Six reasons why gold shares are still attractive


By Victor Hugo
Sunday Times, South Africa
Sunday, May 2, 2004

Markets will be driven in coming weeks by the impact
of Chinese credit tightening and the prospect of higher
interest rates in the US and the UK. The shares of
resources suppliers have been dumped as investors
decided that the credit tightening would have a large
impact on Chinese orders and earnings.

The major markets have traded lower and investors are
asking themselves about broader market vulnerability
after the strong runs of the past year in Europe and the

Markets have merely reduced some of the exuberance
around commodity prices. After all, China and Japan
are still doing their accelerating growth. Slightly slower
demand and growth is not a bad thing -- the market will
wake up to that soon -- and commodity shares will be
snapped up in this heaven-sent dip.

But what about the Dow?

Long-term technicals on the Dow Jones Industrial
Average suggest that the last three weeks have been
setting up scope for an aggressive selloff soon.

Despite all the ra-ra talk about a new bull market in
recent months, the Dow has not managed to break
typical range resistance since January 2000. That is
after some of the most intense efforts in history to
stimulate the US economy.

China and Japan, as well as some resource-producing
countries, are about the only ones to confirm robust growth.

What do the prices that people are willing to pay for the
shares of major US companies say when relativity is
measured and projected on time-and-price tests?

They say that a market selloff has been gathering
momentum and that every point that the Dow falls between
now and the important psychological area at about 10,000
can increase scope for selling all the way to 2002's lows
or to about 6,000 by October 2005.

If that scenario develops, think of the impact on world
markets and your portfolio.

It's time to be defensive -- and too soon to write off gold
as an unfaithful relic of history. Watch the US dollar and
the Dow closely. End-April is an important cycle
signature for broader markets (perhaps down next) and
precious metals (perhaps up next).

There are two main views on the prospects of gold from
now to year-end. The one that has become fashionable is
that the gold run is over -- now that the gold price has fallen
and US Federal Reserve chairman Alan Greenspan is
warning markets that interest rates will have to rise at
some time.

Investors look at the big rises since April 2001 from
$255.95 to January 2004's peak at $428.20. Well, well,
they say -- a correction was due.

Analysts argue for a long selling (down) scenario next
because of volatility since January 2004's peak, as well
as loss of six-month upward momentum.

This camp expects scope for more gold selling and for the
price to fall to between $372 and $343, with the US dollar
stable or stronger. These gold sceptics have already sold
some of their precious metal shares, or are about to do

The other bullish scenario is a gold price of above $500 this
year and above $600 by 2006. I can hear screams of
derision. This implausible scenario is still my preferred
candidate, based on technical evidence.

In this scenario, the US doesn't overcome its debt problems
soon enough to avoid an asset bubble pop. The pop comes
-- and it has an impact on the dollar, stock markets, property,
and bond prices all over the world.

It doesn't matter too much whether the trigger comes from
some of the biggest geopolitical and large-scale terrorism
risk of all time -- a time when confidence is shaky -- or
whether it comes from the realisation that the dollar, US
Treasury Bonds, Wall Street, and US property prices are
inflated and ripe for a puncture or a blowout.

The main factor for the medium- and long-term prospects
of gold is the dollar and what drives it. Momentum and
cycle evidence say the dollar is merely taking a breather
before resuming its downhill trend -- 15 percent or more
lower in the next year and perhaps still weaker after that.

Until the US produces more, sells more, spends less,
pays down debt, and consumes on growth earned rather
than on debt, the global financial system has a problem.

Years of investment flows to the US, reducing US
production, increasing spending -- and flamboyant
consumer patterns -- have caused distortions.

The imbalances have to be cleaned out before the
dollar can recover on a sustained basis. Until then,
any shock to the system -- even gradually increased
interest rates -- can set off chains of dominoes.

That is what the huge increases in recent years of
the gold price, precious metals, and other commodity
prices have been saying. Either the dollar or gold wins.

Many people out there have been expecting gold to
win and still do. Unfortunately though, if gold wins, the
world can expect a lot of turbulence financially and
eventually militarily.


Victor Hugo is an analyst at


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