Gold Bugs and Dom Perignon

Investors returned to their quote screens yesterday, hoping to watch the stock market enter the New Year as triumphantly as it exited the old one. But "Day One" of the 2004 campaign bore little resemblance to the victorious campaign of 2003.

The Dow stumbled 44 points to 10,410, while the Nasdaq eked out a slim 3-point advance to 2,007. According to the Stock Trader’s Almanac, the Dow has posted gains in nine of the last 12 years on the
first trading day of January. But yesterday would be one of the rare exceptions.

Despite the Dow’s auspicious start, investors needn’t panic just yet. January is a very kind month for stocks. Over the past 33 years, the Dow has advanced an average of 2.3% during the month of January, while the Nasdaq has surged an average of 4% during the year’s opening month.

However, this particular January may deliver a less-than-average bounty because December delivered a bit more bounty than usual.

The Dow Jones industrials began the month of December at 9,782 and ended at 10,454 – a gain of more than 6%. Maybe December "borrowed" a bit from January… just like 2003 may have borrowed a bit from 2004… Come to think of it, the entire decade of the 1990s may have borrowed from the 2000s. A stock market selling for 30 times trailing
earnings must have borrowed its gains from somewhere.

Friday’s splendid report on U.S. manufacturing activity from the Institute of Supply Management provided only a fleeting boost to share prices and a VERY brief fillip to the dollar, while knocking the legs out from under the bond market. The ISM’s reading on manufacturing activity for the month of December surged to 66.2% from 62.8% in November.

Stocks jumped immediately after the ISM report, but dropped shortly thereafter. The dollar also bounced slightly after the report, but then returned to its losing ways. The pathetic greenback picked up the New Year right where it left off… sliding into the dustbin of monetary history. The dollar fell one third of a percent to $1.2585 per euro. (The gold market registered no reaction whatsoever to the dollar’s slide… because it was closed for the day).

The surprisingly strong data from the ISM sparked "fears" of a recovering economy among bond traders. Treasury prices tumbled, pushing the yield on the 10-year Treasury note up to 4.37% from 4.26% on the final day of 2003.

The bond market will be an interesting story throughout 2004. How hard will the Treasury department strain to sell its bonds? How strenuously will foreign investors avoid them?… In other words, how high will rates climb? The key to it all will be the U.S. dollar. It will be remain the pivotal investment story of 2004, with gold remaining the most interesting sub-plot. For two straight years the dollar has tumbled about 20% per year. And for two straight years, the gold price has jumped more than 20%.

Will these trends accelerate in 2004, or will the dollar finally catch its footing?

If forced to chose, we would vote for the former. The dollar may regain its footing temporarily, but we would expect it to continue sliding throughout 2004.

In late December of 2002, your New York editor suggested, "If you’re looking to sip some elegant champagne this New Year’s – perhaps some Dom Perignon or Crystal – you might try to wangle an invite to a New Year’s Eve party thrown by a gold-bug."

A couple days later, your editor found himself in precisely that happy situation. He attended a New Year’s Eve party thrown by his good friend, Michael Martin, a stockbroker who specializes in gold stocks. From the moment the party started, the pricey champagne started flowing. Michael treated the guests to a dazzling array of superb champagnes, including several vintages of Dom Perignon…

The day after the party your editor remarked in this column that gold would likely continue rallying into 2003 and therefore, that "Michael Martin will be serving Dom Perignon again next New Year’s Eve." Both expectations came to pass.

Michael graciously invited me over to his house again this New Year’s, but your editor was unable to attend… unfortunately.

Michael tells me that the "Dom" was flowing almost as freely as it was last year. "Well, we served some Dom Perignon," Michael said yesterday, "but not as much as last year… We didn’t want to overdue it. I’m saving some vintage ‘DP’ for the day gold crosses $500 an ounce… and I don’t think I’ll be waiting 12 months to pop open
those bottles."

My glass is ready…

Eric Fry,
The Daily Reckoning
January 3, 2004


By Bill Bonner

"… After the long party of 2003… and the festive years that preceded it… we checked the looking glass on New Year’s day and thought we saw deeper creases… darker eyes… and a palsied shake. Had we been partying too hard? Too long? Looking closer, we think we see 2 strains of delirium tremens in the contemporary American. One is likely to be fatal to his finances. The other may be fatal to his soul… "


"… The old year [has] passed away. It had brought a 50% increase in the Nasdaq. What investor would not have enjoyed his champagne and Auld Lang Syne after a year like that? Yes, the Nasdaq does shoot up sometimes. But it goes down, too. It typically goes down after it goes up. Below, in an attempt to capture the year in review, we
collected a few of the essays which appeared this year in The Daily Reckoning… "

By Kurt Richebächer

"… For us the greatest uncertainties are about the U.S. economy, its financial system and its currency. The great issue not only for America but also for the global economy is whether the U.S. economy has definitely reached the stage where economic growth has become self-sustaining. Or whether it may relapse into sluggish growth next
year, if not recession. Looking at the markets, we have the impression that many people are struggling with this question… "

By Sean Corrigan

"… The tenuous ‘benefits’ of inflationist policy in the U.S. are illusionary at best. They will almost certainly falter should the Fed step down its monetary efforts. The Fed’s actions are, in fact, analogous to wrapping a corpse in an electric blanket, and then expecting that delaying rigor mortis will also bring about a resurrection… "

COST FREE (12/29/03)
By the Mogambo Guru

"… ‘Seignorage is the difference between the value of money and the cost of its production,’ writes Dan Neel in the NY Press. But looked at another way, seignorage is also a shining example of glorious government productivity, as two things are accomplished at once, namely, 1) some debt is extinguished and 2) the money supply is enlarged, committing both a fraud (the artificial extinguishment of debt) AND a horror (the precondition for resultant price inflation,
as this extra money works its way into prices)… "


HEADLINE, NEWS And INSIGHT : Danger and opportunity on the horizon… a new twist on the dollar demise…

Currency and Trade Wars: Ringing in the New Year
by Dan Denning

"… As old world orders decline, new ones rise. And as an investor, you look out on a geopolitical and economic landscape that’s in the midst of profound change. The year 2004 promises to be filled with danger AND enormous opportunity to profit as the world comes to grips with some of the following facts… "

A Dollar Crisis?
by Martin Spring

"… The main reason why the dollar is weakening is well known – the U.S. is importing much more than it can pay for through exports of goods and services. To cover the deficit, America has to attract capital from the rest of the world – more than $2 billion extra every working day. But foreign capital has not been enough to prevent the dollar’s slide… Does this mean that we can expect a major dollar crisis next year?"