|
-- Posted Monday, 17 July 2006 | Digg This Article
Gold’s 5% increase last week was generally attributed to escalating tension in the Middle East yet at the same time the Gold Fields Mineral Services (GFMS) Base Metal Index rose 7.8%. Base metals should not respond positively to war since wars destroy capital and cause misallocation of available capital, both of which in the end are detrimental to economic growth and prosperity. What gold and base metals are doing is signaling weakness in paper money. Gold is a monetary asset and protects its owners against the devaluations of fiat currencies only, and massive amounts of institutional money have been allocated to hard assets as a hedge against a decline in the dollar. Between January and May this year the GFMS Base Metal Index rose 51% and gold rose 38% as institutional investors lay big bets that the US dollar is going to tumble. Those bets were placed on the premise of Japan ending its policies of quantitative easing and zero interest rates, which have been widely expected for almost a year now. With the Bank of Japan’s new policy of transparency, the changes were announced well in advance of taking effect. What is busy happening in Japan is far more important to the price of gold, the value of your house, interest rates, your job, and the value of the money in your bank account than what is happening in the Middle East. Don’t get me wrong; I am not downplaying the current Middle East violence. Personally I believe that the Third World War has already begun and that our lives are going to change dramatically over the course of the next several years as the War spreads and gains momentum. For starters you can expect further confiscation of your personal liberties, whatever is left of them. This commentary, however, is not about liberty or war; it is about markets, money and gold. During previous wars and skirmishes the gold price seldom responded positively for very long. Any rally in the gold price due to conflict was usually (very) short-lived. So if the current rally in the gold price is merely due to Israel and Lebanon bombing each other, and fear that the violence will spread, then we should all sell into the rally for it will soon end. On the other hand, if it has more to do with Japan raising interest rates for the first time in five years, marking the end of an era of yen-stimulated liquidity, then the rally could have legs (see last week’s commentary for more on the yen and the yen-carry trade). The weakness of the dollar against the yen (one of the few currencies that the dollar was weaker against last week) can be directly attributed to Japan raising interest rates and not Middle East turmoil. As I said, base metals have rallied spectacularly during the past six months and the sell-off that commenced in May has essentially been erased. Base metals are rallying again. Now, if war is in our future you can bet economic growth is going to suffer. Also, with the US, Europe and Japan raising rates we don’t even need a war to take the wind out of the economy’s sails. But if the base metal bets were made on the premise that the dollar will weaken, what about traditional base metal demand? Slower economic growth and the end of the real estate boom will cause reduced demand for base metals and weakness in base metals prices. Copper has no business trading where it is. Neither do zinc, lead, nickel or many other metals. They became over-bought as institutional investors tried to find hedges against dollar weakness. Perhaps there is still so much institutional money out there looking for a hedge against the dollar that base metals prices will double again, but, being a contrarian, I would not want to bet on that. Base metals prices are so far ahead of themselves that I believe there is substantial risk of a meltdown in that sector. Because institutional money seems to have been allocated across the spectrum of metals, I fear that a severe correction in base metals could drag the gold price down as well. So what will happen first? Will the dollar collapse causing more money to be allocated to metals thus pushing metals prices even higher, or will base metals correct dragging gold down with them? 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 Monday, 17 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.
|
Trouble Brewing
