Market Review: All That Glitters…

"Gold Shines In The Darkness" reads the front page of the money section in USAToday. In the spot where the paper generally reports the Lipper Index of mutual fund numbers, they instead shed light on the latest trend to hit the investing public.

"Violence in the Middle East. A standoff between India and Pakistan. Warnings of more terror attacks in the USA. As violence hijacks much of the world, gold funds are sitting pretty. The average gold fund jumped 12.3% the week ended May 23."

The rally in gold this week left bullion sitting at 3- year highs. Gold funds have soared… up 72.5% on average. The next best gainers, incidentally, are the universally despised Japan funds, which are up 12.9% year to date. Telecom funds are getting hammered to the tune of -26.6% on average.

What a turnabout, eh?

"After months of being one of the few voices clamoring for gold," writes friend and colleague John Myers, "I’m beginning to attract an uncomfortable amount of company."

"Investors looking for a haven from the schoolyard bully (stocks)," says Myers, "aren’t finding any luck in the trendy repositories of the late ’90s. The dollar is getting hit, bonds are languishing and safe short-term paper is yielding less than zero when inflation and taxes are figured in. No wonder gold has a bunch of new friends."

But ironically, this much attention makes Myers nervous. John, you may recall, is the son of the late, great ‘gold bug’ C.V. Myers. His entire life reads like an investment in gold. When he was just 16, John ferried American readers of his fathers investment advisory to and from the airport in Vancouver so they could buy South African Kruggerands… and he paid for his first home with profits he made off the infamous gold spike of 1980. So now, you’d think he’d be reveling in the limelight, right?

Not exactly.

"My gut tells me the pros are just licking their chops," John wrote on Tuesday to readers of his trading service The Resource Trader Alert. "They’ll soon begin to feast on the latest bunch of Johnny-come-lately [investors] in gold." Despite the widespread attentio – and a juicy 78% gain on the trade – John advised readers to close out their $300 Comex gold positions.

Still, the Fed and Treasury are keeping the spigots wide open. According to the Mogambo Guru the Fed expanded total credit by $4.3 billion last week, and the Treasury cranked out another $1.3 billion in "crisp, new fiat currency."

The tension between the Greenspan Fed, the dollar, gold and the investing public… is a 20-year dream come true for gold bugs; life’s ambition realized. A tough idea to swallow for a youngish guy like me. But gold, at least for the time being, is clearly on top.

The matter, of course, bears watching closely. During a frenzy like this, I wouldn’t recommend you make any quick decisions. Following the announcement of the close of his Comex trade, Myers suggested readers might expect a quick correction and a renewed buying opportunity.

It’s raining in Paris today. But it’s a nice, gentle spring rain. It makes the street’s quiet. Hope you’re enjoying your weekend, too.

Addison Wiggin,
The Daily Reckoning
May 25-26, 2002 — Paris, France

P.S. "Easy money and Big Government!" Sean Corrigan, the Daily Reckoning’s eyes and ears in London’s financial district, takes a look at the gold equation from another angle. Might the rise in retail and the drastic decline of manufacturing – on both sides of the Atlantic – give a clue that easy money… and more credit… are not going to get us out of this mess? See Flotsam & Jetsam below…

P.P.S. The ink is dry… the final details set… this year The Annual AGORA WEALTH SYMPOSIUM will be held in San Francisco! … at The Palace Hotel on August 14th- 18th, 2002. If you don’t know what it is… don’t worry. Every year we get together for a big Agora group hug… it’s a lot of fun and quite profitable for some.

And… there’s an "Early Bird" discount still available. But only until May 30th, 2002 (that’s this Thursday!)

The Agora Wealth Symposium
The Palace Hotel
San Francisco, California
August 14-18, 2002

THIS WEEK in THE DAILY RECKONING
by Bill Bonner

05/24/02 GREENSPAN, THE OBJECTIVIST

"…it takes real brains to make an imbecile of yourself, we note often. On this day, the 23rd of May, 2002, Alan Greenspan is still widely regarded as a genius. If we are right, turning his back on the essential rules of honest money – which he described, himself, in 1966 – will one day catch up with him. And if it doesn’t…it oughtto…"

05/23/02 EVEN MORE ADVICE TO A YOUNG MAN

"…Here at the Daily Reckoning, we’re not opposed to reason; it’s just that reason alone is no defense against craven imbecility…"

05/22/02 GREENSPAN’S MORTAL SIN
Guest Essay by Daniel Denning

"…Could it have escaped Greenspan’s attention that the increase in productivity was largely a result of: a) lower capital costs because of the Fed’s own interest rate policy and b) falling unit labor costs as a result of higherunemployment?…"

05/21/02 MORE ADVICE TO A YOUNG MAN

"…Happiness is greatly over-rated…Along with democracy and freedom, it is inscribed in the nation’s founding documents. But the pursuit of it is largely an illusion. You can chase it all you want; but you will not be happy until it sneaks up on you frombehind…"

05/20/02 THE GOD OF WAR

"…A victory over bear markets and terrorism is so widely anticipated and so little questioned that we cannot help but wonder…what surprises the gods may have in store for us…"

* * * * * * * * * * * * * * * * * * * * * * * * * * * *

FLOTSAM & JETSAM: Why monetarists and Keynesians are both wrong in their prescriptions about the need to use easy money and Big Government to boost "effective" demand…

The Death of Disinflation
– by Sean Corrigan

"…’The economy is splitting with the services sector improving and the goods sector suffering,’ says NFIB Chief Economist William Dunkelberg. ‘If you make stuff, you are having problems. There is excess capacity everywhere, so you can’t raise prices.’

‘You can’t even take advantage of unprecedented gains in productivity, since increases in labor compensation are still growing and absorbing much of the productivity gains. On the other hand, service sector firms are aggressively raising prices.’

Now all those supply-side, ‘death of inflation’ types who keep telling us that we need yet more – or, at least, continued – stimulus to ensure the recovery might pause to wonder whether this service sector phenomenon might instead spark a little old-fashioned round of rising prices?

The signs are all around us.

After all, while Wal-Mart ("Resistance is futile!") can do wonders to lower U.S. grocery bills by employing Chinese laborers for a nickel an hour, the last we heard, nobody was outsourcing Realtors to Rangoon or chiropractors to Korea, and the Empire’s legionary auxiliaries haven’t yet been posted to patrol La Guardia at a lower hourly rate.

…the hangover from the boom only partly exacerbates the problem, since much of the [capital investment] then was wastefully mis-allocated and is not germane to the needs of the current economy anyway – just think Global Crossing and ITV Digital, for example.

‘Producers’ who can’t see their way to a profit have neither the means nor the incentive to invest in new plants and equipment.

Ultimately, this will durably lower the value productivity of the nation. Even now it is making the U.S. ever more reliant on the forbearance of the external creditors who labor so assiduously to undercut their prices, but who bid nothing up in return.

And… lest we think this is solely an American problem, consider the figures contained in the UK employment report earlier this week. In the past two years, 290,000 jobs have been lost in manufacturing, which for us, in our small sceptred isle set in its silver sea, is a significant total-around one in every 14 positions in fact.

Despite this frantic shedding of any firm’s biggest variable cost, output per job has fallen 2.4 percent annualized in the past four months, so productivity is still plunging.

But how come? Are we Brits too stupid to read Microsoft manuals? Can we not implement a ‘change-management, real-time, e-business solution’ along with the rest of IBM’s clients?

Have we not heard of just-in-time inventory management and all the other buzz phrases of the New Era?

Maybe not.

But far more likely is the fact that the raging housing boom, yawning trade deficit, expanding government, and credit-fueled consumption binge is pricing resources out of the hands of producers. This brings about a vicious cycle of cutbacks on the part of the main customers of these ‘higher-order’ businesses – namely, other businesses themselves!

The Bank of England may hew to the Greenspan line and bemoan the fact that rates are too high. However, the fact is that rates in the UK are too low, since they are demonstrably well below that natural rate of interest that allows a broad healthy balance to be struck between production and consumption and saving and investment.

The same is true – in spades – of the US.

Just as the UK has been woefully hollowed out by this process – and will assuredly pay a heavy penance once the boom fizzles – it is clear from the NFIB comments that a recognition of the same symptoms, if not a realization of the cause of the disease, has been arrived at in the U.S. itself.

Unfortunately, the patient has become so weakened by this misdiagnosis that, while he probably would have survived the surgery 17 months and 11 rate cuts ago, now his only course may be to use the current respite to put his affairs in order…"

Editor’s note: Sean Corrigan, the Daily Reckoning’s man- on-the-scene in London, is a founder and principal of Capital Insight, a London-based economic consultancy.