The Remorse Price of Gold

The stock market entered January like the proverbial lion and exited it like a lamb… a slightly crippled lamb. For the final week of January, the Dow fell 80 points, but still managed to exit the month with a slim gain, up a little less than a percent. The Nasdaq, which fell about 2.7% last week, closed out the first month of the year with a respectable 3.1% gain. But the stock market played only a supporting role in the week’s drama.

The written word stole the spotlight, or more precisely, the RE-written word of Alan Greenspan. His monthly FOMC statement deleted the promise to holds interest rates low "for a considerable period" — replacing this ambiguous phrase with an even more ambiguous promise to be "patient" about raising rates. "With inflation quite low and resource use slack," the statement read, "the committee believes that it can be patient in removing
its policy accommodation." As we noted in this column Thursday, "Investors reacted swiftly and decisively to the semantic bombshell: the dollar soared, while stocks and bonds tumbled… If the Fed will no longer promise to
hold interest rates low for a considerable period, the lumpeninvestoriat reasoned, then surely the Fed is preparing to
raise rates, which is good for the dollar but bad for stocks and bonds."

The gold market served up a delayed reaction to the Fed’s new wording by plummeting $16.40 on Thursday to $399.40 an ounce – the yellow metal’s biggest one-day drop since 1977. And voila, the gold price finally dipped below $400 an ounce, the "remorse price" at which the Paris editors of the Daily Reckoning have been
promising to buy more of the shiny metal. "Gold hit our ‘remorse price’ Thursday, falling below $400," the
remorseful correspondents reported Friday. "It dropped $17… Unfortunately, in this morning’s trading it has bounced back above our remorse price. What the heck; close enough. Buy!" James Grant agrees:  "In 2004, gold and silver will appreciate against the so-called strong currencies as well as the weak," the editor of Grant’s Interest Rate Observer predicts. "The metal’s best friend in 2004, we predict, will turn out not to be Alan Greenspan, but Jean-Claude Trichet. When — not if — the president of the European Central Bank announces a reduction in the prevailing 2% ECB repo rate, it will be seen that his purpose is to cheapen the euro. So seeing, investors will call the thing
by its name, ‘competitive devaluation.’  Some investors, reflexively, will take that opportunity to buy the dollar,
reasoning that it is the dollar’s turned to be ‘strong.’  Others, correctly, will reflect how small a monetary role the
‘store-of-value’ function plays in the councils of our central bankers.  With this understanding, they will buy more of those monetary assets listed in the Periodic Table of the Elements."

One reason to trust Grant’s forecast is that the dollar’s fundamental underpinnings continue to rot away day after day,
which means that the rationale for buying gold becomes stronger buy the day. Notwithstanding the dollar’s sharp rally last week, the troubled U.S. currency still faces an extremely unforgiving monetary climate. But gold — like wild buckwheat – thrives in a harsh environment.  That’s why we’re still inclined to keep our bets on the ancient currency, rather than the revitalized greenback.

For one thing, the current account deficit grows wider by the day, necessitating ever larger dollar purchases by foreign investors in order to keep the dollar’s value from falling. Consider that holdings of U.S. debt by foreign central banks jumped to a new record high last week. As of January 21, the Federal Reserve’s total holdings of Treasury and agency debt for foreign central banks soared $13.86 billion to $1.108 trillion. Can this massive global dollar-support scheme continue indefinitely? We think not… and we have come to learn that any phenomenon which cannot continue forever, won’t… Again we suggest: Buy gold!

Eric Fry,
The Daily Reckoning
February 1, 2004

THIS WEEK in THE DAILY RECKONING

A CYNIC’S GUIDE TO INSENSITIVITY (1/30/04)
By Bill Bonner

"… Long-time Daily Reckoning sufferers will recall our mentions of bog-trotters, huns, frogs, canooks and West Virginians. The words sound so harmless; we use them affectionately, like calling a tall friend ‘shorty’… Is racism itself a delusion? Are we not capable of picking out the amusing, endearing, engaging, repulsive and obnoxious traits of our neighbors… giving them handles that entertain us… and yet, having no desire to send them to gas chambers or hang them from trees?… "

NO PLACE TO HIDE (1/29/04)
By Steve Sjuggerud

"… Back at the peak in 2000, there were still places to hide. But now, in 2004, the pickin’s are slim… so slim that the most profitable investment approach now might simply be: Ride the markets as long as they continue surging. But do so like someone who understands that they are overvalued – and that they will correct themselves… "

FLIGHT TO GARBAGE (1/28/04)
By Marc Faber

"… 2003 will enter the financial history books as the year in which all asset classes increased in value, with the exception of the U.S. dollar. The entire global investment community has been seduced into believing that all asset classes will continue to appreciate in 2004. But in my opinion, asset markets will again show diverging performances… and the surprise of 2004 could be renewed economic weakness… "

CORRUPTED THINKING IN A MONEY CULTURE (1/27/04)
By Kurt Richebächer

"… In America’s new money culture, policymakers and economists make no difference between wealth created through saving and investment in the real economy and wealth created in the markets through asset bubbles, engendered by extremely loose money and credit. It is not profits, savings and investment that drive U.S. economic growth. It is America’s unparalleled credit machine… "

AN EXCELLENT CONTRARIAN INDICATOR (1/26/04)
By the Mogambo Guru

"… The Economist magazine has asked the attendees at the Jackson Hole conference a few questions… [such as, in 2003,] ‘Will the dollar fall to $1.25 against the euro at any time in the next twelve months?’ They all, except one, said ‘no.’ I am happy to note that the Economist magazine has the same degree of disrespect for these pompous, arrogant weenies as I do, as evidenced when they write: ‘In short, they provide an excellent contrarian indicator’… "

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HEADLINE, NEWS And INSIGHT:

What would a slight up-tick in interest rates do to the US economy?…   Americans punished for thrift…  mutating bubbles and their disastrous aftermaths…

Spring – The Turning Point for Interest Rates?
by Porter Stansberry

"… Stocks are vulnerable to a new bear market because their valuations, on average, are not sustainable. But valuations alone will not trigger a bear market. The worst thing that can happen to stocks right now would be rising interest rates. This spring, I think, that’s what will happen… "

The Fed’s Housing Boom
by David Y. Cantwell

"… Money has never been cheaper. The American citizen is essentially punished for saving. So why save money? Borrow! Payments are low – take advantage! But while it may feel good – it isn’t. The fallacy in the current consumer thought process is that an increase in the price of housing has no downside. Let’s look closely at housing and why that isn’t true… "

Fear and the Mortgage Bubble
by Dan Denning

"… [The mortgage bubble] is even more dangerous than the stock market bubble. Housing and real estate are at the epicenter of American household net worth. A home is considered a ‘tangible,’ not a ‘financial’ asset. Yet its value is freely determined on the open market, much like a stock or a bond. If you’re looking for inflation, Mr. Greenspan, look here. This is where all your cheap money has been finding its way… "