GOLD and CRASH, page-11

I posted this on Egoli, but seems relevent still. I have grown suspicious of simple "The dollar's down, POG will be up" type statements. It is much more complex than that.

GLOBAL INVESTING: No neat pattern can explain the fortunes of gold
By Paul Taylor
Financial Times; Jul 11, 2002


There have been six gold price cycles since the price of the precious metal hit an all time high of $850 per ounce in January 1980. That peak came after the US abandoned the gold standard in August 1971 - when the dollar was pegged at $35 an ounce - and mainly reflected mounting investors' concerns during the 1970s about inflation.

Somewhat surprisingly, however, research undertaken by Straszheim Global Advisors, the Santa Monica, California-based investment advisory firm run by Donald Straszheim, Merrill Lynch's former chief economist, suggests there is no common denominator to subsequent gold price spikes.

The Straszheim research is significant because it suggests that it is almost impossible for investors to anticipate a gold price rise such as the recent rally, which has seen the price of gold rise by 28 per cent from a low of $255 in April last year to $327 early last month.

"Gold prices have not followed normal business cycles, either here or abroad," says the report. "Sometimes gold's attraction is its 'safe haven' quality. At other times, it is an inflation hedge.

"Gold prices have risen when inflation was rising or when it was falling; when the economy was improving or deteriorating; when geopolitical conditions broadly were stable or volatile; when trade was doing well or poorly; when interest rates were rising or falling; when equities were up or down; and when the currency was high and rising, or when it was low and falling."

The investment advisory firm argues that the current gold price rise has been driven mainly by geopolitical concerns - particularly the threat of terrorism - the potential for significant wealth destruction in equity and real assets, heightened economic uncertainty and the growing distrust of corporate behaviour reflected in equity market prices. Essentially this gold cycle is a "safe haven" effect.

At the same time, the authors note that inflation and interest rates remain low, and the economy is recovering, albeit too slowly for many investors. They also point out that although equity prices have been hammered, "P/Es [price/ earnings ratios] still look rich to many", and that declining profits and share prices in the telecommunications and technology sectors lend weight to the idea of portfolio diversification, including gold.

Given low interest rates and poorly performing equity markets, the firm's researchers argue that "the opportunity cost to investing in gold is lower than it has been in many years".

The report contrasts the current 2001-2002 gold cycle with the previous five cycles - 1999-2000, 1992-1993, 1989-1990, 1985-1987, 1982-1983 and gold prices in the 1970s. It notes that during the 1999-2000 cycle, when gold prices rose by 24 per cent between June and October 1999, equity prices were still rising sharply and the US economy was very strong.

Similarly, during the previous gold price cycle when gold rose by 22 per cent between March and August of 1993, macroeconomic conditions were solid.

The two biggest gold price spikes came in the 33 months ending in December 1987 when gold gained 71 per cent, apparently reflecting a wide range of investors concerns, and in 1982-1983 when gold gained 67 per cent, driven by despair over equities, concern about a slumping economy and renewed inflation fears.

On an historical note, the study also highlights the three gold cycles in the 1970s that followed the Nixon administration's decision to abandon the Gold Standard on August 15, 1971 and launch in its place a soon-to-fail anti-inflation wage and price control system. Each of the subsequent 1970s gold price spikes seemed to be driven by concerns that inflation was getting out of hand - fears that, as the authors note, were in retrospect well founded.