Weekly Gold Market Update

October 26, 2000

The dollar price of gold continued to bounce along at an approximate $270. an ounce "bottom" which it has boringly done since last May. Last Friday, it closed at $ 271.20 an ounce, down $1.20 an ounce from the previous week. This apparent "bottom" is above the 1999 low of $ 253. an ounce. The dollar made a new five-year high against the continental European currencies last week, and the prices of gold in those currencies made new highs.

The prices of gold mining shares, contrary to the price of gold, have made unexpected sharp declines of approximately 20% since their September highs to new all time lows. In our opinion, this must be the final "washout" or "capitulation" stage of their bear market, which began in 1980. They are extraordinary cheap. Their current prices reflect a theoretical gold price of approximately $ 250. an ounce, a discount of about 8% from market. They almost always have sold at large premiums to the gold price. Perhaps the market has been spooked by the unexpected announcement of several mine closures.

The economy appears more and more likely to experience a hard landing, and financial conditions may deteriorate further.

First, high-energy prices and further turmoil in the Middle East have raised the risks of worsening inflationary expectations, slower growth and pressures against the dollar. A large portion of the Arab world is ferociously angered by perceived U. S. support for Israel and is putting pressure on the moderate Arab regimes. Saudi Arabia's King Fahd recently warned, "The kingdom's leadership and people will take decisive measures if the Israeli aggression against Arabs, Islamic sanctities and the Palestine people continues." Iraq is clamoring for payment of its oil exports in terms of Euros, not dollars. Arab wealth may again, as in the 1970s, diversify into gold.

Second, the risks of a credit crisis are rising. The high yield corporate bond spread has widened from 433 points at the end of 1999 to 733 points. Distressed securities comprise some 20% of the junk bond market, compared to 7% a few years ago. Credit conditions are getting worse, and market liquidity is suffering. Credit ratings are being downgraded, and default rates are climbing. Bank worries are mounting about higher levels of bad loans and corporate bankruptcies. The market's risk appetite has begun to decline again quite substantially. The banks' expanding portfolios of problem loans may restrain credit growth.

Third, recent weakness in the financial markets may reflect deteriorating confidence. The Standard & Poor's 500 Index fell 13% from its September high to its October low. Earnings growth rate expectations are being marked down. Household net worth may have doubled since 1990, but since the first quarter of this year it has been falling even though household debt and debt service charges have continued to climb. How long can this continue?

Fourth, since mid-summer, industrial activity has declined.

For many people gold is money and a "store of value" during financial crises. Both gold and treasury bills have been bought during such periods.For example, during the l970s crisis, gold rose from $ 35 an ounce to $ 850 an ounce.

The volume of all the gold ever mined can occupy a cube 63 feet on each side.

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