A Pivotal Month Ahead for Gold
January 30, 2004
Chris Temple, Editor/Publisher
The National Investor
www.nationalinvestor.com
This morning, gold is enjoying a bit of a bounce following the release of preliminary figures for fourth quarter economic growth in the U.S. The first look showing that growth came in at 4.0%, the low end of expectations, has for the moment relieved fears that the Federal Reserve might move sooner rather than later after all to raise short term interest rates. The weaker-than-expected outcome immediately caused the U.S. dollar to sell off anew and, commensurately, pushed the gold price back over $400 per ounce.
The $64,000 question now is whether gold and gold shares have finally hit the bottom for this correction; one that now has gold down by $30 per ounce and gold shares down by a quarter or so from their highs. I tend to believe that the majority of the damage has now been done to a sector that still is attractive longer-term. In fact, I'm looking now with more urgency at my narrowing shopping list of gold-related equities, in anticipation of shortly adding some to my recommended list, to replace those we sold at the early December peak.
Two meetings loom in February that will help to give us the answer as to whether it's now time to load up again. The first is the G-7 meeting scheduled for February 6-7 in Florida. The fur is expected to fly over how the dollar's essentially unchecked decline has threatened Europe's exports, as it has led to record highs in the euro versus the dollar. Interestingly, the U.S. might end up largely as a spectator, as Europe seems to be far more upset with Japan than it is with Uncle Sam!
Apparently resigned to a prolonged weakening in the dollar, Europe will be making the case that it should not be bearing the brunt of the dollar's decline virtually alone. It will browbeat Japan for intervening so heavily to keep the yen's ascent against the dollar relatively modest. Japan will be under some considerable pressure to slow down its interventions supporting the dollar.
I won't hazard a guess as to what might come out of this latest gathering of the world's most notable financial ministers and assorted other pooh-bahs. Remember, though, that it was the LAST G-7 meeting several months ago that actually helped to solidify the dollar's bear market. My gut tells me that something different will come out of them this time; but just what-and how the markets will react-is unknown. The possibility that the dollar could have a sustained bounce against the euro afterwards, though, is reason enough to stay cautious for now; after all, further weakening in the euro and strength in the greenback would take down gold even further.
Last, but perhaps not least, Fed Chairman Alan Greenspan will soon make his regular semiannual pilgrimage to Capitol Hill. Especially in this election year, Democrats on the respective Senate and House committees will blame Greenspan for all the world's ills, including the harsh winter weather of late in Washington. Republicans (with the one notable exception being Congressman Ron Paul of Texas) will pat him on the back for reviving the economy and the stock market.
Traders will be especially on the watch, however, for SOMETHING from Greenspan that will provide some clarification to what the F.O.M.C. had to say on Wednesday. In addition-and especially following the release by the Bush Administration this week of even uglier budget deficit projections for the current fiscal year-Greenspan's comments on that topic will be watched closely as well.
I expect we'll have a much clearer picture following both of these meetings; one which will either tell us that gold has bottomed, or that (if the news is overall supportive of the dollar in the near term) we must still be cautious.
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