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Last Wednesday, the
Philadelphia Gold and Silver Index recorded a new five-year closing high,
confirming the breakouts in gold, silver, and the Gold Bugs Index. The next
three months could well be the last opportunity to buy these stocks and
commodities, in this range in our lifetimes.
Nothing is more
tricky than trying to stay aboard a primary gold bull market, yet if the
fundamental gold bull case is understood, it should be more widely recognized
that there have been few times in history that a sector has had potentially
more upside than the current situation in precious metals. Gold stocks and
the precious metals have a history of violent pullbacks after breaking out,
so if one occurs, as could be expected, don't lose sight of the fundamental
picture. We highly recommend the book, "The Invisible Crash" by
James Dines, which traces the progression of the early stages of the last
major bull market from January 1961 to October 1975. By the peak in 1980,
gold had climbed more than 24 times.
Among the most
important fundamentals to the bullish case are:
1.) A worldwide
effort to debase currencies against the dollar, to maintain a competitive
advantage in trade by export-dependent nations;
2.) An unprecedented
money-printing campaign by the US itself.
3.) The dependence
of the US on foreigners, (largely the Chinese), to continue funding our trade
and budget deficits;
4.) A war mentality
is rising as nations act in their own interest to flight deflationary
pressures at the expense of others.
The US Government is
under extreme pressure to jump-start the economy ahead of next year's
election. Accelerating war costs, tax cuts, and additional giveaways in the
healthcare area, will continue to be funded by money printing, through
ballooning Government debt offerings that are being met by decreasing demand
as evidenced by the declining cover ratios. This is causing increasing upward
pressure on interest rates and a lower dollar. The Fed finds itself in the
precarious position of juggling expectations between deflation to generate
interest in fixed income, and a strong recovery to keep the dollar from
collapsing under the burden of increasing financing needs. While many
estimate gold production is likely to decline through at least 2007, the gold
bears are missing the point that in a true gold bull market, jewelry demand
will increasingly be displaced by investment demand as jewelry demand is
priced out of the market.
There is little doubt ALL investors should
now have a position in gold and gold stocks as an insurance policy due to its
negative beta characteristics in protecting a diversified portfolio.
Richard J. Greene
Managing Partner, Portfolio
Manager
Thunder Capital Management
More articles by the author can be accessed by the
"Research Articles" choice at: www.thundercapital.com
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