Gold Market Update

October 16, 2001

Gold had a sharp correction last week as it declined to the $280 level, finding support at the 45-day moving average and maintaining the positive trend that has been in place since April. Likewise, gold shares are finding support at the 45-day trend line and have been on a path of higher highs and higher lows since November of last year. After stalling out at the $290 post-attack level, bullion traders who were expecting gold to move closer to $300 became frustrated. We were getting a little anxious as well, however, keep in mind that what has become conventional investor psychology takes time to change. My Dad gave me a book entitled DOW 100,000 not long ago. The Wall Street Journal says that ninety-nine out of 100 stock mutual funds lost money in the third quarter. Gold funds gained. Dad is probably a little more inclined to give a gold bug a listen today. As for that elusive $300 level, anecdotal evidence indicates that Central Banks were providing excessive liquidity to maintain order in the gold market in the wake of the attacks. This is supported by the one-month gold lease rate, which at 0.33% on October 5th, reached the lowest level since Bloomberg started keeping records in February of 1995. It appears that the banks are favoring an orderly rise in the gold price, which is our preference as well.

The Denver Gold Show drew its usual crowd of mining companies, fund managers, and analysts during the first week of October. One of the most newsworthy items to come out of this year's meeting was a proposal by producers to collect a $4 per production ounce fee that would go towards a $200 million per year global marketing campaign to promote gold jewelry.

The good news is that miners have awakened to the fact that demand for their product does not end at the refinery. Other discretionary items such as platinum jewelry, big-screen TV's, and leather seats compete for dollars that could potentially buy gold jewelry. We applaud the move, but encourage the industry to take it to the next level by recognizing the roll of gold as an investment. Gold company managements are miners first and foremost. They are happy to dig pits, sink shafts, and build mills - and they do a very good job of it. That they happen to mine for gold is a secondary consideration to their primary function as miners. They like gold because it fetches them a premium share price compared to others who mine more mundane elements, such as iron or nickel. This premium exists not for gold's ornamental value, but because investors buy gold shares as a call option on bullion, which is made possible by gold's value as a monetary asset, investment vehicle, inflation hedge, and financial safe haven. It is our view that only through increased investment demand will the gold price reach the levels needed to return the industry to health. This warrants the utmost attention from the producer's marketing dollars, given the current economic environment and the fact that many investors came of age when gold was broadly out of favor.

Our January 16th, 2001 update compared the chart patterns for the three major stock market bubbles of the 20th Century - the 1929 DOW, 1990 Nikkei, and the 2000 Nasdaq. In that update, we pointed out that the Nasdaq was following a post-bubble trajectory not unlike the 1990 Nikkei. We also said that if this pattern persisted, then Nasdaq would: 1) rally from a low of 2292 on January 2nd, 2001 to a high of 2750 in May, 2001; and 2) decline along a series of lower lows and lower highs from the May 2001 high to the ultimate bottom of around 1500 in April, 2002. What actually happened is: 1) Nasdaq rallied from a low of 2292 on January 2nd, 2001 to a high of 2859 on January 24th; and 2) except for a one-month rally that topped out in May at 2313, Nasdaq declined along a series of lower lows and lower highs from the January 24th high to a low of 1423 on September 21st. In hindsight, the Nikkei pattern was a reasonably accurate proxy for the course the Nasdaq was about to take, however, the Nasdaq sunk lower faster than the data had suggested. A recent update of the data shows that the Nasdaq is now on a trajectory that conforms more to that of the DOW from October 1929 to June 1931. The massive, reflationary fiscal and monetary stimulus currently underway is one of the characteristics that separate the current post-bubble economy from the other two, which gives us hope that this time will be different.

Seventy-five percent of all gold in circulation has been extracted since 1910

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