Dollar bears ready for golden day
Commentary: Linking weak dollar to rising bullion
By Thom Calandra, CBS.MarketWatch.com
Last Update: 11:07 AM ET May 31, 2002
SAN FRANCISCO (CBS.MW) -- As Nasdaq fends off its September lows, economists, analysts and technicians are pointing to the storm signals of rising gold prices and the falling dollar.
The dollar's fall - down about 7 percent this year against the currencies of America's biggest trading partners - is increasingly linked with gold's relentless gains.
Barry Cooper, a gold equities analyst at CIBC World Markets in Toronto, just raised his gold price forecast to $350 an ounce for 2003. Cooper's higher price guess comes about a day after an analyst at Goldman Sachs Group said gold's price would be challenged to stage gains above $324, given weak jewelry demand in Asia. See the CBS MarketWatch story.
It takes two to make a market," says Cooper, who signs off his reports and his voice mails with "Have a golden day." "The beauty is one of us will be proven right," he told me Friday morning.
Cooper uses the dollar as the driver for gold, which Friday morning was rising $2 to $326.80 an ounce. In a fresh report Friday, he says each 1 percent move higher for the euro against the dollar will translate into a 1 percent move higher for gold. If the euro, at 94 cents for the first time in 16 months, reaches $1, gold, reflecting a worldwide retreat from American assets, will move to $345 an ounce. And that will lead to a 25 percent gain in the prices of gold mining stocks, one of the few strong gainers in the stock market this year.
The euro has gained 8 percent vs. the dollar since April 1 while gold has risen 7.5 percent in the same span. "The fundamentals are in place for sustained rally in bullion," Cooper says. "Included in these positive factors are weakness in the U.S. dollar, reduced hedging, a terrorism premium, investment demand increasing, market uncertainty, lower mine production, and poor reserve-replacement capabilities following a five-year culling of exploration."
Mainstream economists, those on Wall Street, are becoming resigned to a fall for the dollar, but few are linking a dollar fall directly with gold's rise. Stephen Roach at Morgan Stanley, for example, was one of the first to point to the growing red ink in the current account, which could surpass 4 percent of America's gross domestic product in coming quarters and scare overseas investors. Roach said the implications for returns on U.S. assets, like stocks and bonds, is negative.
Just this week, Bill Dudley at Goldman Sachs Group (GS: news, chart, profile) told the firm's clients, "A sharp dollar slide appears almost inevitable at some point. The imbalances are too large and are growing too fast to be unwound smoothly." Dudley gave the textbook approach to a dollar decline: inflation for American consumers as overseas goods become more expensive, rising government bond market yields and a nasty spiral for the stock market.
Dudley estimates the current account deficit, which is basically America's real-time ledger of trade and money flows with the rest of the world, will reach 4 percent of economic output by December and 5 percent toward the end of next year.
"The 1985-87 experience is a case in point," Dudley wrote this week. "Although the dollar peaked in 1985, the nominal trade balance did not begin to narrow
until the summer of 1987, more than two years later. Bond yields rose very sharply in the days leading up to the Oct. 19 stock market crash. The dollar decline was, in fact, the proximate cause for that stock market crash."
As for gold, bullion prices are generally seen as a leading indicator of accelerating inflation, especially in basic commodities. So far this year, that seems to be holding up. The Commodity Research Bureau/Bridge Index of 18 commodities (agriculture, energy, metals) is up about 5 percent since Jan. 2 vs. a 21 percent gain for gold. Silver prices - the poor man's gold -- are up about 12 percent this year.
John Hathaway at Tocqueville Gold Fund in New York says besides the weak dollar contributing to further gold gains, the metal also will benefit from less selling by gold producers that during gold's bad years tried to squeeze extra income through derivative-based forward sales of bullion. These practices, advocated by Barrick Gold (ABX: news, chart, profile), Placer Dome (PDG: news, chart, profile), Anglogold (AU: news, chart, profile) and others essentially added to the supply of gold sales and lending in the world of big banks.
In addition, Hathaway says central banks around the world almost certainly are looking over their shoulder at the falling dollar, and America's weak stock market. Central banks have liquidated hundreds of tons of the metal in recent years as they strove to put more paper in their vaults and less bullion.
"Central bankers are only human," Hathaway told his Tocqueville shareholders this week. "Once, they were only to happy to pile on to the downtrend in the dollar gold price by outright selling and lending of gold reserves in order to accumulate more paper assets. Now, they find themselves in the position where their principal reserve asset, the U.S. dollar, representing 76 percent of world central bank reserves, is declining in value against the gold they were dumping as well as their holdings of other paper currencies. What they are loaded with is their worst asset."
Sounds like gold may be a worst nightmare for central banks, hedged gold miners and the stock market. Hathaway's shareholders, meanwhile, are happy. His $88 million Tocqueville fund (TGLDX: news, chart, profile) is up 88 percent this year.
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