Precious Metals Updated – May 12, 2004
By Thomas G. Cloud

Many calls and e-mails continue to pour in asking these two questions: “Is the gold bull market of the last thirty months over? Should I sell my gold?” To answer these questions, let’s visit the dollar and its potential for the future. As an American investor, it seems we think of everything in dollars and we do not consider what is happening in Japan or Europe when the dollar is rising and their currencies are falling. There are many fundamentals that drive the ratio between these currencies and we will visit those in a few minutes. Another important issue is whether the dollar will continue to last and survive as a reserve currency of the world. With the recent pull back in gold, silver and palladium, is this a gift providing a time to allocate more resources to precious metals or is it a time to sell? I will try herein to provide information that impacts these two questions taking a closer look at the following headings: the dollar, gold, silver, and palladium. It is also important to note that there is manipulation within an election year which could prove profitable if one truly acknowledges what the government is trying to do (i.e., send an incumbent president back to the White House). With these points as a short background, we will now address the four categories outlined above.

DOLLAR VALUE
The first area to consider is the true value of the dollar. Investors should realize that the primary cause of the pull back in precious metals has been the rise of the dollar over the past several weeks. As gold increased 48% over the years 2002 and 2003, the dollar fell over 32%. We have now seen an 8% rise in the dollar since March. This has caused the price of precious metals to fall in dollars. However, it is interesting to note that gold has increased in the Euro and has brought some new investors into the market. The most important question concerning the value of the dollar is whether the trend has changed. There is no question in my mind that the dollar’s major trend remains down. Take a moment to consider the enormous budget deficits we are running. In addition to running Federal deficits, we are also running huge foreign trade deficits. The current foreign trade deficit is about $500 billion. In other words, we are sending $500 billion out of this country to help others come back and buy our assets. The government deficits are also running over $500 billion per year and these deficits are growing. This alone should be enough to show that long term the dollar is going to go down, as money will have to be printed and created out of thin air just to keep the government running. Throw in the fact that the price of war in Iraq and Afghanistan continues to increase – a figure that could reach $200 billion annually by 2005 according to the Defense Department.

Also as you realize, interest rates in the United States have kept downward pressure on the dollar (especially since our rates are lower than most other countries of the world). With all the talk about interest rates rising, I find it hard to believe that this will actually happen. Mr. Bush surely does not want to repeat what his father did. He does not want to raise rates until we go into a recession. With his Iraq problem, he simply cannot afford to have our economy quit growing. Therefore, he will do all he can to keep the dollar high so that he does not have to raise interest rates to attract foreign investors.

So the tug of war that will continue through the fall could in fact bring the dollar higher. However, the bottom line is that nothing has changed. The dollar is still in a long-term bear market. This trend will most definitely resume by the fall, if not sooner.

There is a lot of talk going on “behind the scenes” by financial experts and money managers who believe the dollar must be removed as the world’s reserve currency as quickly as possible. They realize that the deficit-plagued dollar will have an ultimate demise in the future. The only feasible option is to turn to the Euro. Remember the Euro will add seven new countries over the next three years making its economy larger than that of the United States. Also have you considered that we might be headed toward a one-world currency sometime in the near future as many Biblical scholars are predicting? In looking from both a fundamental and technical aspect, this writer believes this will occur at some point in the future.

GOLD
In a recent article, Doug Casey was asked to evaluate the real price of gold since gold became tradable in 1971. At that point, gold was priced at $35 per ounce. In nine years, gold jumped to a little over $800 per ounce. Since then gold has come back to around $400 per ounce after a drop in 1991 to $248 per ounce. His analysis concluded that while gold is still ranging about 50% of its high of 1980, it is really down about 85% considering all of the paper money and fiat currency that has been created. The conditions that drove that bull market in the 1970’s are going to be much stronger this time around even if we have a few month delay for this administration to play its cards to keep the dollar strong and interest rates as low as possible. We are now seeing gold used as a currency and as money. Take a look at goldmoney.com to see this electronic transaction that is picking up in volume. This is expected to grow and grow.

Perhaps the most important indicator that many technical analysts have followed is the sixty-five week moving average. Currently gold is above its moving average and has been there since early 2001. This indicates that gold’s major trend remains up since that sixty-five week moving average is still only $375 per ounce.

On the fundamental side of gold nothing has changed as India continues to consume gold at large premiums. In addition, Chinese citizens put their savings into gold instead of paper money while large money managers continue to move millions and billions into gold at the fastest rate since the late ‘70’s. Gold backed currencies are still being looked at by Muslim nations. Investors in the U.S. are now purchasing more gold over the past decade with the exception of 1999 and Y2K.

I recently saw a slogan that truly says a lot: “Gold is for saving wealth; fiat currency is for buying wealth.” The Bank of International Settlements said that the derivative market today is between $120 to $130 trillion and the total value of all markets worldwide is only $210 trillion. Most of the debt that circulates in derivatives is real estate debt and other derivative debt that is actually denominated in dollars. So we all should realize that this paper gain will not go on forever. Certainly it leads me to believe that we are looking at a gold bull market that has just begun. While there may be some pullbacks, these should be considered normal in any bull market.

I believe gold will and cannot be defeated long term no matter how much Central Banks try to manipulate gold. Lastly, James Sinclair, the most well know writer on gold for the past forty-five years, stated recently that if gold did not reach $485 per ounce by year end, he was ready to retire. With gold trading at around $392 per ounce, this has got to be a major buy. As I stated above, there may not be quick profits over the next few months; but one year from now you will wish you had increased your gold holdings.

SILVER
Silver has been on a roller coaster since November 1, 2003. It hit $5 per ounce and began to climb rapidly as industrial demand from China and the Far East increased. By late March and early April, silver was priced at $8.40 per ounce. Since that point, there has been a pull back to $6 per ounce and we have witnessed concern from those investors that purchased at a higher price. Silver is not a monetary metal like gold; it trades only in about 25% of the world’s metals markets. Silver is building a severe shortage that will impact its future pricing. Realizing that silver will be climbing over the next two years, China is purchasing silver now. Currently, we believe silver is a prudent purchase and should in fact make up between 20% to 25% of your metal’s portfolio. While its volatility will be more severe than that of gold, profits may prove to be more significant.

Because premiums to purchase silver for physical delivery are higher than any other metal, we have established a fungible storage program for silver that cuts in half the premium that one would pay for physical delivery. Silver should be accumulated throughout this year. We agree there will be the severe shortages many experts have written about including renowned author, Ted Butler. The people that shorted silver have gotten help from many sources to drive the price down. You can bet that these people who exited short contracts will not be going back to shore up possessions anytime soon. While it may take six to eight weeks for this pullback to end, the downside risk of silver from $6 is extremely low. Watch for increased prices starting in September, if not before.

PALLADIUM
Within this section, I will not recount all the reasons I have outlined previously as to why I believe palladium is an excellent investment opportunity. Since our buy signal was given on March 8, 2004 at $242 per ounce spot price, we have seen palladium go all the way to $346 per ounce spot price and now back down to $245 spot. Nothing has changed. If you need to review, please go back and read my market update about palladium which appears on our website at www.turamali.com.

The only note I would like to make on the demand side of palladium is that on April 2, 2004, Umicore announced they have a new technology that will allow the use of palladium as a catalyst in diesel emission systems as well as in gasoline emission systems. Until this point, platinum was the only metal capable of filling this function. This breakthrough will definitely increase the demand on palladium especially later this year and early next year when most of the car production is done.

If you missed the first opportunity to get in, certainly this is a screaming buy as the only reason palladium has pulled back has been the scare in the other more dominant metals like gold and silver. We continue to believe that 10% to 20% of one’s metals portfolio should be positioned into palladium. Again, please review the March 8th buy signal to learn more about the purchase options available for palladium.

CLOSING REMARKS
To recap, gold is currently trading at $392 per ounce with a high of $426 per ounce this year, silver is currently trading at $6 per ounce with a high of $8.40, and finally palladium is currently priced at $245 and traded as high as $345 per ounce in the spot market this year. While no one can tell exactly what any metal will do over the next six to eight weeks, it is clear that current prices will be considered “a steal” when we look back a year from now. As a reminder, last year gold hit $400 per ounce in April and in May dropped all the way back to $325. Looking one year later, gold is back to $392. I am expecting the same situation for the next twelve months as we watch all of these metals move much higher than they are now.

To discuss these assets in more detail or find out more about how to purchase gold, silver or palladium, please contact our offices at (800) 247-2812 or (770) 441-1550.

TURAMALI, INC CONSULTING, INC.
8735 Dunwoody Place, Suite 0
Atlanta, GA 30350
www.turamali.com

(770) 642-6702 or fax (770) 642-0137