The Hatfields meet the McCoys in Denver

1p EDT Sunday, October 24, 1999

Dear Friend of GATA and Gold:

You'll enjoy Mark Hulbert's financial column in today's
New York Times. It's below.

Please post this as seems useful.

CHRIS POWELL, Secretary
Gold Anti-Trust Action Committee Inc.

* * *

GOLD WOULD RISE ON INFLATION TREND ALONE

By MARK HULBERT
The New York Times
October 24, 1999

What makes gold soar will eventually make stocks swoon.

That simple truth explains much about the recent
downward path of the stock market. The gold market came
to life well in advance of the Dow's most recent
correction, which started in late August.

The price of gold is up 20 percent since it began its
rise on July 20, despite weakness last week. Moreover,
gold mutual funds gained an average of 19.2 percent
during the third quarter, according to Lipper Inc., the
research firm, after a 2 percent increase in the second
quarter, the first time in four years that gold funds
have produced back-to-back quarterly gains.

Many investors may not make the connection between the
rise of gold and the selloff in stocks because they see
gold's rally as artificial. That is not entirely
unreasonable, because the sharpest part of the rally
was seemingly prompted by an external event that did
not have much to do with gold's economic fundamentals:
the announcement on Sept. 26 by European central banks
that they would limit their sales of bullion.

The rally has been propelled further by another
nonfundamental factor: Short covering from traders who
had been aggressively shorting gold.

Still, after studying gold forecasting models tracked
by The Hulbert Financial Digest, I have concluded that
the fundamental cause for gold's rally was not the
central banks' announcement, but increasing
inflationary pressures, against which gold is a
traditional hedge. In fact, one of the most successful
models bases its buy and sell signals on inflationary
trends, and it had turned bullish on gold in mid-
September, well before the steepest part of the rise.

This forecasting model was devised by the Institute for
Econometric Research of Fort Lauderdale, Fla., a
newsletter publisher. The model is simple, based not on
the absolute inflation level but on whether or not
inflation is accelerating.

Specifically, it compares the Consumer Price Index's
most recent 12-month percentage change with the
corresponding reading three months earlier. If the most
recent reading is higher, then the model is bullish,
and investing in gold funds and shares is recommended.

For example, the Labor Department announced in mid-
September that the Consumer Price Index was at 167.1,
or 2.3 percent higher than it was a year earlier. In
June, three months before that announcement, the index
was at 166.2, or 2.1 percent higher than in June 1998.

The model thus indicated that inflation was
accelerating, and it issued a buy signal for gold.
(That trend was supported by the consumer price report
last Tuesday, which showed inflation over the previous
12 months at 2.6 percent; in July, that figure was 2.0
percent.)

Because conditions were already ripe for a bullish move
in gold, I believe that if the central banks hadn't
provided the straw that broke the gold market's bearish
back, sending gold prices up 14 percent in a week,
something else would have. Those who analyzed the
inflation data might well have seen what was coming --
11 days ahead of the central banks' move.

Though the institute's record is not perfect, it is
impressive. Over the last 15 years, by my calculations,
an investor who switched a portfolio in and out of the
gold market on the model's signals would have gained
2.6 percent, annualized. That doesn't seem striking
until it is compared with the 0.2 percent loss,
annualized, that he would have suffered by buying and
holding bullion.

Picking specific gold-mining stocks is trickier. Many
companies sell their gold production in the futures
market. The hedging protects against declines in gold's
price. But it means that they won't be benefiting
immediately from higher gold prices. That is why one of
the favorite mining companies among gold newsletters is
Franco-Nevada Mining of Toronto, whose policy is to not
hedge its production.

Among newsletters I track, the most-recommended no-load
gold fund is American Century Global Gold. The stocks
it holds are geographically diversified, use different
hedging strategies and represent both high- and low-
cost producers.

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Mark Hulbert is editor of The Hulbert Financial Digest,
a newsletter based in Annandale, Va. His column on
investment strategies appears every other week. E-mail:
strategynytimes.com.