made an ascension from $70 per ounce in 1974 to $850 per ounce by 1980. While I am not ready to predict those kinds of percentage increase, I do feel (as I've discussed for the past year) that gold will be getting some attention as it continues to rise in price for the next several years. In looking at the "big picture", I will discuss some of the indicators which lead me to believe that gold is a must for every single portfolio.

Stocks and Unemployment
When the unemployment numbers were published last week, we saw a 6% rate for the first time in seven years. Remember that 5% unemployment is considered full employment. In 1999, the rate had actually fallen to 3.2%. Thus we have seen this rate nearly double in just three years. This alone is an indicator of things to come.

More importantly, however, we have just completed the fifth consecutive quarter of declining corporate profits (which is an all time record including the Great Depression era of 1929-1934). In the last three months alone of 2001, the S&P 500 firms showed a profit decline of 21.6% on average for the 500 firms. This has never happened before. A lot of this is being brought about my more honest bookkeeping. With the situation at ENRON and the Arthur Anderson situation, auditors and accounting firms are being more careful than they've been in past years. This will continue - and corporate profits will continue to tumble as well.

Another example that is nearly as scary as declining corporate profits has been the massive decline of NASDAQ. When the NASDAQ hit 5000 in early 2000, everyone was in the dot.com mania. We have now seen a drop of over 65%; yet the NASDAQ remains grossly over valued. Today the NASDAQ is selling at 66 times earnings with most companies reporting no earnings. Until the earnings ratio returns to the 12-24 range, this is an area that investors will be moving out of putting money into money markets or gold.

GATA and the Hedgers
The GATA-Howe lawsuit against the Treasury and the Federal Reserve has been thrown out in the Boston court. This is very disappointing especially since the first judge ruled that there was enough evidence to proceed. However, many gold people still believe this will have a permanent and lasting effect as to how governments will handle future gold rallies. In other words, GATA and Howe caught on to their antics and they were able to captivate the media's attention worldwide. Any countries interfering with gold rallies now will definitely be singled out and this should certainly help any future rallies being stopped as they have in the past. As mentioned earlier, when gold went through $305 per ounce, it triggered a call to cover on the short hedges of the past five years. Each of you who are playing gold stocks should be aware that those companies who are hedged over 50% could be in trouble. Those include Anglo Gold, Barrick, Homestake, Normandy, and Placer Dome. Be careful if you hold these stocks - even though they have historically been considered the big cap stocks. In our opinion, they carry the most risk at this particular point in time. There should be a surge in the junior gold stocks, especially those that are not hedged at all as prices are expected to go up for the foreseeable future.

The Dollar
There is nothing that will impact the potential rise of gold more than the actual value of the dollar. We have completed a five-year run that has never been seen in which the dollar appreciated against all major currencies. Prior to 1997, the dollar actually dropped 75% of the time for the past 30 years against currencies like the Swiss franc, Sterling pound, and German mark. With the change coming that we are predicting, the dollar will take a sharp downturn sometime in late 2002. If oil begins to be priced in the new Euro and the dollar is no longer the reserve currency of the world, two things may happen very quickly. First, England will join in the Euro timing their entrance so that can realize the highest premium for their currency (thus making billions in profits). It will give them the chance to join in the European community moving in as the leader of the largest economy in the world. According to the publication, "Criminal Politics", recently countries like China allowing their younger and aggressive entrepreneurs to open accounts in dollars. The articled noted that the reason a communist country would allow this option is because they believe the future of the U.S. dollar is not what the world believes it to be. They believe the dollar is massively overvalued because we are reaching trade deficits of a trillion dollars per year.

The most shocking revelation, however, has been the announcement by the US Treasury that it will soon issue a new paper currency. In the article of March 19, 2002, the "Wall Street Journal" reported that the Treasury will maintain the design of the old currency, but will introduce subtle color changes. This will be sold to the consumer as a way to flush underground money up. In reality, it will do nothing but devalue the dollar. It is possible that the currency we all hold now will only be used off shore or by foreign holders. The new money with more subtle colors would be used only within US borders and would cause all hoarded cash among US citizens to be flushed out. This has been discussed in the past; but, as this particular article stated (and reconfirmed again on March 20th), this should be a reality sometime during 2003.

With regard to devaluation, the greatest impact will come when the dollar goes down as gold will rise. Looking at from a technical view, one should expect a peak in the dollar no later than September or October. It may come even quicker. Watch the US dollar index. If that drops below 115, investors should move into other currencies or into gold.

Other Quick Views
Ned Schmidt, CFA, CEBS, has written an article called "Another Step Towards $1,252 Per Ounce Gold". In the article, he points out that gold made a secular low in the summer of 1999. Since July of '99, gold is up 20% while the S&P is down 20% and the NASDAQ is down 34%. He also notes that at the end of 2001 the ratio of gold to the S&P 500 crossed through an important moving average. The last time that happened was during the early 1970's and it signaled a bull market in gold.

Gold investors should be looking at balancing their portfolio and diversifying with gold at 10% to 20% of a portfolio based individual beliefs as to where gold is headed. The main thing gold investors should do is to try to focus on fundamentals. Gold is being purchased at record rates. Shortfalls are increasing monthly from worldwide demand as compared to what is being mined. Current pricing will be viewed as "cheap" later in the year (and especially in years to come) if most of the "experts" are right.

Mr. Schmidt points out that in the 1970's the Federal Reserve made the mistake of monetizing the war - the budget deficits in the oil price surge. Once again, we have a Federal Reserve Chairman willing to monetize the Pan-Eurasia war and the budget deficit. The master of bubble economics did not learn from the busting technology of the stock bubble. At the present, Greenspan is creating a giant housing/mortgage bubble that will also pop. The bursting of that bubble will mean the end of the Greenspan dollar bubble.

Gold analyst, David Walker, in an April 28th article finds what is occurring in the fundamental side of gold fascinating. He estimates the shortage to be nearly 300 plus tons annually in the deficit range. When you consider that is 25 tons per month, it doesn't take long to figure out why gold is going up and why it should go much higher.

Final Thought
The potential of war in the Middle East that hasn't even been discussed, the freedom of the Chinese to own gold for the first time in 50 years, and the potential changeover to the dollar in Central and South America, are also factors that could lead to more demand for gold. We will continue to monitor all of these possibilities. In my next newsletter, I will discuss the various gold, silver, and platinum products. I will discuss mark-ups, the difference in premiums, and which products have reporting requirements when sold via form 1099. In the interim, if you have a specific question regarding the positioning of gold within your own portfolio, please do not hesitate to phone me at (800) 247-2812. You can also reach me via e-mail by visiting our website Turamali.com.

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