-- Posted Friday, 16 June 2006 | Digg This Article
Gold has been under pressure since it peaked on May 12th. The initial downdraft was in sympathy with other metals that were grossly over-bought over the past ten months and were undergoing a correction. Since last week Monday, however, the rate of decline increased as the dollar strengthened because of comments Ben Bernanke made. That more dramatic decline came to a halt Thursday as the dollar-rally petered out. Gold is now almost back to where it was in the first quarter of this year, before it went on a tear. Is this the end of the correction? It may be. There is a lot of negative sentiment out there about the dollar and many people understand gold’s ability to hedge dollar weakness. But the gold price rallied during the past ten months along with base metals. Even though base metals prices corrected, they may still have a lot more downside left. Should economic growth in the US erode further, other economies would be affected, substantially reducing base metal demand. From July last year to May of this year the copper price more than doubled and reached a high of almost $4 a pound. During the past month the price of copper fell by about 20% to $3.12, still almost double what it was in July. The rally in the copper price occurred in spite of rising copper inventories -- a clear sign that the copper market does not lack supply. I would not be surprised to see copper back under $2 a pound, or thereabout. And if copper (and other base metals) were to fall another 30%, would the price of gold hold up? On the other hand, unlike base metals, gold is not a commodity and I believe the gold price will decouple from base metals prices at some point -- I just don’t know when. According to the OECD, the dollar should fall by 35% to 50% to balance the US trade deficit. That corresponds very well to my own estimate of the dollar’s over-valuation. My models also indicate that gold should be around $900 an ounce on an inflation adjusted basis, so if we assume the dollar is over-valued by 35% it would peg the current gold price at around $600 an ounce. With gold now under $600 an ounce it looks attractive once more. I am therefore on the one hand tempted to buy gold stocks since the price of gold is less than I think it should be. On the other hand, if the fund managers that have been pouring capital into metals decide that they want out, the gold price could still come under considerable pressure. This is where the Better Sleep Principle comes to play. I had not really thought about it but I have for many years now subconsciously followed the Better Sleep Principle in my own investing. It works like this: If I start worrying about something when I go to bed at night I fix it the next morning. For example, if I own too much of a stock and am concerned about what would happen if the price falls, I sell some. If I don’t own a particular stock and I lie in bed worrying that the price would go up before I get a chance to buy it, I buy some. I do whatever it takes to make me sleep better at night. Here’s why you should follow your own instincts to make sure you sleep well at night: it doesn’t help if you follow someone else’s advice and they sleep well while you lie awake. Investing is a very personal endeavor; only you know what you need to do. At this point in time I own enough gold stocks that I would be very happy if the gold price rallied. I also have enough cash that I would be equally pleased if the gold price collapsed, since then I could buy even more gold stocks at lower prices. I sleep just fine. Paul van Eeden If you enjoy reading these commentaries I suggest you go to my website at http://www.paulvaneeden.com/commentary.php and register to get them by email. Rest assured that I do not sell or rent any of my subscribers’ email addresses. Paul van Eeden works primarily to find investments for his own portfolio and shares his investment ideas with subscribers to his weekly investment publication. For more information please visit his website (www.paulvaneeden.com) or contact his publisher at (800) 528-0559 or (602) 252-4477. Disclaimer This letter/article is not intended to meet your specific individual investment needs and it is not tailored to your personal financial situation. Nothing contained herein constitutes, is intended, or deemed to be -- either implied or otherwise -- investment advice. This letter/article reflects the personal views and opinions of Paul van Eeden and that is all it purports to be. While the information herein is believed to be accurate and reliable it is not guaranteed or implied to be so. The information herein may not be complete or correct; it is provided in good faith but without any legal responsibility or obligation to provide future updates. Neither Paul van Eeden, nor anyone else, accepts any responsibility, or assumes any liability, whatsoever, for any direct, indirect or consequential loss arising from the use of the information in this letter/article. The information contained herein is subject to change without notice, may become outdated and will not be updated. Paul van Eeden, entities that he controls, family, friends, employees, associates, and others may have positions in securities mentioned, or discussed, in this letter/article. While every attempt is made to avoid conflicts of interest, such conflicts do arise from time to time. Whenever a conflict of interest arises, every attempt is made to resolve such conflict in the best possible interest of all parties, but you should not assume that your interest would be placed ahead of anyone else’s interest in the event of a conflict of interest. No part of this letter/article may be reproduced, copied, emailed, faxed, or distributed (in any form) without the express written permission of Paul van Eeden. Everything contained herein is subject to international copyright protection.
-- Posted Friday, 16 June 2006 | Digg This Article
Previous Articles by Paul van Eeden
Paul van Eeden is an independent investor, analyst and newsletter editor.
Born in South Africa, Paul graduated from university with a degree in chemistry and applied chemistry with additional credits in accounting, economics, business economics, philosophy, statistics, mathematics, biochemistry and physics.
Paul's first business was an African art distributorship, of which he acquired a 50% interest during his first year at university in 1985. He has experience, either as an owner, manager or director, in plastics manufacturing, food supplements and cosmetics distribution, advertising & marketing as well as the manufacturing and distribution of gas detection equipment.
Paul van Eeden left South Africa in 1994. He joined Yorkton Securities in Toronto as a stock broker in 1995 and moved to Global Resource Investments in Carlsbad, California in 1996. In November 2002, Paul decided to leave the brokerage industry and joined Doug Casey as co-editor of the International Speculator (www.internationalspeculator.com) newsletter.
His investment approach was shaped by the ideas of Benjamin Graham and David Dodd so Paul is always on the search for tangible value that can be bought at a reasonable price. That can usually be accomplished only during the trough of a market, which is currently not the case for general US equities.
Therefore Paul decided to focus on the natural resources sector, specifically gold. The period from 1996 to 2001 was a trying time - the bottom of the worst bear market in gold in twenty years - but, of course, it was also a time of opportunity.
At the San Francisco Gold Show in November 1998, Paul van Eeden introduced his original thesis that the gold price in US dollars is driven by the US dollar exchange rate, and that traditional commodity style analyses would not yield predictive results when applied to gold. He showed that a dollar-only view of the gold market is inadequate: understanding the gold price requires a global view, incorporating exchange rates across many currencies. This novel line of thinking is now ubiquitously accepted.
In 2003 Paul went further, showing that the price of gold in US dollars is tightly correlated to the expansion of US monetary aggregates (M3) and that an analysis of gold as money not only clarifies the gold price from 1971 to the present, it has other implications that are still unforeseen by most financial and commodity analysts today. One of these is that the gold price will soon exceed $1,000 an ounce. Another is that, aside from operational differences, not all gold mining companies will benefit equally from this increase in the gold price.
Paul van Eeden not only does his own research on the fundamental drivers behind the gold market, he also takes a hands-on approach to investment analysis: interviewing management, studying exploration projects and visiting mining operations. Whilst investing in mining and exploration companies is inherently risky, value is never far from his mind and features forcefully in his selection criteria.
Most of Paul's time, now, is devoted to finding investments for his own portfolio.
|