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-- Posted Sunday, 24 September 2006 | Digg This Article
An article in Mineweb earlier this month said that the International Diamond Exchange (IDEX) reported diamond prices are softening. I have not seen any hard data for a long time, but I do recall seeing a study about ten years ago that indicated a very high correlation between higher-end diamond prices and stock market indices. Diamonds are the ultimate luxury item and during times of prosperity (usually when stock prices are rising), demand for diamonds is strong. Conversely, when times are tough, less people buy expensive diamonds. According to IDEX, the prices of 1.5 and 2 carat diamonds fell below their prices of a year ago for the first time in recent history. In my way of thinking that is probably because the bull market in stocks, bonds and real estate that started in 1982 might finally be coming to an end. IDEX apparently found that US jewelers are concerned that softening jewelry demand is a leading indicator for US economic growth. I would not hang my hat on diamond prices as a leading economic indicator but in conjunction with everything else that’s going on I would look at it as confirmation that US economic woes are deepening. Last week I reported on the Federal Reserve Bank of Boston’s comments that weakness in the housing market poses a risk to the US economy. This week the Federal Reserve Bank of Philadelphia said its business conditions index, a gauge of manufacturing activity in the Mid-Atlantic region, fell into negative territory for the first time since 2003. A negative reading implies economic contraction and thus the index is not merely indicating a slowdown in economic growth, but an actual contraction of economic activity. The Conference Board, a nonprofit business research group, issued a separate report of composite leading economic indicators that also signaled weakness ahead. Their index of leading indicators has declined for five out of the eight most recent months. The biggest contributors to the decline were waning consumer expectations and declining building permits. During the past month, short selling on the New York Stock Exchange hit a new record -- a clear indication that there is a strong belief out there that the current rally in stocks is not going to last. Not surprisingly the Federal Open Market Committee decided to leave US interest rates unchanged this week for the second month in a row. In the accompanying statement the Fed said: “ The moderation in economic growth appears to be continuing, partly reflecting a cooling of the housing market.” The Fed continues to talk about the threat of inflation but weakness in the economy is, thus far, prohibiting them from raising interest rates. The dollar softened up this week due to all this talk about negative economic conditions and that gave a boost to both gold and base metals prices. As the US economy weakens the demand for base metals will eventually drop off. China, India, Russia, Brazil, and the rest of the developing and developed world will not be able to replace falling US demand for goods and services. A lot of hope is pinned on China, but to believe that Chinese demand for base metals and other raw materials is going to offset falling US demand is ludicrous (see “Will China really save the world?” www.paulvaneeden.com/displayArticle.php?articleId=169). Unlike base metals, Gold is purely a monetary asset. So while falling economic activity will have a negative impact on base metals demand and, consequently, base metals prices, the same is not true for gold. Falling economic activity has no impact on the gold price. Because gold is a monetary asset the gold price is determined predominantly by the inflation rates of fiat paper money and currency exchange rates. Therefore, a slowdown in US economic growth coupled with a declining US dollar exchange will have a positive impact on the gold price even if base metals prices fall. A large amount of capital was invested in metals during the past year as investors looking for a hedge against the US dollar bought all sorts of “hard assets”, including base metals, precious metals and gold. Those investors did not differentiate between base metals, which are commodities, and gold, which is money. So while declining economic activity should not have a negative impact on the gold price, falling base metals prices might cause those same investors, who indiscriminately bought gold and base metals, to sell those assets, including gold. This could cause the gold price to fall in sympathy with base metals in the short term; however, any such decline in the gold price should be viewed as an opportunity. At some point the gold price will decouple from base metals and rise due to rising fiat currency inflation and a falling US dollar exchange rate. My own target for the gold price remains somewhere between $900 and $1,300 an ounce so with gold now under $600 an ounce I am once again a buyer. I don’t buy physical gold; instead I invest in mineral exploration companies. I sold aggressively during May and have been waiting for good buying opportunities to arise. Now I am starting to see some attractive stock prices once again. If you are interested in what I buy and sell with my own money you could subscribe to my paid weekly newsletter, in which I discuss the stocks I buy and sell. For more information please visit www.paulvaneeden.com/publications.php. ROB TV John Embry, who is the chief investment strategist for Sprott Asset Management, and I, were on a Report on Business Television show last week where we discussed the gold market and took questions. It was a fun show and you can watch it at http://www.robtv.com/shows/past_archive.tv?day=tue, scroll down to 12:30PM. Paul van Eeden Conferences: My next speaking engagement is in New York on October 19th, at a dinner organized by the Committee for Monetary Research and Education. If you are interested in attending, please contact Elizabeth Currier at cmre@bellsouth.net. 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, 24 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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Jewelry, the economy and gold
