KastelCo, ... and we must have faith, believe, truly believe, in the power of gold :0)
forbes.com
Gold Bugs Look To History
Robert Lenzner, 01.31.03, 11:00 AM ET
This is a chart to cheer gold bugs and confirm their sister deflationists in their convictions. It shows the relationship between the prices of gold and equities. Note, the pessimists say, the decades of the two previous descents of that ratio from a peak: the 1930s and the 1970s.
Christopher Wood, emerging markets analyst for CLSA, a unit of Credit Lyonnais, who supplied us with the numbers, believes strongly that "gold is at the very beginning of a multiyear bull market that will take the yellow metal many times higher than its present level." The reason Wood gives: "Gold is the only real hedge against the massive financial excesses that still prevail in the western world."
Wood feels that central banks' gold reserves are not sufficient to defend against a run on the dollar that he believes has already begun. Lack of confidence in the U.S. currency, sharpened by war scares and a rising U.S. budget deficit, has pushed the euro from 98.52 cents in August to over $1.08.
Speculators and hedge funds are betting that further weakness in the dollar can only strengthen the thin and volatile market for gold. "Asia is massively overweight the U.S. dollar and massively underweight gold," says Wood, the author of CLSA's Greed and Fear investment recommendations.
The World Gold Council estimates that gold's share of total foreign reserves is now 57% in the U.S., 51% in France, 50% in Italy and 39% in Germany. These strong positions compare with only 6% in India, 3% in Taiwan and Indonesia, 2% in China, Thailand and Singapore and only 0.1% in Korea and 0.02% in Hong Kong.
"This massive Asian underweight position in gold makes no sense either from a financial or a geopolitical standpoint," says Wood. "The more the dollar falls and the more gold rises, the more Asian policy makers and central bankers are likely to focus on the risks of having all their eggs in one dollar basket."
Wood also rests his case for gold on two technical market aspects. First, the short position of commercial gold users like jewelry manufacturers has more than tripled since 2001. Someday these short positions might have to be covered, which will put upward pressure on the precious metal.
Second, as the chart shows, the value of the Dow Jones Industrial Average to gold suggests that gold has a long way to go on the upside. Back in 1980, when gold peaked at $850 an ounce, the Dow 30 was only 872.8 or almost in parity. But today the Dow industrials sell at over 20 times the price of gold. If the ratio of stocks to gold were to be five times--a common occurrence at other market troughs--gold would have to rise to $1,600 an ounce.
"The bottom line is that gold is a hedge against both deflation and inflation, and the inevitable breakdown of the 'paper dollar standard,' asserts Wood. He has been bullish on gold for more than a year and has been recommending the precious metal since when it sold at $270 an ounce. Gold is now trading at above $350 an ounce, its highest level in nearly six years.
The best equity plays in gold, says Wood, are Newmont Mining (nyse: NEM - news - people ) in the U.S., Harmony Gold Mining (nyse: HMY - news - people ) and Durban Roodepoort Deep (nasdag: DROOY - news - people ) in South Africa, and Lihir (nasd: LIHRY - news - people ), an Australian mining company which owns property in Port Moresby, New Guinea. |
