The latest developments in the Middle East have continued to be a major driving factor for gold. Iran remains defiant in the face of demands from the United Nations (led by the United States, United Kingdom and France) that any uranium enrichment program be halted. Enriched uranium is one of the key ingredients needed to make nuclear fuel and highly enriched uranium is used to manufacture nuclear weapons. ------------------------------------------------------------------------
"We believe gold's role of being a universally accepted store of value will return once again within the global monetary system."
The case is due to be heard by the International Atomic Energy Agency, which will decide if Iran needs to go before the United Nations Security Council. Increasing the pressure, however, has been Teheran's threat to immediately resume uranium enrichment programs on a large scale if the Security Council becomes involved. An outcome should be known in the next few days.
According to the New York Times, Iran's top nuclear negotiator said at a recent news conference that nuclear research and development formed an essential part of Iran's national interests and would not be given up.
Europe and the US have responded by refusing to accept Iran continuing with any form of nuclear research program, given the potential to develop nuclear weapons. Iran has effectively delivered the West an ultimatum and warned that any coercive measures designed to pressure an outcome will only result in counter measures.
Specifically, Iran has warned that if UN sanctions are imposed, oil prices would be affected because Iranian oil exports would essentially be removed from the market place. In addition to the confrontation between Iran and the West over nuclear enrichment programs, other deeply concerning issues are present within the region.
The situation in Iraq appears to be worsening by the day. Over 250 people have been killed in the past ten days alone. The seemingly unresolvable quagmire of violence and anarchy is now threatening the country with opposition to the West spreading throughout the Middle East.
From a humanitarian perspective, we remain deeply concerned about political developments in the Middle East. However in terms of investment opportunities, these same political under currents are very bullish for gold, silver and oil in our opinion.
Iraq's predicament could become instrumental in greatly increasing turmoil and violence throughout the Middle East region.
A united Shiite population in Lebanon, Kuwait, Saudi Arabia, and of course Iran could destabilise all of the oil producing nations. The US Military has around 130,000 troops stationed in Iraq, but the question remains, are these sufficient numbers to maintain law and order in one country, let alone the region.
Given the events of the last ten days, we very much doubt this. It is therefore difficult to see how the price of oil and gold can remain stable in such an environment.
Putting the political turmoil in the Middle East aside, there are other issues that support our bullish outlook on gold. China will shortly surpass Japan in terms of being the largest creditor nation with the United States, holding central bank reserves of some US$1 trillion.
The world today is awash in US paper, and the oil producing nations, many of which reside in the Middle East, could easily change their attitude towards holding dollars at some point in time. An aversion to holding dollars could of course be exacerbated if the political situation deteriorates further in the Middle East.
With crude prices at record levels, oil producing nations now receive abundant quantities of US dollars - or petro dollars as they came to be known during the 1970s. Iran is pushing ahead with plans to establish an oil bourse that will be denominated in euros. This could have a serious impact on demand for US dollars if other (Middle East) nations switch to a euro pricing structure.
We have long been convinced of the US dollar's vulnerability and believe that the greenback is in for a very rough ride over the next five years. In the long run, we believe the dollar will undergo a severe devaluation that will ultimately bring about rampant inflation within the United States.
No central bank has been able to maintain the purchasing power of a currency in the face of excessive money printing. In the 30 years since President Nixon took the greenback off the gold standard (because too much gold was leaving the country) the total supply of US currency has soared.
Fiat currency, or paper money as it is commonly known, is only functional when there is confidence that it can store value. That is, $1 today will buy the same amount of goods tomorrow. When this crucial link snaps and confidence breaks down, value deteriorates. As history has demonstrated on many occasions, this process can be rapid once the 'dam bursts'. ------------------------------------------------------------------------
"Timing primary bull markets can be an impossible task, and the inherent volatility can 'throw many a trader to the wolves!"
We saw this process underway last January in Zimbabwe when the local currency lost much of its value. To save ink, the central bank began using cheap paper and only printing on one side. During our two week visit the Zimbabwe dollar lost about 5 percent in value on the black market to trade at around Z$8000 to the US dollar.
Today, just over one year later the exchange rate has plunged to Z$205,000 against the US dollar. Larger sovereign nations such as Germany, France and Argentina (to name but a few) have suffered similar fates at different times in history.
We have no doubt that the day of reckoning is fast approaching for the US dollar. Gold, unlike fiat currency, has been used as a store of value for thousands of years. We believe gold's role of being a universally accepted store of value will make a comeback within the global monetary system.
With respect to the charts, the gold price continues to be in a strong uptrend and last month traded at an all-time high in terms of Australian dollars at $771.50. This reflects a rise of 100 percent from the 1999 low.
Our strategy for the bull market in gold has been to steadfastly stay with the dominant uptrend. Timing primary bull markets can be an impossible task, and the inherent volatility can 'throw many a trader to the wolves!'
In our opinion, the best strategy for maximising wealth in this bull market is to maintain a diversified portfolio of gold and gold stocks and to stay fully invested throughout the duration of the cycle. This may be boring for some investors and a cause of anxiety for others, but we believe this strategy is superior to attempting to time the market on a short term basis.
The difficulty with this strategy is that investors are certain to face a myriad of corrections, and extreme volatility over the next few years. No upward trend (in any security or market) has a smooth and straight trajectory. It is therefore entirely predictable that corrections will occur in any bull (or bear) market.
Gold is no exception. Over the past five weeks gold has corrected sharply - shedding as much as US$42 an ounce or around seven percent. In recent days gold has rebounded to within US$8 of the February high, however, we believe further volatility is likely in the near term.
Corrections vary greatly in intensity and often result in investors and traders exiting their positions prematurely. Bull markets are said to carry as few passengers as possible, and we believe this will certainly prove true for gold.
Despite the prospects of further consolidation in the weeks ahead, the longer term outlook remains overwhelming positive in our view. In time, we believe gold will trade well beyond the 1980 all-time high of US$850. Accordingly, we strongly recommend Members ignore short term volatility and maintain overweight exposures to gold and gold stocks.
