Gold''s shorts have made a bad mistake, Sinclair argues

Gold Rush May Continue, but With Tempered Expectations

By Jonathan Fuerbringer
The New York Times
Wednesday, November 26, 2003

Gold does not have to break $400 an ounce to prove that
it is in a bull market. That has been clear for some time,
as the price has surged 52 percent since gold hit bottom
in April of 2001.

But $400 has to be breeched, and maintained, to prove
that the rally, which many American investors have
probably missed, still has legs. And $450 an ounce has
to appear to be within reach to offer a nice profit potential
to investors who, unfortunately for them, usually don't
pay attention to gold until its price is already going up.

For the gold producers and the gold faithful who lived
though the dark times -- in which gold fell steadily after
trading over $800 an ounce in 1980 -- there is no problem.
Gold, which has been over $390 an ounce for two weeks,
is going higher.

With the dollar falling sharply yesterday against the euro,
gold surged to $402 an ounce, its second moment over
$400 on the Comex division of the New York Mercantile
Exchange since early 1996. But gold futures for February
delivery fell back below $400, to $398 at the close.

Even Ian C. MacDonald, manager of precious metals at
the New York branch of Commerzbank and a gold bear
for 15 years, said, quot;The scary thing is we don't know
how high this price can go.quot;

But investors attracted by the $400 headline should take
note of what is pushing the price of gold higher and
consider whether these forces have the momentum to
keep the rally going.

The chief argument for gold recently has been the
weakness of the dollar. Pierre Lassonde, the president of
Newmont Mining, a major gold producer, argued that the
price of gold is 80 percent dependent on the value of the
dollar, which has fallen 11 percent this year against the
euro, 7.9 percent against the Japanese yen, and 7 percent
against a broad trade-weighted index that includes all of
the United States' main trading partners.

Others agree. An analyst at a big hedge fund, who insisted
that he not be named, put the argument bluntly: quot;I don't
think supply and demand matter,quot; he said. quot;What matters
is the esteem people have for paper money and what we
are seeing here is a flight to hard assets -- gold.quot;

This inverse relationship of gold to the value of the dollar
has worked well sometimes in the past, but not always.
It has done pretty well, however, during gold's new bull
market. The dollar has been in a steady decline against
the euro since July of 2001 while the dollar has been
falling against the yen since February of 2002.

At the same time, it may have been the euro's inability
since May to breech the $1.20 level against the dollar
that has held gold back from $400 an ounce. For example,
when the dollar shot up 1.2 percent against the euro on
Monday on expectations of stronger United States
economic data, gold fell 1.1 percent, or $4.50 an ounce,
to $391.50.

Gold aficionados believe that the dollar will continue to
fall. They argue that the Bush administration wants a
weaker dollar and that confidence in the dollar is being
hurt by American foreign policy. The current account
deficit, which measures the balance of trade in goods
and services with the rest of the world, is nearing $500
billion, and that is also a drag on the dollar.

Yet if the economy does manage to continue to grow
modestly -- after the stunning 8.2 percent growth at an
annual rate in the third quarter that was announced on
Tuesday -- the dollar might not fall all that much more,
limiting the upside for gold from here.

Another factor often cited as a positive for gold --
political instability and global terrorism -- has not given
a boost to gold recently. In fact, it was quite striking that
after the truck-bombing of two synagogues in Instanbul
on Nov. 15, a Saturday, the price of gold dropped $6.50
an ounce in trading the following Monday. And after the
truck-bombing of the British Consulate and a British
bank in Istanbul on Nov. 20, the price of gold fell $1.20.
A third force of note is speculators. They have been
betting heavily that gold will rise. Look at the net of
the futures contracts to buy and sell gold outstanding
on the Comex division of the New York Mercantile
Exchange on Sept. 2. The net equaled almost 123,000
contracts to buy about 12.3 million ounces of gold, the
biggest weekly position by far in the Commodity
Futures Trading Commission data going back to 1983.

But since then, these positions have been trimmed, with
the net buy contracts totaling 93,160 as of Nov. 18.
While this is the ninth biggest weekly net position, the
fact that it has shrunk may be another reason why gold
has still failed to break through $400.

Another positive for gold that has been tempered is the
proposal for a so-called exchange traded fund for gold.
Sponsored by the World Gold Council, this exchange
traded fund would allow retail investors to buy gold
easily through their brokers in amounts as small as a
tenth of an ounce. Some analysts argue that the price of
gold may already have run up in anticipation of this
buying. But the Securities and Exchange Commission
has not yet approved the proposal.

quot;I am sure getting tired of waiting,quot; lamented John
Hathaway, a gold fund portfolio manager at Tocqueville
Asset Management.

All this stuttering around the $400-an-ounce level does not
mean that gold will not go higher. But it is a warning to
investors who are getting in now not to expect gold to
repeat its recent history and rise another 50 percent. They
should temper their expectations.

It is also not a bad idea to listen to analysts who argue that
a small amount of gold in a portfolio, something under 5
percent, can be an effective way to diversify one's
investments, regardless the outlook for gold.

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