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Kitco and Doug Casey team up in new Internet site
By Eric J. Fry
Tuesday, February 1, 2005
http://www.dailyreckoning.com/RudeAwake/Articles/Riskfactors.html
"You should consider carefully the risks described below
before making an investment decision," advises the
prospectus of the streetTRACKS Gold Shares (NYSE: GLD).
"Fluctuations in the price of gold could materially
adversely affect an investment in the Shares."
We had a hunch, even before reading the prospectus, that a
falling gold price might be a bad thing for GLD -- an
exchange-traded fund "designed to mirror as closely as
possible the performance of the price of gold bullion."
But we also had a hunch that a falling dollar might be a good
thing for GLD. Reading the prospectus confirmed both hunches.
By definition, a buyer of dollars is a non-buyer of gold. Any
examination of gold's "risk factors" would not be complete,
therefore, without also considering the risk of NOT owning
gold -- also known as the risk of owning dollars.
"The price of gold has fluctuated widely over the past several
years," begins the "Risk Factors" section of the prospectus.
"Several factors may affect the price of gold, including:
"-- Global gold supply and demand, which is influenced by
such factors as forward selling by gold producers,
purchases made my gold producers to unwind gold hedge
positions, central bank purchases and sales, and
production and cost levels in major gold-producing
countries such as South Africa, the United States and
Australia.
"-- Investors' expectations with respect to the rate of
inflation.
"-- Currency exchange rates.
"-- Interest rates.
"--Investment and trading activities of hedge funds and
commodity funds and.
"-- Global or regional political, economic or financial
events and situations. ..."
To be sure, all of the influences cited above affect the
gold price. But don't these same influences also affect
U.S. dollar, only in reverse? Or to rephrase the question:
Which monetary asset is more likely to be "materially
adversely" affected by the risk factors enumerated above?
Gold or the dollar?
Falling inflation, for example, is the sort of monetary
trend that a gold bull would call a "risk factor." But
rising inflation, which happens to be the monetary trend of
the moment, is a clear and present danger to holders of
U.S. dollars. Notwithstanding official assurances to the
contrary, a new inflationary trend seems to have sprouted
from the seeds of Alan Greenspan's overly "accommodative"
monetary policies. The Consumer Price Index has been
trending higher for a couple of years, while many other
price gauges are soaring. The Intermediate Goods Index, for
example, has rocketed 9 percent over the last 12 months, as
rising energy and input costs have made their way into the
production chain.
"Investors should be aware," the GLD prospectus continues,
"that there is no assurance that gold will maintain its
long-term value in terms of purchasing power in the
future."
Again, we would respond: What about the dollar? What
assurance do we dollar holders possess that the
greenback "will maintain its long-term value in terms of
purchasing power?"
Apparently, some of the world's largest dollar holders are
beginning to have their doubts. "More than two-thirds of
the world's central banks have boosted the euro holdings in
their currency reserves over the past two years, largely at
the dollar's expense," The Wall Street Journal reports,
citing a survey by publishing firm Central Banking
Publications.
Meanwhile, a separate Journal story notes, "OPEC's dollar-
denominated bank deposits fell to 61.5 percent of total
deposits in the second quarter of 2004, down from 75
percent in the third quarter of 2001, while over the same
period, euro-denominated deposits rose to 20 percent from
12 percent. Part, but not all, of this reflect depreciation
of the dollar."
A few central banks are also adding to their gold reserves,
even as they reduce their dollar reserves. Perhaps these
gold-buying bankers have perused page 28 of the GLD
prospectus, which lays out "The Case for Investing in Gold."
"All forms of investment carry some degree of risk," the
bullish discussion cautiously begins. "However, including
gold in a well-balanced portfolio can help diversify risk.
Gold's ability to serve as a portfolio diversifier is due
to its historically low-to-negative correlation with stocks
and bonds."
In other words, the ancient monetary metal tends to perform
well when faith in paper assets wanes. That's because, as
the prospectus points out, "Gold does not depend on a
promise to pay on the part of any government or corporation,
as is the case with investments in money market instruments
as well as in the corporate and government bond markets.
Gold is not directly affected by the economic policies of
any individual country and cannot be repudiated, as is the
case with paper assets. Gold is not subject to the risk of
default or bankruptcy. Gold cannot be created at will as
can paper-backed assets."
All true. But the strongest aspect of the bull case for
gold relies upon the fact that the "risk factors" for
owning the U.S. dollar are far more numerous, far more
serious, and far more likely than those for owning gold.
If we were commissioned to write a prospectus for the U.S.
dollar, we might caution:
"The dollar's value may react adversely to changing
investor perceptions resulting from:
"-- The retirement of a deified bureaucrat who chairs the
Federal Reserve.
"-- A rapid decline in the value of U.S. financial assets
and/or real estate assets.
"-- A growing perception of American fiscal imprudence,
as evidenced by its growing current account deficit
and rising foreign debts.
"-- A derivatives debacle that becomes a banking crisis
that becomes a currency crisis.
"-- A rise in the inflation rate above that which the
Federal Reserve chairman deems constructive.
"-- The failure of an economy powered by Starbucks lattes
and Destiny's Child CDs to continue attracting direct
foreign investment."
Gold's $4 drop yesterday reminds us of the risks of owning
the yellow metal. On the other hand, the dollar's 40 percent
drop over the last three years reminds us of the risks of
owning the alternative.
So far no one has approached us to write a prospectus for
the U.S. dollar -- not yet.
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RECOMMENDED INTERNET SITES
FOR DAILY MONITORING OF GOLD
AND PRECIOUS METALS
NEWS AND ANALYSIS
Free sites:
http://www.cbs.marketwatch.com
http://www.capitalupdates.com/
http://www.silver-investor.com
http://www.thebulliondesk.com/
http://www.goldismoney.info/index.html
http://www.minersmanual.com/minernews.html
http://www.a1-guide-to-gold-investments.com/euro-vs-dollar.html
http://www.investmentrarities.com
http://www.kereport.com
(Korelin Business Report -- audio)
http://www.plata.com.mx/plata/home.htm
(In Spanish)
http://www.plata.com.mx/plata/plata/english.htm
(In English)
http://www.resourceinvestor.com
Subscription sites:
http://www.lemetropolecafe.com/
http://www.interventionalanalysis.com
http://www.investmentindicators.com/
Eagle Ranch discussion site:
http://os2eagle.net/checksum.htm
Ted Butler silver commentary archive:
http://www.investmentrarities.com/
----------------------------------------------------
COIN AND PRECIOUS METALS DEALERS
WHO HAVE SUPPORTED GATA
AND BEEN RECOMMENDED
BY OUR MEMBERS
Blanchard & Co. Inc.
909 Poydras St., Suite 1900
New Orleans, Louisiana 70112
888-413-4653
http://www.blanchardonline.com
Centennial Precious Metals
3033 East First Ave., Suite 807
Denver, Colorado 80206
1-800-869-5115
http://www.USAGOLD.com
Michael Kosares, Proprietor
cpm@usagold.com
Colorado Gold
222 South 5th St.
Montrose, Colorado 81401
http://www.ColoradoGold.com
Don Stott, Proprietor
1-888-786-8822
Gold@gwe.net
El Dorado Discount Gold
Box 11296
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http://www.eldoradogold.net
Harvey Gordin, President
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Mobile: 602-228-8203
harvey@eldoradogold.net
Gold & Silver Investments Ltd.
Mespil House
37 Adelaide Rd
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+353 1 2315260/6
Fax: +353 1 2315202
http://www.goldinvestments.org
info@gold.ie
Investment Rarities Inc.
7850 Metro Parkway
Minneapolis, Minnesota 55425
http://www.gloomdoom.com
Greg Westgaard, Sales Manager
1-800-328-1860, Ext. 8889
gwestgaard@investmentrarities.com
Kitco
178 West Service Road
Champlain, N.Y. 12919
Toll Free:1-877-775-4826
Fax: 518-298-3457
and
620 Cathcart, Suite 900
Montreal, Quebec H3B 1M1
Canada
Toll-free:1-800-363-7053
Fax: 514-875-6484
http://www.kitco.com
Lee Certified Coins
P.O. Box 1045
454 Daniel Webster Highway
Merrimack, New Hampshire 03054
http://www.certifiedcoins.com
Ed Lee, Proprietor
1-800-835-6000
leecoins@aol.com
Miles Franklin Ltd.
3015 Ottawa Ave. South
St. Louis Park, Minn. 55416
1-800-822-8080 / 952-929-1129
fax: 952-925-0143
http://www.milesfranklin.com
Contacts: David Schectman,
Andy Schectman, and Bob Sichel
Missouri Coin Co.
11742 Manchester Road
St. Louis, MO 63131-4614
info@mocoin.com
314-965-9797
1-800-280-9797
http://www.mocoin.com
Resource Consultants Inc.
6139 South Rural Road
Suite 103
Tempe, Arizona 85283-2929
Pat Gorman, Proprietor
1-800-494-4149, 480-820-5877
Metalguys@aol.com
Swiss America Trading Corp.
15018 North Tatum Blvd.
Phoenix, Arizona 85032
http://www.swissamerica.com
Dr. Fred I. Goldstein, Senior Broker
1-800-BUY-COIN
FiGoldstein@swissamerica.com
The Moneychanger
Box 178
Westpoint, Tennessee 38486
http://www.the-moneychanger.com
Franklin Sanders
1-888-218-9226, 931-766-6066
----------------------------------------------------
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