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-- Posted Sunday, 17 September 2006 | Digg This Article
As expected, more talk of a slowing US economy caused base metals prices to continue their decline this week and, as expected, falling base metals prices dragged the gold price down as well. Very few institutional investors differentiate between gold and other metals; they bought them all as a hedge against a weaker US dollar, so when they finally wrapped their heads around the fact that the US economy can slow down and that a slowing economy will cause a decline in base metals demand, they started selling their metals -- including gold. On Monday, Cathy Minehan, the President of the Federal Reserve Bank of Boston, commented on the risks that the slowing housing market could pose to the US economy. She was speaking at a meeting of the National Association for Business Economics and a survey of the Association’s economists revealed that they, too, expected the US economy to post below-trend growth for the rest of this year and into 2007. The Bank of Japan also kept its interest rates unchanged without giving away any clues as to when, or if, it might raise interest rates again. There is some speculation that weakness in the Japanese economy could deter the BOJ from raising interest rates in the near future and this dampened enthusiasm for base metals further. Most investors (both individual and institutional) are reactionary, and when they read about negative sentiments such as these they react by giving sell orders to their brokers, which is precisely what happened this week. US money supply (as measured by my own estimate of M3) increased by 8.4% over the past twelve months. Current gold inflation, which is mine supply as a percentage of all above-ground gold (all the gold that has been mined to date), is around 1.6% per annum. That is why the gold price continues to rise against the US dollar over time – it is as simple as that. In the short term, however, exchange rates and investor sentiment also have to be brought into account and it is mostly they that cause short-term volatility. But in the long-term, the gold price in any currency will rise by an amount equal to the difference between its inflation rate and the inflation rate of the currency you price it with. My model of the gold price (based on the inflation rates of gold and the US dollar) puts the gold price at around $900 an ounce with the difference between the current gold price and $900 being accounted for by an over-priced US dollar. For gold to rise from $600 an ounce to $900 an ounce requires the dollar to fall, on average, by 35%. The Organization for Economic Co-operation and Development (OECD) said earlier this year that the dollar had to fall by 35% to 50% in order to balance the US current account gap. I don't know how they came up with those figures, but they correspond very well to my own expectation of how much the dollar should decline. If the gold price is going to rise to $900 an ounce then gold at under $600 an ounce is starting to look attractive again, but there is still downside risk in base metals and until the gold price uncouples from base metals prices I would not get too aggressive on the buy side. But gold will decouple, because unlike base metals, its value (and long-term price) is not dependent on economic growth. Paul van Eeden Special Event: I will be speaking at a special event organized by the Discovery Group on September 26th in Toronto. Cocktails will be served from 6:00 PM and dinner at 7:00 PM, after which I will give a talk on gold, the economy and investing in the mineral exploration sector. A donation of $50 per person is requested with the proceeds going to "Water for the People". If you would like to attend, please contact Rebecca Page at (604) 646-4523 or rebeccap@discoveryexp.com without delay, as space is limited. Conferences: The next conference I will be speaking at is the Toronto Resource Investors Forum on September the 24th and 25th. For more information please visit http://www.paulvaneeden.com/conferences.php Newsletter: 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 Sunday, 17 September 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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Wait for Gold to Decouple From Base Metals
