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Weekly Gold Market Update

October 19, 2000

After declining during the week of October 2nd to just under $270 an ounce on light volume and on the back of a renewed dollar rise against the euro, gold recovered last week. On Thursday coincident with an attack on a U.S. destroyer and soaring oil prices, gold rose $5.90 to $276.40 an ounce, the highest level in more than a month. Then on Friday in the face of horror stories, about high tech and telecom financing and the collateral damage to now hardly distinguishable commercial and investment banks the Nasdaq soared. Gold gave back some of its gains but still closed up $3.10 for the week to remain roughly in the $270-$280 range that has prevailed since late July.

The mystery to many is why gold has not responded vigorously to sharp declines in stock prices. Our equation Nasdaq—current account equals dollar and gold inversely has been called into question. The Nasdaq in the equation, however, is not today's Nasdaq but the future Nasdaq of the mind. Although the Nasdaq is down 34% and has suffered a long drought between new highs, a speculative bull market psychology prevails, even in corporate boardrooms.

  1. Deutsche Bank on Wednesday offered almost double the last sale price for 84% of National Discount Broker - No fear of even a desultory market east of the Rhine.
  2. DLJ'S private equity fund paid a $3.4 billion, a 21% paltry considered premium for all of IBP. Even meat packing stocks do go up. Right?
  3. France Telecom, fresh from spending billions for the right to communicate wireless has just offered $10 Billion for profitless and debt laden Equant, a Dutch phone company.
  4. The U.S. government caught the fever as it awarded bids for one third of its Strategic Petroleum Reserve release to upstart trading companies with minimal financial resources. Wrong way moves in the oil futures market could create devastating losses and perhaps imperil the return of oil to the reserve.
  5. Last summer old Ma Bell gave two communications companies the right to sell to itself. 30 million shares of Excite @ Home at $48 a share. Today the shares are worth $l0.50 each, leaving AT&T with a $1 billion liability.
  6. Then there is IBM's N. Y. Times extolled $5 billion chip making expansion just after industry leader Intel doubled its own expansion plans and amidst reports of weakening end user demand.

Ignored or discounted in these strategies are the aforementioned problems with unsold various junk securities as well as unrefundable junk loans. Junk bond yield spreads have widened by 2 full percentage points this year with barely a market for new issues.

Official economic reports continue to be inconclusive. Corporate releases, however, indicate at best slowing growth and perhaps recession ahead. Examples include:

  1. Motorola's report of disappointing wireless growth with attendant consequences for upstream products.
  2. The National Association of Purchasing Managers production index has fallen almost monthly for a year. A slight rebound in September left the index negatively perched while its price index rose deeper into positive territory. Stagflation looms. Airline wage and fuel cost increases are signs of similar pressure in the service industries.
  3. Lucent noted slowing sales of older products and higher reserves for bad debts on newer ones.
  4. Home Depot complained that the economy "is in a malaise to a certain extent".
  5. Leading indicators in the U.S. declined again in August and have been flat or lower in seven of the last eight months.
  6. Auto parts makers are being hurt by "permanent" car and truck production cuts.
  7. DuPont reports gradual economic slowing and higher prices paid.
  8. Germany's index of business confidence declined for the third consecutive month
  9. Several major retailers report actual declines in sales notwithstanding bullish government reports.

Only the vast expansion of credit makes the word recession important to the prognosis for gold. During the five years ended June total private debt expanded 66% and corporate debt grew 62%, at least three times sustainable real G.D.P growth. An egregious example is General Motors whose total liabilities have grown $63 billion in four years while shareholder equity has shrunk $2 billion and l8% of shares out standing have been retired. If car sales decline and lease payments are skipped the liabilities will still be there.

The most bizarre comment of the week was issued by the President of the Bank of France when he described Britain's hesitancy to join the euro as bizarre. Opinions sometimes change quickly. During the truckers fuel tax protest, Britain's Prime Minister's favorable ratings fell to 32%, even lower than John Major's after Britain's expensive failed flirtation with European Monetary Union. Today 75% of Britons polled reject the euro. Describing the public as bizarre is not conducive to a bureaucrat's good political health.

A second bizarre comment was a Financial Times report that Peter Bernstein, author of "The Power of Gold", describes a gold bug as someone who always believes gold is about to rally sharply. Just as Dickens had to unquestionably establish Marley's death so must a gold bug be accurately defined. Webster's Collegiate has come to the rescue: "A supporter of the gold standard".

A gold standard does not necessarily mean that gold circulates widely, although it does circulate. Neither does it mean that nations must hold vast quantities of gold, but sufficient to be credible. In fact for a while national treasuries held more of the world's gold after the gold standard had abandoned them than before. What the gold standard mainly does is to better assure the value of government issued notes than any system previously or subsequently devised. The inaccurately described rise in the gold price therefore is actually a decline in the perceived value of paper instruments, either because of inflation or a generalized loss of credit worthiness. Bear markets following wildly excessive credit inflation typically bring this reality home. Yes, opinions, particularly toward gold can change quickly.

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