Market Review: What does the gold market know?

09/14/03

For five straight days last week, the NYSE traders matched up millions of buyers and sellers, and processed hundreds of billions of dollars worth of trades. And at the end of it all, the Dow Jones Industrial Average closed out the week… drum roll, please… nearly unchanged.

The Dow and S&P both fell a mere 0.3% over the past five trading days, while the Nasdaq fell 0.2%. The Dow’s modest lost snapped a 5-week winning streak. But bullish sentiment is still alive and well.

Stocks are in vogue and investors can’t seem to buy enough of these things, no matter how richly priced they might be. Curiously, most folks trust a rallying stock like children trust a policeman. Unfortunately, a rallying stock is more likely to commit petty larceny than to "protect and serve."

But as long as the stock market is rising, the lumpeninvestoriat will trust that all is well and hope that all will soon be better still. They will believe that economic conditions are improving and that stocks will continue rising. We hope the lumps are right… Indeed, we suspect that they’re half-right; the economy seems to be showing signs of recovery. But the lumps are also half-wrong: an improving economy doesn’t mean than an overvalued stock market will become even more overpriced.

Maybe this realization is seeping into the subconscious of some investors. Perhaps this latent anxiety about the stock market, coupled with clear and present worries about the U.S. dollar, is inspiring a few folks to buy gold. The yellow metal charged out of the starting blocks early in the week with a dazzling $6.60 gain on Tuesday to $382.80 an ounce – the highest closing price in seven years. But the precious metal tarnished a bit as the week wore on, slipping to $374.80 at week’s end.

Despite the fact that gold ended the week a few dollars farther away from $400 an ounce than where it started, the price jump into the rarefied air above $380 sent the gold bugs hearts a-flutter. Gold bulls have little to complain about. The yellow metal has jumped more than $30 over the last three months and gold stocks have been on fire. The XAU Index of gold shares has greatly outdistanced the S&P 500 year-to-date with a sparkling gain of 20%.

"What does the gold market know?" we wondered aloud earlier this week. "Does it know that the Fed’s reflation campaign will succeed too well? Or does it know that President Bush will continue spending billions of taxpayer dollars to preserve Iraq as a breeding ground for terrorists and a habitat for anti-American terrorist acts?

"Or maybe the gold market knows only that U.S. financial assets are very expensive, and worries, therefore, that U.S. stocks selling for 35 times earnings, U.S. bonds yielding 4.40%, and a U.S. dollar selling for $1.12 per euro are all too pricey for risk-averse investors to own in large quantities.

"Gold has always provided a kind of insurance, first and foremost. It is not an ‘investment’ per se. But when economic uncertainties mount, buying a bit of gold ‘insurance’ can be a terrific investment."

Stay tuned…

Regards,

Eric J. Fry
The Daily Reckoning

September 13-14, 2003

[Editor's note: You'll notice Eric has contributed his analysis of this week in the market's for the Daily Reckoning Weekend Edition. Given that the Wiggin's have a new baby and Mr. Fry and family would rather enjoy there own weekend's together… we're going to shuffle up duties a little bit and see if we can't all still give you our own brand of market coverage and maintain sanity at home. Eric is going to take a stab at weekly coverage after the markets close. Addison is going introduce the opening of the markets on Monday with Bill and The Mogambo GurU.

Hope you don't mind… hope it works… and we'll see you on Monday, cheers, Addison. As usual, you'll find this week in the Daily Reckoning below.]

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THIS WEEK in THE DAILY RECKONING

FLIGHT TO IMBECILITY (09/12/03)
by Bill Bonner

"… In a crisis, investors fly to safety; all of a sudden, their attention shifts from return ON investment to return OF investment. But what about today’s investor? He looks around him and sees no menace, neither from the highest debt levels in history, nor from the trillions in derivatives, nor from rising unemployment, nor from falling profits, nor from high stock prices, nor from the largest deficits in history – both in government and trade. What should he do?… "

(UN)CONSTRAINED DISCRETION (09/11/03)
by John Mauldin

"… Establishing a ‘reasonable’ set of policies, such as Paul McCulley suggests, would mean the Fed may to all too soon feel forced to abandon them in order to deal with the potential crisis resulting from today’s imbalances. Such a reversal has the potential for creating far more havoc than the current environment of ‘guess what Greenspan is feeling today.’ Since the exact nature of the potential crisis is unknown, how can you set a proper course? Better, says Greenspan, to allow them ultimate flexibility than adopting polices. Trust me… "

END OF DAYS (09/10/03)
by John Myers

"… The problem for dollar holders who are wary of the greenback’s falling purchasing power is where to go. With the exception of the Swiss franc, few currencies offer a greater long-term purchasing guarantee than the dollar. Therefore, once dollar inflation begins, dollar holders are left with one major headache: what to buy? The answer invariably comes down to one thing – real assets… "

PONZI ECONOMY (09/09/03)
by Kurt Richebächer

"… This simple recognition – gross lack of saving and capital formation – is really at the root of our controversial and highly critical view of the U.S. economy’s sanity and vitality. True, its growth rate has been the highest among the industrial countries for years. But it has all the time been economic growth of the most miserable quality. The striking hallmarks of this extremely poor quality were collapsing savings, low rates of business fixed investment, a profit carnage that began at the height of the boom, exploding consumer and business debts and an exploding trade deficit… "

FED BANKERS AT THE J-HOLE (09/08/03)
by the Mogambo Guru

"… So there you have it in a nutshell. There are no criteria that you can use to criticize the Fed’s actions, and we have to rely on Greenspan’s personal judgment. You, and by this time you know who I am talking about, are worthless peasant trash, and he is willing to sacrifice you, and me, and everything we love so that he can exercise awesome discretionary power in an irresponsible manner… "

Addison Wiggin

Addison Wiggin is the editorial director of The Daily Reckoning, and executive publisher of Agora Financial, an independent financial research firm based in Baltimore, Maryland. His second editions of international best-sellers Financial Reckoning Day Fallout and The New Empire of Debt, which he co-authored with Bill Bonner, were updated in 2009. His third book, The Demise of the Dollar… and Why it’s Even Better for Your Investments was updated in 2008, the same year he wrote I.O.U.S.A. Read more about Wiggin’s best-selling books here.   

Wiggin is the executive producer and co-writer of I.O.U.S.A. an acclaimed documentary nominated for the Grand Jury prize at the 2008 Sundance Film Festival and the 2009 Critics Choice Award and shortlisted for a 2009 Academy Award. Wiggin is a three-time New York Times best-selling author whose work has been recognized by The New York Times Magazine, The Economist, Worth, The New York Times, The Washington Post as well as major network news programs.

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