2003 - an acronym perspective

In the first few days of 2002, I wrote and posted a report, containing my 2002 predictions. In brief, it was bullish on gold and the euro, negative on equities and the US$.

I maintain that position for this year, but for different reasons.

I do not believe the European economy will improve substantially; however it will weaken to a lesser degree than the US economy, causing negative capital flows from the U.S - part of which will go to Europe, hence a higher euro dollar.

A great deal of the remainder of capital outflow from the U.S will go straight back from where it came from: Japan. As I and others last year speculated on the Japs buying gold due to their economic flatness, I do so again this year.

This year will be different though. US$ gold has broken through a number of key technical targets. If it holds US$ 350, it looks as though it could go all the way to 418 without too much fuss: (apart from a few breathers).

Silver last Friday broke through a depressing resistence of US$ 4.80 - 4.85. If this holds, $5.60 looks to be the first target.

Whilst I do remain bullish on gold and silver producers, ensure you identify the best plays.

There are cautions you must take into consideration.

1. Is the producer selling gold in A$, US$ or other currency. This is important because A$ gold has not increased in value as much as US$ gold, due to the strengthening of the A$ against the US$. This will be compounded in 2003 if the POG increases. Why? Because the increase in the POG is representative of a weakening of the US$ and increases in money supply, leading effectively to a devaluation of the US currency.

2. Hedging. Obviously we are all looking for unhedged plays. If and when gold does go nut (upwards), the attraction for unhedged producers to forward sell becomes more enticing. Keep a close eye on your companies to make sure they don't enter forward contracts when the POG looks like it may fall from highs above US$420 and above.

I'm sure there are many more cautions, but these abovementioned ones are less commonly discussed in a bull market.

I have and will be adding further to physical gold and silver holdings. I am also in the process of purchasing options on the COMEX - for both gold and silver.

My holdings of physical silver metal will (in dollar value) at the end of this month, be three times the size of my physical gold holdings - for reasons already adequately explained over the past months on HC.

I indicated a couple of months ago that I exited the property market. I maintain an extremely negative view on suburban residential property for 2003 and 2004. The property market will fall; whether it will rapidly decline or have a soft landing will become evident over the next six or so months.

Housing building activity is already in decline, and the trend is set to worsen as an oversupply minimises yields to investors by reducing rental incomes.

Internationally, I think Japan is in some serious trouble. The government has to, at some point in time, come to terms with the banking system. Hundreds of billions of dollars of bad debts cannot be hidden forever. Whether 2003 is the year for this remains to be seen - but if it is, then any chance of the global economy even slightly recovering would be completely eliminated.

The US will resemble Japan throughout the 1990's: they will announce about $US 500 billion in extended tax cuts in the coming days or weeks in order to start the economy moving. The reality is however, that this will only increase money supply, cause currency devaluation and benefit the POG. Value will continue to be lost in other areas of the US economy.

Australia will, as usual, be more resilient. Whilst speculation continues that the drought is over, I remain more cautious. In general, we will continue to have balanced or near balanced budgets from governments. Growth will be lower than economists recommendations, as they do not (or may not) hold similar views to me on other macro issues such as the international economy, real inflation and currency. For example, if my assessment of a significantly increasing A$ against other major currencies occurs, our exports will become too expensive for foreign buyers, therefore creating a negative effect on growth.

Anyway, I guess that's about it for the moment. There is so much more to add, but you'll probably get the dirft from having read this piece.

Just a few quiet thoughts on a sunny Melbourne morning.


Kind regards, and a happy trading year for all,


Acronym.