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Gold Investments Weekly Newsletter

Weekly Markets

Precious Metals
Gold was largely unchanged down just 0.2% for the week. On the New York Mercantile Exchange, gold for April delivery closed at $435.10 an ounce.
Silver was up 0.8% for the week rising 12 cents to finish at $7.349 an ounce on Friday.
Platinum was up 1.3% for the week. Platinum rose to $866.50 an ounce from $864.
Palladium was the big winner for the week up a massive 15.6% in just one week.
Palladium rose to $208 an ounce from $182.

Gold's response to the positive US job numbers was very encouraging for the bulls. U.S. employment rolls registered their first appreciable growth in nine months during February, with nonfarm payrolls expanding by an above-consensus 262,000, according to Labor Department data. "Gold surged right after the employment numbers, and that shows gold is defying the typical expectations," said Kevin Kerr of Kerr Trading International. "I think we have moved into a new realm for gold as it finds its own way and charts a new path with investors," Kerr said. "I think now we are setting up to test $475 very soon."

For the month of February, Silver was the best performer as it was up more than 9%. Since its latest major interim low on January 4th, it has appreciated by 17%. The NASDAQ fell by 4% over the same period of time. Silver's recent correction and consolidation looks to be over and it looks like it will attempt to challenge the $8 mark again in the coming weeks.

Palladium's surging price was attributed to Russian President Vladimir Putin's order on Thursday to unveil all data on Russian precious metals production and reserves. There is apprehension that Russian palladium reserves will be less than expected, analysts from AG Edwards said. Palladium and platinum are used to clean car exhaust fumes, but until recently palladium could not be used in diesel-powered vehicles. Given the huge price difference between the two -- platinum is currently around four times more expensive -- car manufacturers have been looking to switch to palladium where possible. In the jewellery sector, where the use of platinum is much more prevalent, the price advantage has encouraged some Asian manufacturers to try palladium. "The price differential...is sufficient to be encouraging substitution in the auto, and possibly jewellery sectors, although this has been the case for some time and shows no sign yet of restoring the (palladium) market to balance," Alan Williamson, analyst with HSBC said in a report.

The price of oil raced above $55 a barrel and gasoline hit a record high last week as traders continued to fret about energy supplies despite plentiful U.S. inventories. The price of oil settled at $53.78 on Friday in New York. Oil was up 4.4 percent on the week and up nearly 10 percent over the past two weeks. Oil and fuel markets are being driven by the underlying fear that supplies won't be sufficient to satisfy the world's voracious energy appetite. Also acting OPEC secretary general, Adnan Shihab-Eldin said on Thursday prices could rise to $80 in the next two years in the event of a major disruption in supply.

Oil's latest jump came on top of two weeks of increases, which have already reached the petrol pumps in the US Analysts warn that more petrol price increases are coming.

The Goldman Sachs Commodities Index jumped 3.4%, increasing year-to-date gains to 17.6%. The CRB index rose 3.0% to $301.16, closing today at the highest level since January 1981. The CRB is sporting 2005 gains of 8.9%.

The Reuters CRB Index (basic components include hard tangible assets such as Metals, Textiles and Fibers, Livestock and Products, Fats and Oils, Raw Industrials, Foodstuffs). One of the CRB index's greatest strengths is the fact that there is an equal weighting of all of its 17 components. This weighting assures that no price increase in any single commodity, like oil, can significantly skew the entire index. Significant moves in the CRB are only possible when the majority of its component commodities are moving in unison with a particular primary trend. The most important commodities - gold, oil, and silver only account for 3/17th of the entire index.

Rubber: Prices in two key markets rose owing to the continued low harvest season in leading producer countries.

Coffee: Prices hit 4 and a half year highs in London and traded close to five-year peaks in New York on huge speculative buying amid expectations of a world production deficit in 2005-06.

Coffee prices have jumped 20% since the start of the year, indicating that futures could be on a path to sustained recovery after recent tough years caused by ample supplies. ``Sentiment is bullish and fundamentals remain supportive,'' said Ann Prendergast of the Refco brokerage. Robusta quality coffee for May delivery shot to $978 a tonne in London, the highest level since July 2000.

Sugar: Prices fell as speculators continued to bank profits. Prices had risen to the highest level for 3 and a half years in London and for 3 and a half months in New York at the end of January on strong global demand but then declined on profit-taking.

Commodities, as represented by the CRB have been moving higher since it's massive double bottom in early 1999 and late 2001. It has marched from a low near 183 in October 2001 to a recent bull market high of 309. This sterling 70% gain over some four years means that the CRB is likely in a secular bull market or a major new long-term trend likely to run higher for a decade or so. It is worth noting that if the Reuters CRB Index all time high of 338 in 1980 is adjusted to real dollar terms or adjusted fro the considerable inflation of the last thirty years it gives a price of 754 in November 1980 or 962 in early 1974.

"China's breakneck economic growth is causing a dangerous shortage of its most important energy source -- coal -- with potential consequences for the entire world, the China Business Weekly reported... The scarcity is so severe that officials even worry aloud that it could cause social instability among the 1.3 billion Chinese, the state-run newspaper said. 'The imbalance between coal demand and supply will become more acute this year,' the newspaper quoted the National Development and Reform Commission as saying.

Martin Weiss, author of 'The Ultimate Safe Money Guide' and who writes the Safe Money Report wrote how "For the first time in 24 years, a key index of commodity prices -- the Reuters CRB index -- surged above the 300 mark, reflecting one of most dynamic demand-driven commodity booms of all time. Just in the past eight months, world steel prices have surged by nearly 70%, driving producers into a frenzy and consuming companies into a panic. Nearly half of the world's steel suppliers have cancelled orders in January. Nearly all are slapping on special surcharges or renegotiating their contracts. The commodities boom is sweeping through metals, grains, meats, and other foods. Nearly all commodities are being catapulted higher by supply/demand imbalances the likes of which have not been seen since the 1970s."

Friday's bludgeoning and surprise dollar drop after the positive jobs report put the dollar index slightly in the red for the week. The New Zealand dollar gained 1.3% (the USD is now at a twenty-three year low against the New Zealand dollar), the Taiwan dollar 0.7%, the Canadian dollar 0.6%, and the Australian dollar 0.5%. On the downside, the Venezuelan Bolivar was devalued 10% this week, while the Chilean peso declined 1.6%, the Brazilian real 1.4%, and the Uruguay peso 1.2%.

The latest bout of dollar selling/euro buying extended the single currency's gains through key technical levels, which forced additional euro buying as traders moved to stop losses on dollar-heavy positions. The euro broke technical resistance at US$1.3225, but the next key level at US$1.3240 wasn't decisively breached.

The euro has soared from about $1.20 in September to an all-time high of $1.3667 at the end of December, powered by concerns over the U.S. budget and trade deficits. The dollar has since regained some ground, but those worries remain and analysts think the recovery could be temporary.

For the week, the Dow Jones industrial average gained 0.9% to 10,940.55. The Standard & Poor's 500 index also rose 0.9%, to 1,222.12, and Nasdaq rose 0.3% to 2,070.61. The Dow and S&P500 both closed at three-year highs today. The Dow Transports closed at an all-time high. The S&P400 Mid-cap average closed at a record high. The S&P Homebuilding index closed at a record high, up 18% y-t-d. For the week, the Dow and S&P500 gained about 1%. The Transports jumped 3%, and the Utilities added 1.5%. The NASDAQ100 was down fractionally. The troubled Biotechs were hit for 6%. Elan's withdrawal of it's MS drug after the death of one patient and a poor prognosis for another sent it's share price reeling by nearly 80%. Elan accounted for 20% of the market capitalisation of the Irish Stock Exchange and the ISEQ dropped nearly 6% when the Elan news broke on Monday.

Two-year Treasury yields rose for a seventh straight week, adding 4 basis points to 3.56%. Two-year government yields are up about 50 basis points so far this year. Five-year Treasury yields were up 7 basis points this week to 3.96%. Ten-year Treasury yields rose 5 basis points to 4.32%. Long-bond yields added 2 basis points to 4.65%. The spread between 2 and 30-year government yields narrowed 3 basis points to 109. Benchmark Fannie Mae MBS yields increased 4 basis points. The spread (to 10-year Treasuries) on Fannie's 4 5/8% 2014 note widened 1 basis point to 34, while the spread on Freddie's 5% 2014 note narrowed 1 basis point to 28. The 10-year dollar swap spread rose 1.75 to 40.75, a 2005 high. Corporate bonds continue to benefit from abundant liquidity. The implied yield on 3-month June Eurodollars was unchanged at 3.43%.

Weekly Commentary

Property in Ireland and Investment Diversification

The fundamental tenet of investment theory is diversification or in lay man's terms to not have all the proverbial eggs in the one basket.

Thus a wide range of assets including a variety of equities with exposures to different market sectors and regions; a variety of different countries bonds; a diversified property portfolio; a cash component including euros and possibly a number of other sound international currencies and a 5% allocation to gold bullion would be considered a sensible, conservative and prudent properly diversified portfolio. The key obviously is to determine what amount or ratio of each asset class to have and this should be decided based upon global macroeconomic fundamentals.

There are no accurate statistics as to the breakdown of Irish investor's asset allocation but it is believed that there is some 80% invested in property, primarily in property in Ireland but increasingly internationally as well. Thus under any criteria there can be no doubt that Irish investors have not taken the important maxim of not having all one's eggs in one basket to heart.

This may be because of Irish investors being more risk averse than their counterparts in the UK and especially the US where there are far higher levels of share ownership. Possibly this risk averseness is due to our history and the very poor state of the Irish economy up until relatively recently. Throughout our history and all agrarian societies throughout the world, land and other hard tangible assets such as livestock have been the measure of one's wealth and status in society. Only through acquiring and retaining land could families become wealthy and pass that wealth on down through the generations. The deeply rooted attraction to acquiring livestock and land or with might be termed 'the field mentality' seems to have been transmuted into our recent mania for property.

Halifax: UK

More importantly, since the mid-1990's Irish investors have rightly realised that our joining the Eurozone with access to a huge and growing EU market, a stable currency and low and stable interest rates would be a massive benefit to the Irish economy. This instilled great confidence and this, along with a young dynamic educated English speaking work force and low corporate tax rates, contributed to the 'Celtic Tiger' and it's attendant property boom.

The Irish economy was now and still is subject to unprecedentedly low interest rates, some would say inappropriately low interest rates. This very cheap money made saving unattractive due to the low return available on deposit accounts especially considering the significant rate of inflation. Thus borrowing to invest in property in Ireland from the mid-90's to today was rightly seen as a sound, safe and rewarding investment option.

Banks lending practices have become very loose and banks and building societies have been lending multiples of annual income. Lending institutions have been lending money for house purchases on the back of parental guarantees and prospective future earnings. Indeed the Standard & Poor's credit-rating agency is monitoring the Irish property boom very closely and the Economist magazine, the IMF and even the Irish Central Bank have all warned regarding the property market in Ireland. The Central Bank warned "It is imperative, that, at this time, high standards of discipline continue to be maintained, that all credit institutions remain fully alert to the dangers of lending to marginal borrowers and that lenders take full account of the economic cycle when making lending decisions."

It is a little dangerous to extrapolate the past decade's extraordinary Irish, US and global economic growth and consequent property price gains far into the future. With economists heralding the return of the 'Celtic Tiger' and the 'animal spirits' of complacency, irrational exuberance and greed becoming more evident it is important that Irish investors remember that past performance is no guarantee of future returns. One might be forgiven for thinking that this continually repeated but often forgotten truism has been replaced in the investors lexicon by the more imprudent 'you can't go wrong with property'.

The conventional wisdom in the United Kingdom in the second half of the 1980s was that you couldn't lose money in property. After all, U.K. house prices had never fallen on an annual basis since the war, as opposed to the stock market, which fell by over 20 percent in one day on Oct.19, 1987. Thus property was viewed as being as safe as houses. However the cosy consensus was soon disturbed when prices began to drop as the Bank of England raised interest rates. Property prices in the UK dropped by between 15% and 50% in different regions and locations. The housing recession of the early 1990's saw almost 400,000 homes repossessed and 1.8 million home-owners suffered negative equity.

Students of financial and economic history will know that five of the most dangerous words are "this time it is different". Conventional wisdom or the consensual view of the 'experts' and the masses often prove to have been wishful thinking and plain wrong. History repeats itself or at least often rhymes and a blind belief that "this time it is different" can end up being both expensive and financially painful.

It is more important than ever to have and apply a sound economic analytical framework and not to ignore massive macroeconomic fundamentals such as the huge and unprecedented US trade and budget deficits and the near record oil prices. Those who are bullish and very optimistic about the economic prospects for the Irish economy will hopefully be proved right but one way or another it is important that investors evaluate the risk and diversify accordingly.

Given that it is believed that 80% of our wealth is in property it would be wise to curtail further investment in the property sector and to look to pay down existing debt and to look to safer more conservative asset classes such as cash savings accounts and gold. In this vein the Special Savings Investment Schemes (SSIA's) was an important step in creating a greater culture of saving.

It goes without saying that the conservative and prudent investor seeks to minimise his or her investment risk. The only indisputable truth that the past teaches us is that the future always throws up surprises. The very people who are certain that the Irish property market will continue to experience large rises in prices may well be the very people who will be most surprised when there 'certain' views turn out to have been optimistic and incorrect. Because of the uncertainties of the future and the possibility of an economic contraction in the US economy investors and commentators should remain humble in their forecasting and investors should carry some insurance in order to protect themselves financially from unforeseen eventualities.

In the context of the merits of asset diversification and gold, Jim Power, the Chief Economist of Friends First Ireland recently said "I teach Financial Management on a part-time basis in Dublin City University and a central tenet of what I teach concerns the virtues of portfolio diversification. I am a firm believer and have argued in numerous presentations on the topic of Property v Equities that it is not a case of either/or, but a case of both. I would be a big fan of holding gold as part of a diversified portfolio and would feel more confident about it than any other asset class at the moment."

Quotes of the Week

"The United States of America's public finances are a shambles and they are getting rapidly worse. . . . . The truth is that the United States faces a long-term deficit that will only increase as the baby boomers retire. The resulting fiscal imbalance will test the nation's spending and tax policies.
Washington's recent difficulty in maintaining fiscal restraint has not helped matters. . . .
I don't like using words that are overly inflammatory. At the same time, I think it is critically important that the American people, as well as their elected representatives, get a better understanding of just how serious our situation is. . . . .
The sooner we start fixing this, the better because right now the miracle of compounding is working against us.
Debt on debt is not good. We have to first stop digging, and then figure out how we're going to fill the hole. . . . . The thing that is frustrating is that you can talk to people and point to things, but that's all you can do. You can lead them to water, but they have to drink. And they better start drinking fast -- and soon."

David Walker, Comptroller General (Chief Auditor) of the United States.

"The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit... In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value... Deficit spending is simply a scheme for the hidden' confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard."
Alan Greenspan, Federal Reserve Governor, Essay - 'Gold and Economic Freedom', 1967.

"Today, however, Mr. Greenspan has become one of those central planners he once denounced, and his views on fiat currency have changed accordingly. As the ultimate insider, he cannot or will not challenge the status quo, no matter what the consequences to the American economy. To renounce the fiat system now would mean renouncing the Fed itself, and his entire public career with it. The only question is whether history will properly reflect the destructive nature of Mr. Greenspan's tenure."
Senator Ron Paul before the House Financial Services Committee

"I think we have been remarkably successful, in my judgment ... mimicking much of what the gold standard does... I think in that context so far we have maintained a stable monetary system."
Alan Greenspan, Federal Reserve Governor in response to question from Senator Ron Paul before the House Financial Services Committee

"The US economy is headed toward crisis, and the political leadership of the country--if it can be called leadership--is preoccupied with nonexistent weapons of mass destruction in the Middle East. The US economy is failing. The afflictions are serious. They could be fatal even if diagnosed and treated. America is losing the purchasing power of its currency and its ability to create middle class jobs. The dollar's sharp decline and projections of continuing trade and budgetary red ink are undermining the dollar's role as reserve currency. A number of central banks have announced that they will be diversifying their currency holdings and will not be buying dollars at the same rate as in the past. This will put more pressure on the dollar. At some point the flight will begin. Instead of buying fewer dollars, central banks will sell dollars hoping to get out before the dollar hits bottom. Suddenly, the advantage of being the reserve currency becomes a nightmare as the world's accumulations of dollars are brought to market. An enormous supply and weak demand mean a very low exchange rate for the once almighty US dollar. A venal and self-important Washington establishment combined with a globalized corporate mentality have brought an end to America's rising living standards. America's days as a superpower are rapidly coming to an end. Isolated by the nationalistic unilateralism of the neoconservatives who control the Bush administration, the US can expect no sympathy or help from former allies and rising new powers."
Paul Craig Roberts, 'The Coming End of the American Superpower', Counter Punch Magazine
Former Assistant Secretary of the Treasury in the Reagan administration and former Associate Editor of the Wall Street Journal editorial page and Contributing Editor of National Review.

"The Federal Reserve did a study four years ago that demonstrated that any time a trade deficit rose above 5 percent of a national economy's GDP, an inflection point had been created. We are now approaching 6 percent of GDP. Obviously, I hope this does not result in crisis. That is, a debt crisis because of the amount of money we have to borrow from overseas to support our imports, nor a diminishment of our tax base through outsourcing to the point that jobs become so poor-paying that we can't maintain our tax base. But all of that is entirely possible unless people awaken to the dangers that are being posed. I know this is dull stuff for many people, to talk about external debt and currency devaluations. But the fact is, they're all in prospect if we do not reverse these mindless policies. . . . . We simply cannot sustain the path we're on."
Lou Dobbs, Anchor and Managing Editor of CNN's 'Lou Dobbs Tonight'. Anchors the nationally syndicated financial news radio report, The Lou Dobbs Financial Report, and is a columnist for Money magazine and U.S. News and World Report.

"Since the U.S government has been printing money like crazy to jump start the economy and stave off deflation, there are more dollars chasing commodities, and the demand for raw materials like oil and natural gas is soaring. However, there has been limited production of raw materials over the past 20 years...so you can imagine that with skyrocketing demand and limited supply, prices are going through the roof."
Tom Dyson, Financial Columnist, Daily Reckoning.

"Oil prices are too high. I'm not happy about oil prices one bit. . . . . Clearly these energy prices create headwinds. . . . High oil prices act like a tax on consumers."
John Snow, US Treasury Secretary.

For anyone who doesn't think the stock and bond markets are currently hopelessly distorted, I recommend taking a long cold look at the hedge fund industry. It is a sobering spectacle. . . . . Like the margin traders of the 1920s, but on a hugely larger scale, their activities are propping up fashionable, hugely overpriced stocks. Unlike the margin traders of the 1920s, they are also further inflating the housing bubble and depressing the dollar by keeping long term interest rates artificially low. If Satan wanted to destroy the U.S. economy, and ultimately the capitalist system, he would devise an enormous mechanism whereby money would be poured into long bonds and speculative stocks, distorting both markets, causing a huge misallocation of capital, and leading to a crash that made 1929 look like a picnic. In the unlikely event that Satan exists, hedge funds are thus unquestionably His instruments.
Ian Hutchinson, 'Instruments of Satan', Washington Times, Chief Economics Correspondent of UPI.

"According to Greenspan problems with Fannie Mae and Freddie Mac, [Government Sponsored Mortgage providers which have provided financing for some 75% of US mortgages and are $2 Trillion in debt], are 'almost inevitable'. The truth is he is worried because they are so big that they can't be allowed to fail.
. . . Supporting Greenspan, Treasury Secretary John Snow said thatinvestors were deluded if they thought that agency debt came with an implicitor explicit government guarantee. . . . The whole agencything is a double edged sword for the authorities. They want to spook the peoplewho think that, in a crisis, the government will bail them out. But they don'twant to provoke an actual crisis because that would mean the whole thing implodinglike the proverbial house of cards."

Sheila Flanagan, 'US Mortgage Sector has a House of Cards' Feeling', Financial Columnist, The Irish Times.

"The positive short-term economic outlook is playing out against a backdrop of concern about the prospects for the federal budget, especially over the longer run. Indeed, the unified budget is running deficits equal to about 3-1/2 percent of gross domestic product, and federal debt held by the public as a percent of GDP has risen noticeably since it bottomed out in 2001. . . . . as the latest projections from the Administration and the Congressional Budget Office suggest, our budget position is unlikely to improve substantially in the coming years unless major deficit-reducing actions are taken. . . . . The combination of an aging population and the soaring costs of its medical care is certain to place enormous demands on our nation's resources and to exert pressure on the budget that economic growth alone is unlikely to eliminate. So long as health-care costs continue to grow faster than the economy as a whole, the additional resources needed for such programs will exert pressure on the federal budget that seems increasingly likely to make current fiscal policy unsustainable. The likelihood of escalating unified budget deficits is of especially great concern because they would drain an inexorably growing volume of real resources away from private capital formation over time and cast an ever-larger shadow over the growth of living standards. . . . . In the end, the consequences for the U.S. economy of doing nothing could be severe. But the benefits of taking sound, timely action could extend many decades into the future"
Alan Greenspan, Federal Reserve Governor, Testimony to House of Representatives ( 2-03-05).

Key events in the week ahead

On Wednesday, the Federal Reserve releases its "Beige Book," an anecdotal survey of economic activity and conditions in 12 districts around the country. The survey plays a role in the central bank's decisions on interest rates.

Early on Friday at 8:30 a.m.(1330 GMT), the January trade balance is due. Economists expect the deficit narrowed to $56.0 billion from $56.4 billion in the previous month. The huge U.S. trade deficit, which shows the gap between U.S. exports and imports, has weighed heavily on the dollar because it raises questions about the economy's strength.

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