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Bill Murphy on Bank of England

Section: Daily Dispatches


By Steven Jon Kaplan

Gold Mining Outlook

5 p.m. EDT, Friday, May 7, 1999.


Buy more gold.

Although the Bank of England announced early Friday
morning that they are selling 415 of their 715 tonnes
of gold, this is likely to be one of the last major
gold sales by central banks. The worldwide recession
recovery, combined with a strong commodities rally,
leaves inflation on the rise, as epitomized by a huge
gap between short-term rates and long-term rates in
almost all developed economies.

This sale is thus equivalent to Fidelity Investments
deciding to sell shares in a very profitable company
with a high growth rate and a low P/E. Although such an
unloading would initially depress the price, especially
if some thought that Vanguard and Strong would follow
suit, it would have no effect on the company's
fundamentals, and would therefore be completely
reversed over a short period of time.

Similarly, the sale of gold by a particular entity does
not alter the relationship of the yellow metal in the
world financial system.

The Journal of Commerce commodities index, a reliable
indicator for many years, is displaying its highest
growth rate in more than 1-1/2 years.

Use the opportunity to buy gold when everyone else is
selling it. Already many shares have bounced from
extreme lows set during intraday trading. This is a
gift for those who feared they may have missed the
rally, or who were waiting for a pullback before
committing additional funds.

As I had said on the very day before the yellow metal
started its spring rally, the more that everyone else
is gloomy, the more that one should be buying gold with
both hands and both feet.

Usually I don't like to criticize financial analysts,
knowing how difficult it is to make financial
predictions. Special mention, however, must be given to
the gold gurus at Goldman Sachs, who issued a sell
recommendation on gold shares Friday morning almost at
the very minute that gold bottomed below $280. Not only
is this advice one very important day late, but any
clients who take them seriously would be selling at
what may well turn out to have been the last best
buying opportunity for many years. Perhaps they're
still a little hung over from their recent IPO party.

According to the latest survey from Market Vane,
bullish sentiment on the U.S. dollar is at an unusually
high level of 84 on a scale from 0 to 100. Even if it
were not for the record trade gap and the fact that
corporate insiders are heavily short the greenback
especially versus the Swiss franc, German deutschmark,
Japanese yen, and British pound sterling, this would be
reason enough to bet against the U.S. dollar. First, as
interest rates for bank CDs and money market funds
fell, people shifted their assets from safe investments
into the U.S. stock market. Then, as the recession hit
the third world, people shifted their investments from
emerging markets into the U.S. stock market. Now, as
the world is recovering from recession, rapid growth is
forcing up long-term interest rates worldwide. Thus,
bonds are collapsing, which -- you guessed it -- has
caused investors to sell bonds to put their money into
the U.S. stock market. Even if U.S. equities were not
already at hypereuphoric overvaluations, a combination
of rising inflation, increasing long-term interest
rates, and the ready alternative of equities around the
world with far superior growth rates and infinitely
lower P/E ratios will eventually induce a core of
intelligent investors to switch out of U.S. equities.

Do not wait for everyone else to act before you do, as
there will be a mad rush for the exits. The average
investor, thoroughly drunk on U.S. equities, is not
even aware that the yield on the 30-year U.S. Treasury
is at its highest level since June 9, 1998. When
interest rates are high enough, some money leaves the
stock market for the bond market. In addition, higher
rates increase the costs of borrowing, lowering
corporate profits.

In a sign that the gold share market is returning from
the doldrums, the Johannesburg Stock Exchange announced
Monday that they are planning to launch a junior mining
sector later in the late summer of 1999. According to
Reuters News, "shares in resource companies listed in
Johannesburg have soared over the past six weeks on a
growing belief around the globe that bombed-out
commodity cycles were in line for a turnaround in the
next 12-18 months, spurred by a recovery in demand from
Asian economies."