Weekly Gold Market Update

September 20, 2000

Continuing strength of the U.S.dollar last week and hesitation before the next British auction on Tuesday led to a 0.4% easing in the dollar gold price to $272.30 an ounce on Friday. However, gold prices rose in terms of the Euro, sterling, yen and other currencies.

Gold mining share prices fell and once again tested their August lows.

The ratio of the Dow Jones Industrial Average to the price of gold declined to 40.1 on Friday. It had topped out at approximately 41 during the past four weeks. Prior peaks were 44.8 in August 1999 and 42.8 last January. Is this ratio now headed south?

Suddenly, the world faces an energy crisis. Crude oil prices are up some 54% from a year earlier. Natural gas prices have more than doubled since the start of the year. Will a cold snap this winter generate even higher prices? Will this lead to an unexpected loss of market confidence, a financial crisis and a lard landing?

Complacency continues to reign. The global economy is booming. The Dow Jones Industrial Average & NASDAQ Composite Index have had good summer rallies, although, so far they have not surpassed their January and March respective highs. Commercial and industrial bank loans have climbed at an average annual rate of almost 10% during the last six months. Business fixed investment remains the chief engine of growth. There is strong international confidence in the dollar.

Beneath the surface of this confidence, however, there are growing vulnerabilities and imbalances. Corporate earnings growth rates peaked in the first quarter of the year. The second quarter growth rate declined, and future growth rates are expected to continue to diminish. Second quarter productivity growth was 5.7%, and compensation costs rose 5.3%. A risk to future earnings is that productivity growth may return to a lower level when high technology expenditures become played out and that wage costs may continue to grow. Alan Greenspan recently said: "A tapering off in productivity acceleration is inevitable at some point in the future." Credit quality continues to deteriorate as bond spreads widen. New York Stock Exchange customers' margin debt in July was 37% above a year ago. Thirty year T-bond yields rose from 5.66% to 5.90% last week. The huge U.S. current account deficit has been sustained by foreign investment funds flowing into the U.S. Foreigners now have financial claims on the U.S. amounting to $6.5 trillion. There is a risk that the present path of the deficit is unsustainable and that an inevitable reversal may take place. The CBO forecast of a $4.5 trillion cumulative surplus over the next decade is out as both political parties are promising big spending programs. The possibility of a liquidity crisis may not be avoided. Alternatively, the world's central banks may accommodate the crisis and engender a new cycle of inflationary expectations.

With financial, monetary and economic risks growing, there is always the probability that if anything can go wrong, it will (Murphy's Law). Accordingly, cautious investors may more and more seek to preserve their wealth from serious stock market "reversions to the mean," credit contractions and eventual negative real short-term interest rates. Gold is a default-free and currency risk-free monetary and asset which investors have sought in times of monetary and currency disorder. Historically it has had a negative correlation with the stock market. If financial stress increases, as we anticipate, the investment demand for gold may well grow as it did in previous cycles. Our expectation is that this possible growth again will contribute to a new up trend in the gold price.

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

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