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Bill Murphy: ''Fringe'' or not, evidence backs gold price suppression scheme

Section: Daily Dispatches

Opinions Differ on Rising Price of Gold

By Ellen Simon
Associated Press
via Business Week Online
Saturday, September 24, 2005

Gold is hovering near 17-year-highs. What that means depends on
who's doing the interpreting.

According to one school, demand from China and India is pushing the
price higher, but another school insists gold is up because Western
investors are convinced inflation is much higher than their
governments admit.

Gold has always been the investment of choice for bomb-shelter-
building doom-and-gloomers, those accumulators of canned goods whom
everyone avoids at family gatherings. As an asset, gold usually
behaves according to its own set of rules. Gold rises with oil
prices, falls when the dollar rises and increases when inflation
fears intensify.

It's considered a "safe haven investment" -- should your currency
become worthless, your gold will retain value."For many years,
financial advisers would tell individuals to put a certain
percentage of their portfolio in precious metals," said John H.
Hill, Citigroup's metals and mining analyst. "It's portfolio
insurance. If you own gold, physical gold, it's just a hedge on
everything else.

"If it goes sideways to nowhere, be happy," he said. "It means the
rest of your portfolio is intact, you have a job, your community is
OK and the world hasn't descended into chaos."

Gold prices have retreated after hitting a 17-year high of $476.30
an ounce in trading on the New York Mercantile Exchange earlier this
month. That milestone means some investors who normally ignore gold
are paying more attention to it, with wildly diverging opinions on
what gold prices are saying.

On Tuesday, before Federal Reserve policy makers met, Chip Hanlon,
president of Delta Global Advisors Inc. wrote a note to clients with
the subject line, "Gold makes today's Fed meeting an easy call."

Hanlon said that if Federal Reserve Chairman Alan Greenspan watches
gold closely, as many believe, "how can the chairman be anything but
horrified by this metal's recent technical breakout to its highest
level since the earliest days of his tenure?"

He wrote, "Gold is soaring despite the market's expectation of a 25
basis (0.25 percentage point) hike, more aggressive action is
necessary to clamp down on surging inflationary pressures."

Inflation is one reason Hill expects gold to hit $500 an ounce in
coming months.

"We regard gold as an essential barometer in the grand battle
between hard and financial assets," he said.

"The point is not that the dollar is going to go up or down against
the yen or the euro or the yuan, the point is that all currencies
are going down relative to other standards of value, whether it be a
barrel of oil, a bushel of wheat or an acre of real estate," he
said. "Hard assets have obviously been winning, worldwide, for a
number of years. That's what gold is telling us."

While jewelry accounts for 82 percent of the gold market, "the
catalyst of the day is obviously inflation jitters," he said.

Worldwide demand has increased. Demand in India set a record last
year and demand in China jumped as well. In fact, demand was so
strong, gold prices held steady in the first half of the year as
central banks internationally sold off record levels of their gold
supplies, Hill said.

While gold prices usually fall when the dollar rises, that equation
hasn't held recently.

"Mounting inflationary concerns, driven largely by higher energy
prices, have pushed gold higher despite a stronger dollar," a Sept.
19 Goldman Sachs commodities report said. "For example, the price of
gold rose despite a strengthening in the dollar against the euro in
June, as the rejection of the European constitution by voters
increased the risks associated (with) the long-term stability of the

Goldman estimated a "fair value" for gold at $463 an ounce over the
next 12 months, but added that "the recent runup in inflationary
expectations suggests the potential for a $15 to $20 move higher.

Gold can sometimes trade off short-term interest rates minus the
rate of inflation, said Richard B. Hoey, chief economist and chief
investment strategist, The Dreyfus Corp. and chief economist of
Mellon Financial Corp.

"Short-term inflation is rising now faster than interest rates are
rising," he said.

Still, he doesn't see the recent price increase as indicative of an
inflationary surge. "It's still down about 45 percent from its peak
25 years ago," he said. "If you look at a good long-term chart, yes,
it is in fact up some. But it's up after a long, dull period."

Just as Hoey doesn't see the recent highs as significant when
compared with historical numbers, not all gold watchers are
convinced the metal will continue its upward climb.

In a note to investors, Morgan Stanley's Rick Bensignor said, "For
my nickel, I suspect there is a trade to be made on the long side,
but not necessarily an investment, meaning that I can't tell you
with high confidence that gold will be higher than the current level
in three to six months."


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