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-- Posted Wednesday, 5 July 2006 | Digg This Article
As anticipated the US Federal Reserve raised the overnight interest rate on Thursday by one quarter of a percent to 5.25%. Instead of rallying on the news the dollar plummeted. In the accompanying statements the Fed seemed to indicate that its stance towards further interest rate increases has softened and it would consider both inflation and economic growth going forward. Since there are clear signs the economy might be slowing down this could mean the end of the Fed’s rate hikes -- hence the dollar fall. The gold price rose in direct response to the weaker dollar and a casual observation of the gold market might lead one to the conclusion that the worst is behind us. Nonetheless, I remain cautious because base metals prices are still grossly overvalued in my opinion and if base metals prices fall they could drag the gold price down temporarily. That’s because many of the institutions that bought into the commodity super-cycle idea also bought gold, and if they sell, they will sell across the board. The positive for gold is that pressure on the US dollar is increasing. My own expectation is that the dollar has to fall, on average, roughly another 35%. In the May 29th Commentary I mentioned that the Organization for Economic Co-operation and Development (OECD) was quoted in Forbes as saying the dollar had to fall by 35% to 50% in order to balance the US current account. Last week I saw an article quoting Daniel Gros, a director of the Centre of European Policy Studies (CEPS) saying that accounting errors in America’s balance of payments and net international investment position add up to a staggering $2.7 trillion. His prediction: A substantial depreciation of the US dollar. In the March 6th Commentary I explained that both China and Japan have to let the dollar fall as neither of the two could unilaterally keep the dollar where it is. In several commentaries I had documented China’s changing stance towards the dollar and in the March 6th commentary I reported that Japan had changed its stance as well, by saying that the end of its zero interest rate policy had arrived. However, neither China nor Japan has actually done anything substantial yet. China has not rebalanced the basket of currencies against which the renminbi exchange rate is set and Japan has not yet started raising interest rates. That does not mean changes are not coming. Japan announced again this week that its policy of zero interest rates is over and suggested that the Bank of Japan could start raising interest rates by the end of summer. Higher Japanese interest rates would kill the yen-dollar carry trade and could lead to a rise in the yen-dollar exchange rate (devaluation of the dollar). President Bush’s Treasury secretary nominee, Henry Paulson, told a Senate panel that the US has to aggressively encourage China to make its currency more flexible. Translated, it means that China has to allow the US dollar to fall. As the dollar falls the gold price in US dollars will rise and according to my calculations the gold price should rise to about $1,000 an ounce. That makes the current gold price of around $600 an ounce look very attractive. If I did not own any gold related investments I would be aggressively buying right now. But, as I said earlier, there is also some risk that the gold price could fall further before it eventually rises to triple digits. Therefore I would also not be fully invested at this time. I always try to engineer win-win situations, which is why I own a lot of gold investments and I have a lot of spare cash. If the gold price goes up, I’m happy. If the gold price goes down, I can buy more at lower prices, and I’m happy. It also makes it much easier to sleep well at night and not worry about what the gold price is going to do next week or next month. Paul van Eeden - June 30, 2006 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 Wednesday, 5 July 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.
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Looks like the worst is over, but there is still risk
