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Gold is getting off the mat all by itself

Section: Daily Dispatches

By Don Luskin
Special to
First posted May 23, 2001 on
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I have touched the third rail, and it is made of gold.

For millennia, gold has excited mankind's passions,
goading us to the heights of achievement and the
depths of evil. Now, since I've been writing about
gold's role in the international monetary order over
the past couple of months, and about gold-mining
stocks over the past week, it seems I've excited a
few passions myself.

Never before on any topic have I received so many
messages in my email box or postings on the
discussion boards at my Web site,
-- or comments from my colleagues here at And it's all totally bipolar. People
seem to either worship gold and gold stocks, or to
loathe them. Now I'm caught in the middle, and all
ecause I've dared to touch the third rail by
mentioning gold.

I won't even begin to try to diagnose the source of
the emotional power that electrifies the third rail of
gold. To me, gold is just one of several valuable
indicators that helps me to understand how the
gears of economics interlock. I look at gold just as
I look at the yield curve, foreign exchange rates,
Fed policy statements and a dozen other factors. I
ind it extremely valuable as a super-sensitive,
forward-looking indicator of monetary liquidity. When
I saw the uptrend in gold confirmed last week, I joined
the quot;don't-fight-the-Fedquot; chorus because gold told me
that the Fed is finally really easing -- not just
pretending to ease. I didn't lose a dime by waiting,
either, because I haven't missed a moment of this
rally. Gold simply convinced me that the rally
wasn't just a big, beautiful fake-out.

And to me, gold stocks mean no more -- and no
less -- than auto stocks, chemical stocks or
semiconductor stocks. It so happens I haven't
owned a gold stock for something like 20 years,
a period during which gold itself has been in a
long-term secular decline. Until last week. My
interest in gold stocks now is a reasoned play
on the possibility that gold itself is ready to
recover from the dismal 22-year lows at which
it found itself just last month. It's a contrarian
call, to be sure. I shouldn't expect everyone to
agree with me. Quite the opposite -- even on
my own trading team, when I suggested we
should start panning for gold in gold stocks, I
got nothing but looks of stunned disbelief.

But I stood by my reasoning. Once again, it's
quot;don't fight the Fedquot; -- the same reason that
so many folks at are citing
to justify their bullishness in equities. What's
sauce for the goose is sauce for the golden

And that means that even those who hate
gold had better root for it to go up. Because
the fates of these two markets are inexorably
intertwined right now.

It's all about the end of the deflationary spiral,
of which the collapse in the gold price was
the most prominent evidence. Now the Fed is
willing to re-inflate, and that's a good thing for
gold -- and for the stock market. We see
re-inflation in the drop in the long bond and the
widening of the spread between regular and
inflation-protected Treasury bonds. We see it
in the Dow Jones Industrial Average bottoming
on March 22, the very day of the top in the yield
of the long bond. We see it in the Nasdaq
Composite bottoming on April 4, the day after
the price of gold bottomed. We see it in the
multitude of statements from Fed officials in
the past 48 hours, all telling us that inflation is
nothing to worry about.

And we see it in gold stocks, the most useful
of which behave like levered investments in
gold itself.

I don't accept that gold and gold stocks are
doomed to march forever downward until they
hit zero, and that the quot;barbaric relic,quot; as John
Maynard Keynes called gold, is consigned to
the dustbin of history. I believe that gold always
has had -- and always will have -- important
monetary properties. But even without them,
gold will respond to re-inflationary impulses
in the economy. If nothing else, there is the
fact that gold is becoming scarcer every day.
Annual production now isn't even enough to
keep up with the global demand for jewelry.
But, of course, if I were talking about a
production shortage in oil, I doubt anyone
would be getting excited if I recommended
buying oil stocks.

And yes, as I wrote Monday, shorts are
covering right now. But that's not a rigorous
reason for why gold -- or gold stocks -- should
go down from here. Shorts are covering in the
stock market, too, and that's no reason to be
bearish on stocks. Gold shorts are covering
because their world has changed. The shorts
are saying quot;don't fight the Fed,quot; knowing that
their free-money trade made possible by high
short-term interest rates is over and done with.
These are smart guys. They're not covering
because they think gold is going down.

We talking heads who write about stocks for a
living share lots of ideas we believe in, and for
me this is just one of them. In the fund I manage,
I've invested slightly more than 2% of assets
across three gold stocks -- Homestake Mining,
Newmont Mining, and Kinross Gold. Just part of
this complete breakfast -- in my fund, and in my
writing. Big deal, huh?

Based on the tone of the reactions from my
colleagues at, I guess it
must be, although I can't begin to imagine why.
Give me a break! Let's not make this into a bar
bet where if gold stocks go down, I'm an idiot --
and if gold stocks go up, the other guy is an idiot.
This is just another trade, and all trades are
based on disagreements. That's why there's a
buyer for every seller, folks. There's nothing
personal or rancorous in it, at least not for me.

Well, what can I expect? That's the third rail of
gold. And whether you agree with me or not,
you should thank me for having the courage to
touch it. Many of you already have. In the past
24 hours, my email has run 100% -- without a
single exception! -- in support of the reasoned
and principled way I've been discussing gold.
Not necessarily agreeing, but urging me to
keep calling 'em as I see 'em.

And that's just what I intend to do. Successful
investing isn't about getting my colleagues to
love me. If I want love, I'll buy a puppy. Successful
investing is about having the guts to make a
controversial contrarian call. To be able to
rigorously and consistently explain why you
made it. And, if necessary, to admit when you're
wrong -- when the market tells you, not when
your peers tell you -- and then to move on. That's
what it's all about.


Don Luskin is president and CEO of and a portfolio manager of
OpenFund, an aggressive growth fund investing
in the New Economy. OpenFund strives to be fully
nvested, expecting to be at least 90% invested
under most market conditions. At time of
publication, OpenFund was long Homestake
Mining, Newmont Mining, and Kinross Gold,
although holdings can change at any time.