The Rude Awakening
Wall Street, New York
Tuesday, April 26, 2005 ------------------------- The Rude Awakening PRESENTS: To all Rude Awakening readers
who have endured more than enough bullish stories about
gold, we apologize in advance for the next 839 words… --- Advertisement ---
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------------------------- ANOTHER ANNOYING GOLD ARTICLE
Eric J. Fry To all Rude Awakening readers who have endured more than
enough bullish stories about gold, we apologize in advance
for the next 839 words. We don't want to write about this
thing any more than you want to read about it. But
occasionally, we observe phenomena that lead us to consider
the precious metal as a plausible investment and a
respectable asset class, albeit a very fickle one. Gold beckons us once again, both because the stock market
has become unnervingly volatile of late, and also because
gold has managed a mini-rally that has attracted very
little attention. Perhaps the gold market is preparing -
North Korea-style - to host a surprising display of
power…or perhaps not… Two months ago, a friend predicted, "The wind will be at
your back if you're short the stock market." He was mostly
right. It's true that share prices have fallen since then,
but being short the stock market has felt more like sailing
into a hurricane than sailing WITH a following breeze.
Indeed, neither bulls nor bears feel as though they have
the wind at their backs. Both "crews" feel constantly
buffeted by gale-force crosswinds that neither help them to
advance nor destroy their vessels completely. The treacherous financial winds seem likely to continue
blowing, which may explain gold's recent mini-rally.
Yesterday, the precious metal rallied from a $2 deficit to
gain a few cents by the end of trading - continuing a two-
week trend that has seen the metal gain $10.70 to $434.20
an ounce. Is gold's recent rally the beginning of something
important, or just another fleeting fling? We favor the
former interpretation, but would not be surprised by the
latter. Certainly the gold market is "due" for a rally of
some magnitude. It has been resting its legs for more than
a year, while almost every commodity on God's earth has
been dashing ahead. This fact has been readily apparent week after week in the
"Market Lab" section of Barron's. Every Monday, the
esteemed financial journal publishes the one-week and one-
year performances of various stock market industry groups.
And almost every Monday, the "platinum and precious metals"
sector can found near the bottom of the list. This week, we
could not avoid noticing the ironic fact that the "Coal"
sector ranked #1 last week with a 10.4% gain, while the
"precious metals" sector ranked #99, with 4.5% LOSS. These
contrasting results continue a months-long trend. 
The chart above does not mean to imply that gold and coal
possess any sort of necessary relationship, but does mean
to illustrate how completely opposite they have become…in
a somewhat surprising way. The precious metal attracts very
few eager buyers, while the common energy source attracts
very few eager sellers.
But the differences do not end there. Gold, for example, is
a very poor source of energy - it melts. Coal, on the other
hand, does not glisten when dangling from earlobes. Gold
cannot heat a pizza oven or power an electricity plant.
Coal cannot fill a cavity or adorn a bellybutton. Coal,
which is priced in dollars per ton, is also a much less
convenient store of value than gold, which is priced in
dollars per ounce. In short, coal is unlikely to displace
gold as a monetary asset of last resort. That said, coal is
essential, while gold often seems…well…non-essential. And yet, gold's behavior in recent days - as well as its
behavior throughout the millennia - suggests that some
investors are finding gold useful to hold in their
portfolios, even if the monetary metal is not absolutely
essential. Buying interest in gold seems to be
intensifying, which is causing its price to "act well." Therefore, our renewed interest in gold stems mostly from
the metal's "constructive" technical action - i.e. it is
going up. We are also drawn to the precious metal because
of the stock market's destructive action - i.e. it is
treating investors to just enough "good days" to entice
them to stay put for the many bad days. The Nasdaq
Composite, for example, is still more than 10% below its
year-end level. Also piquing our interest in gold is the fact that bonds
have been rallying. Over the long term, gold and bonds
often move in opposite directions. But on a short-term
trading basis, the two often move together. Therefore, we
consider the recent bond rally to be both a precursor and
an ally of the prospective gold rally. Now that we have offered a few kind words about gold, we
would hasten to add that the precious metal is just as
likely to disappoint its admirers as to reward them. As a
short-term trade, gold is only slightly more reliable than
a heavily favored thoroughbred. But since the stock market
worries us greatly at the moment, buying gold seems like a
reasonable speculation. Even so, we suspect that the most intelligent response to
the recent turbulence on Wall Street would be "lethargy
bordering on sloth," as Warren Buffet would describe it.
But if you feel you must do something, buying gold at $434
an ounce seems no worse an idea than buying the Nasdaq 100
(QQQQ) at $35.38 a share. [Ed. Note: As we've reported before in these pages, with an
incredible three-quarters of China's 400,000 megawatts of
installed electrical power capacity coming from coal,
China's skies are also turning black with coal smoke. Seven
of the world's 10 most polluted cities are in China. Acid
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------------------------- Did You Notice…?
By Eric J. Fry The cover story of this week's Barron's extolled the
virtues of Diageo (DEO), the world's largest purveyor of
premium spirits. As the keeper of popular hard-alcohol
brands like Johnnie Walker scotch and Captain Morgan rum,
Diageo is riding high on a new booze craze. "People want to
get drunk and drunk fast," one bartender explains to
Barron's. Evidently, getting drunk slowly has fallen out of style,
which might partially explain the poor performance of
Anheuser-Busch (BUD) shares. BUD languishes near a 52-week
low, while DEO floats near its 52-week high. 
Might the shares of these two spirits companies begin to
re-converge? This notion gains support from two recent events: 1) Warren Buffet recently acquired a large interest in
Budweiser, but not in Diageo. 2) Barron's recently wrote a glowing cover story about
Diageo, but not about Budweiser. [Ed. Note: As much as your editors of the Rude Awakening
enjoy a cold bud or a spiced rum, we like water too -
especially when it generates profits 24 hours a day, 365
days a year… Cheers! http://www1.youreletters.com/t/133233/4889621/775189/0 ------------------------- And the Markets…
| Monday | Friday | This week | Year-to-Date | DOW | 10,242 | 10,158 | 85 | -5.0% | S&P | 1,162 | 1,152 | 10 | -4.1% | NASDAQ | 1,951 | 1,932 | 19 | -10.3% | 10-year Treasury | 4.26% | 4.25% | 0.00 | 0.04 | 30-year Treasury | 4.56% | 4.58% | -0.02 | -0.26 | Russell 2000 | 596 | 590 | 7 | -8.5% | Gold | $434.58 | $434.60 | -$0.03 | -0.7% | Silver | $7.26 | $7.28 | -$0.02 | 6.5% | CRB | 308.68 | 307.29 | 1.39 | 8.7% | WTI NYMEX CRUDE | $54.57 | $55.39 | -$0.82 | 25.6% | Yen (YEN/USD) | JPY 105.65 | JPY 105.97 | 0.32 | -3.0% | Dollar (USD/EUR) | $1.3000 | $1.3066 | 66 | 4.1% | Dollar (USD/GBP) | $1.9114 | $1.9146 | 32 | 0.4% |
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