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The Blue Money Report
"Money, like number and law, is a category of thought. "
~ Oswald Spengler

Welcome to the Blue Money Report

Today's Commentary: 12.26.02
A Midas Lure

The Gold Question

Gold has a traditional way
Its functions to perform;
It surges when great fear holds sway
Then poof! The surge is gone.

When wisdom flees and faith departs
The ruling money club,
Investors tap an age old smarts
And gold's their chosen snub.

War and oil interruptus
Bring gold bugs to the fore;
Bio threats, a plunging dollar
Can cause the stuff to soar.

As certain as the panic rush
When fear is in the air,
Is gold investors' exit crush
When markets sound: 'all clear.'

These days as we confront Iraq
Is gold just near-term fun?
Or after Saddam gets the sack
Might there be worse to come?

Mike Silverstein
©2002

I may have mentioned before that the first time I ever owned gold was at $210 an ounce back in 1980. That was just before the metal, purchased at the urging of a trusted friend, soared to over $800. That trust in his advice earned me enough money to spend the next six months in Europe. At the time, I never considered gold much of an investment. It was, and still is a very speculative gamble.

But recently, bubble hungry investors have been casting a wanton glance toward the metal that has been the ruin of many. But there are some things you should seriously consider before venturing into something you think you know something about.

There are just too many outside influences that are directly reflected in the price you see at the corner of your television screen. Fear is a big factor in the price of gold and any sudden movements. Fear of increased inflation or it's destabilizing opposite, deflation can send the price upward, a bear market in stocks or bonds or both, and some sort of financial unrest all have an effect. Back in the early 1990's as we made our first assault of Saddam, gold found the $400 mark rather easily and then proceeded to go back down after the conflict ended.

Bringing some knowledge of commodities to the table with you is always helpful. There are some complicated maneuverings that the average investor may not be aware of and that lack of knowledge will come back to bite you. Commodity traders look at weekly position reports, jewelry demand, industrial needs all add to the information that needs to be compiled along with market trends, some of which are non monetary in nature.

li>Buy and Hold strategies seem to work best when dealing for gold. The active trader might find the investment challenging but historically, this kind of trading in gold has been less that noteworthy.

Should you decide to diversify your portfolio, you should do so with the utmost of concern as to the percentages. In a bear market in gold, holding any is considered unwise. In the current state, an allocation of five percent will provide you with somewhat of a safety net.

According to John Hathaway of Tocqueville Funds: "Gold equities tend to appear expensive in comparison to those of conventional companies because they contain an imbedded option component for a possible rise in the gold price." Understanding reserves, cash flow from these companies, and the ability to continue current production that meets demand can weigh heavily on the performance of the metal.

Gold will always remain somewhat outside the conventional world of investors due to it's somewhat anti-establishment appearance, An investment in gold is still a bet against the health of the economy and it's ability to recover enough to provide returns from more conventional investments. If it is meant to provide insurance, purchase gold through bouillon of coins or even better, through funds.

Gold does represent everything that is speculative about investing. It rides the wave of fear and can fall as fast as it is heavy. To read an excellent case about prudence when investing in gold, Mr. Hathaway writes, "Of the three known extraordinary factors depressing the gold price in recent years, central bank selling, industry hedging, and rapid expansion of mine output, only the first remains."

There are other contributing factors to the run up in gold prices and the speculation that they can go far past the $400 an ounce price. Federal Reserve Chairman Alan Greenspan has suggested that, "there¹s virtually no meaningful limit to what we could inject into the system were that necessary" by literally printing enough money through the acquisition of long term Treasuries. This sudden increase in the number of dollars in circulation or the threat of such action reduces the value of the dollar in terms of goods and services, which is the same as increasing the price of those same goods and services.

Now this strategy unto itself is economically sound and could work with only one exception... foreign investment. Far too many countries have invested in our currency as the best means to hold their wealth. What do you suppose their reaction to news that their investment will be de-valued to keep deflation from occurring in the U.S.? The idea of continuing o finance American debt is beginning to weigh on these foreign investors and now the threat of a dollar worth less is causing some investors to look toward gold as a place of safe haven.

Greenspan may have further cemented this overseas speculation during an address to the Economic Club of New York with this statement: "Although the gold standard could hardly be portrayed as having produced a period of price tranquility, it was the case that the price level in 1929 was not much different, on net, from that of 1800. But in the two decades following the abandonment of the gold standard in 1933, the Consumer Price Index in the United States was doubled. And, in the four decades after that, prices quadrupled. Monetary policy, unleashed from the constraint of domestic gold convertibility, had allowed a persistent over issuance of money".

As it stands right now, gold is poised for some sort of movement upward. How far is anyone's guess but there are too many factors aligned with our reluctance to maintain a strong dollar policy to not warrant some serious consideration, even if it is only modest.

Special thanks to Mike Silverstein for providing our introductory poem. If you would like more financial verse, visit his Wall Street Poet