Market Review: What does the gold market know?

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

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

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

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

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

Despite the fact that gold ended the week a few dollars fartheraway from $400 an ounce than where it started, the price jumpinto the rarefied air above $380 sent the gold bugs heartsa-flutter. Gold bulls have little to complain about. The yellowmetal has jumped more than $30 over the last three months andgold stocks have been on fire. The XAU Index of gold shares hasgreatly outdistanced the S&P 500 year-to-date with a sparklinggain of 20%.

"What does the gold market know?" we wondered aloud earlier thisweek. "Does it know that the Fed’s reflation campaign willsucceed too well? Or does it know that President Bush willcontinue spending billions of taxpayer dollars to preserve Iraqas a breeding ground for terrorists and a habitat foranti-American terrorist acts?

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

"Gold has always provided a kind of insurance, first andforemost. It is not an ‘investment’ per se. But when economicuncertainties mount, buying a bit of gold ‘insurance’ can be aterrific investment."

Stay tuned…

Regards,

Eric J. Fry
The Daily Reckoning

September 13-14, 2003

[Editor’s note: You’ll notice Eric has contributed his analysisof this week in the market’s for the Daily Reckoning WeekendEdition. Given that the Wiggin’s have a new baby and Mr. Fry andfamily would rather enjoy there own weekend’s together…  we’regoing to shuffle up duties a little bit and see if we can’t allstill give you our own brand of market coverage and maintainsanity at home. Eric is going to take a stab at weekly coverageafter the markets close. Addison is going introduce the openingof the markets on Monday with Bill and The Mogambo GurU.

Hope you don’t mind…  hope it works…  and we’ll see you onMonday, cheers, Addison. As usual, you’ll find this week in theDaily 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 OFinvestment. But what about today’s investor? He looks around himand sees no menace, neither from the highest debt levels inhistory, nor from the trillions in derivatives, nor from risingunemployment, nor from falling profits, nor from high stockprices, nor from the largest deficits in history – both ingovernment and trade. What should he do?… "

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

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

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

"… The problem for dollar holders who are wary of thegreenback’s falling purchasing power is where to go. With theexception of the Swiss franc, few currencies offer a greaterlong-term purchasing guarantee than the dollar. Therefore, oncedollar inflation begins, dollar holders are left with one majorheadache: what to buy? The answer invariably comes down to onething – real assets… "

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

"… This simple recognition – gross lack of saving and capitalformation – 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 industrialcountries for years. But it has all the time been economic growth of the most miserable quality. The striking hallmarks of thisextremely poor quality were collapsing savings, low rates ofbusiness fixed investment, a profit carnage that began at theheight of the boom, exploding consumer and business debts and anexploding 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 criteriathat you can use to criticize the Fed’s actions, and we have torely on Greenspan’s personal judgment. You, and by this time youknow who I am talking about, are worthless peasant trash, and heis willing to sacrifice you, and me, and everything we love sothat he can exercise awesome discretionary power in anirresponsible manner… "