HE REMORSE PRICE OF GOLD
The Daily Reckoning
The stock market entered January like the proverbial lion and exited it like a lamb... a slightly crippled lamb. For the final week of January, the Dow fell 80 points, but still managed to exit the month with a slim gain, up a little less than a percent. The Nasdaq, which fell about 2.7% last week, closed out the first month of the year with a respectable 3.1% gain.
The written word stole the spotlight, or more precisely, the RE-written word of Alan Greenspan. His monthly FOMC statement deleted the promise to holds interest rates low "for a considerable period" -- replacing this ambiguous phrase with an even more ambiguous promise to be "patient" about raising rates. "With inflation quite low and resource use slack," the statement read, "the committee believes that it can be patient in removing its policy accommodation."
As we noted in this column Thursday, "Investors reacted swiftly and decisively to the semantic bombshell: the dollar soared, while stocks and bonds tumbled... If the Fed will no longer promise to hold interest rates low for a considerable period, the lumpeninvestoriat reasoned, then surely the Fed is preparing to raise rates, which is good for the dollar but bad for stocks and bonds."
The gold market served up a delayed reaction to the Fed's new wording by plummeting $16.40 on Thursday to $399.40 an ounce – the yellow metal's biggest one-day drop since 1977. And voila, the gold price finally dipped below $400 an ounce, the "remorse price" at which the Paris editors of the Daily Reckoning have been promising to buy more of the shiny metal.
"Gold hit our 'remorse price' Thursday, falling below $400," the remorseful correspondents reported Friday. "It dropped $17... Unfortunately, in this morning's trading it has bounced back above our remorse price. What the heck; close enough. Buy!"
James Grant agrees: "In 2004, gold and silver will appreciate against the so-called strong currencies as well as the weak," the editor of Grant's Interest Rate Observer predicts. "The metal's best friend in 2004, we predict, will turn out not to be Alan Greenspan, but Jean-Claude Trichet. When -- not if -- the president of the European Central Bank announces a reduction in the prevailing 2% ECB repo rate, it will be seen that his purpose is to cheapen the euro. So seeing, investors will call the thing by its name, 'competitive devaluation.' Some investors, reflexively, will take that opportunity to buy the dollar, reasoning that it is the dollar's turned to be 'strong.' Others, correctly, will reflect how small a monetary role the 'store-of-value' function plays in the councils of our central bankers. With this understanding, they will buy more of those monetary assets listed in the Periodic Table of the Elements."
One reason to trust Grant's forecast is that the dollar's fundamental underpinnings continue to rot away day after day, which means that the rationale for buying gold becomes stronger buy the day. Notwithstanding the dollar's sharp rally last week, the troubled U.S. currency still faces an extremely unforgiving monetary climate. But gold -- like wild buckwheat – thrives in a harsh environment. That's why we're still inclined to keep our bets on the ancient currency, rather than the revitalized greenback.
For one thing, the current account deficit grows wider by the day, necessitating ever larger dollar purchases by foreign investors in order to keep the dollar's value from falling. Consider that holdings of U.S. debt by foreign central banks jumped to a new record high last week. As of January 21, the Federal Reserve's total holdings of Treasury and agency debt for foreign central banks soared $13.86 billion to $1.108 trillion.
Can this massive global dollar-support scheme continue indefinitely? We think not... and we have come to learn that any phenomenon which cannot continue forever, won't... Again we suggest: Buy gold!
Eric Fry,
The Daily Reckoning |
