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Lone prospector has a case against Barrick for huge Chilean gold mine
Gold Rush? You Bet Your Bottom Bollar -- and Euro
By Ambrose Evans-Pritchard
The Telegraph, London
Thursday, April 13, 2006
Norman Lamont says the best investment he ever made was to buy gold
shares in the bullion fever of the late 1970s: his worst mistake was
to hold onto them, defiantly, as Paul Volcker squeezed every drop of
excess liquidity out of the global economy.
Commodities crashed, and gold did not stop dropping until it touched
bottom at $252 an ounce in April 2001 -- the moment Gordon Brown
choose to auction a chunk of Britain's reserves.
The Federal Reserve is on the warpath again, raising interest rates
15 times to 4.75pc in less than two years. Europe is tightening, and
Japan has signalled the end of the biggest free lunch in history:
unlimited liquidity at zero rates for deployment by banks and hedge
funds anywhere in the world.
It is the first time since the early 1980s that all three blocs have
stamped on the markets in unison.
Those who have ridden the gold bull for the past five years to
yesterday's close of $597.75 -- making 120pc profit on bullion, or
580pc on the mining stocks of the HUI Gold Bugs index -- must be
wondering whether the boom is running out of oxygen at this
Long-term bull or bear, you need a strong nerve to jump headlong
into the gold market right now, at the top of the sharpest spike in
five years, just as India's gold-bedecked brides consummate before
the Monsoon. The time-honoured "May dip" awaits the unwary.
Or if you like charts, entrails, and technical signals, watch the
HUI mining index, listed under the code $hui on www.StockCharts.com.
The soothsayers swear by it, believing that mining stocks give
warning of about two days each time gold hits an interim peak.
The shares begin to look weary, then tip over, though the metal
itself is reaching tentative new highs. Ignore that signal at your
peril. It has been flashing amber to red this week.
Keep an eye on Japan as well, now the swing player in the market,
according to UBS. Japanese investors -- from big funds to day-
trading housewives -- buy gold when the yen is weak. They sell when
the yen snaps back.
So where is the yen heading? The Japanese ship money abroad at the
beginning of the tax year in April, driving down the yen.
That effect is played out by Easter. That is now.
My own hunch is that gold will come clattering down to its trend
support line (the 200-day moving average, now at $495.37) as all
commodities come off the boil. Pick your trigger.
HSBC says the sector tends to deflate once the Fed rate cycle peaks,
which could be as soon as May. Societe Generale thinks the bubble
will pop once the US housing market fizzles out, a variant of the
At that moment we will all have to put our thinking caps back on.
The first leg of the gold rally has seen easy pickings, with a risk-
reward balance too tempting to resist.
The price had been driven far below its historic equilibrium (an
ounce worth a suit of armour, or a Savile Row suit), both by central
bank sales, and a mix of shorting by bullion banks and "hedging" by
the mining companies themselves. Sooner or later, short positions
have to be covered. The metal was on a catapult.
The equation is trickier in 2006. With the credit cycle turning, and
global liquidity draining at 6pc annually, the case for gold relies
on its role as a counter-currency to the dollar, not as a commodity.
Vladimir Putin has ordered Russia's central bank to double the share
of gold in its fast-growing reserves from 5pc to 10pc, while Chinese
officials are muttering about the need to diversify some of their
$850bn reserves out of dollars into gold.
But talk is not action. So far both Russia and China seem to be
opting for euros instead.
The supposition is that the euro can offer an anchor of stability
once the day of reckoning arrives for the dollar, hobbled as it is
by a US current account deficit of 7pc of GDP and unprecedented
external liabilities nearing $4 trillion.
Last week the European Central Bank's Jean-Claude Trichet showed why
the euro is inherently unable to play that role. To the
consternation of currency traders he backed away from a rate rise,
allegedly after receiving telephone calls from irate politicians in
Paris and Rome, alarmed at the strength of the euro.
A stateless currency for 12 disparate economies, the currency itself
is on borrowed time. If the ECB allows the euro to rise much
further, Italy, Greece, and Portugal will be driven ineluctably into
In the end, the euro will have to chase the dollar down, pari pasu.
A small army of gold bugs have already twigged to the implications
Once the full markets catch on, I suspect that gold will blast
through to record highs. We are not there yet.
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