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To: orkrious who wrote (240939)	5/15/2003 4:41:25 PM
From: orkrious	Respond to of 436258

All That Glitters Really Is Gold By Ken Morris Special to RealMoney.com 05/15/2003 02:36 PM EDT thestreet.com Gold gets no respect. Analysts continue to blast it as a relic, a nonrelevant asset class. And quite frankly, it's hard to blame the casual observer for that notion. Recent run-ups aside, gold has been moribund for more than 20 years. Once a commodity worth $800-plus an ounce, gold has ranged between roughly $250 and $300 an ounce since the bull market in equities began in late 1982. But has gold really failed in its historical role as a store of value? Not hardly. Ask anyone in Russia during their market meltdown if they wish they'd bought gold instead of holding soon-to-be-worthless equities, bonds and currency. Ask those folks in Mexico if gold was, in hindsight, the place to be when the peso went from seven to 10-plus against the dollar. In 1997-98, when Southeast Asia went through massive devaluation -- a time when George Soros flooded Malaysia's central bank with ringgit and broke the currency -- did those investors wish they had held gold? Ask them if gold acted as a store of value. Why, then, have pundits ridiculed gold? One significant reason is that gold is a dollar-denominated asset in a period of relative dollar and financial asset stability (an understatement since these asset classes had been in the most prolonged bull market in history until the Internet bubble finally burst). As gold ran up from $270 an ounce to a recent high of around $380, it began, finally, to show its mettle (pun intended). In other words, gold might, in dollar terms, be performing as it should, even to those wearing dollar-denominated sunglasses. Firm Cap For the past 20 years, there was one other technical trend that frustrated gold bugs: The propensity of central banks to lend gold to banks and speculators at something like 1% in interest a year, not to mention outright sale by central banks no longer enamored with gold as a hard currency. This lending activity by central banks helped put a cap on the gold price at $300 an ounce for two decades. How? Borrowers, expecting gold to always peak at $300 an ounce, hit the central banks up for gold loans at that level. They then sold the gold en masse, flooding the market with supply. These players then took the proceeds from gold sales and invested in Treasuries and other financial assets, some yielding several hundred basis points above the 1% the central banks were charging them. A few of these rocket-scientist speculators even bought gold options to hedge against the improbable event of gold breaking through $300 an ounce. I suspect most of them gave up on that precaution after a few years of wasting their hedge money. In other words, until it didn't work again, the resistance level of $300 became a self-fulfilling prophecy. Later, when squeezed by climbing prices, those who sold short the borrowed gold at the $300 level dove in to cover and the tables violently turned. At the same time the central banks were lending, producers -- similarly frustrated by the failure of gold to rise above $300 an ounce -- made forward sales, essentially selling future production at higher prices to enhance returns. Once their perceptions changed, producers not only ceased forward sales, but aggressively unwound sales they held on their books. The double whammy on the downside became a double whammy on the upside. Suddenly, buyers of gold rivaled the intensity of former sellers at the magical $300 level. Previous resistance turned into massive support. The confluence of these events also explains why some derivative watchers are anticipating a day when speculators, forced to realize losses, begin to confess the past sins of being short rising gold and long declining financial assets (leveraged bets all). Gold is a market made harder to understand from the dollar investors' point of view because of market trends the last 20 years. But with hindsight, let's recall the August 1979 cover story in Business Week (as I nearly always do to provide me with historical insight) proclaiming the death of equities. The prominent proclamation of the death of anything should be the clearest buy signal there is for an investor. Gold may have risen from the dead after all.