Tags: Barron's: | Fresh | Gold | Rush | '06

Barron's: Fresh Gold Rush in '06

Friday, 30 December 2005 12:00 AM

MoneyNews is revisiting gold this holiday week, after the precious yellow metal has lately been in somewhat of a slump.

The last time we talked about gold was during the week of Dec. 12, when it reached $528 per ounce. However, it only took a week for gold to slide back to $492 per ounce. And that's still significantly higher than the $460 price levels investors saw - and got so excited about - in November.

This week, in an article titled "Golden Opportunity?" Barron's notes that volatile price swings aren't uncommon in the wild world of gold. The respected financial magazine also says that gold isn't done climbing and that investors would do well to get onboard while prices are still reasonable.

"But for investors who take the long view (and perhaps some Dramamine), gold could pay off handsomely over the next few years, and possibly into subsequent decades," says article author Robin Goldwyn Blumenthal in the Dec. 26 issue.

"In other words, we may be in the early stages of a powerful bull market in bullion."

Gold's growth is tied to inflation, Barron's says.

Always a good investment hedge against high inflation and tight currency markets, gold is also highly favored by investors who share the Federal Reserve's concern (if not outright anxiety) over rising inflation.

Plus, investing in gold is easier and more accessible than ever. As Barron's reports, institutions and individual speculators can now invest in gold more easily, due to the rise of exchange-traded funds (ETFs) specializing in gold.

Blumenthal writes that the largest such fund, StreetTracks Gold Trust, has seen its assets grow to $4 billion in its first year of existence - not bad for a rookie fund.

Barron's also makes another interesting point about gold's growth prospects. "It's true that gold already has doubled since 2001, to about $500 an ounce," Blumenthal says.

But the article quotes Barron's Roundtable member Marc Faber (whom Blumenthal describes as an early bull on gold) as saying that "commodities are an asset class for the first time in history." Hedge funds and other investors can no longer ignore that fact, says Blumenthal.

"I don't think this is a late-cycle movement," Faber says.

Blumenthal says Faber notes "that commodity cycles are typically long - from 45 to 60 years from peak to peak. The last peak was in 1980, meaning the next one could still be at least 20 years away."

According to Faber, when compared to oil or the Dow Jones Industrial Average, the price of gold is "still relatively low, with about 20 ounces of gold needed to match the level of the index. Typically, gold is considered expensive only when the ratio drops below five. That suggests there's plenty of room for gold to rise, in either a bull or bear market for stocks," says the article.

Still, some gold investors warn a new generation of gold bugs that speculation might be taking over and that there are no truly compelling reasons for the price rise we've seen over the past few months.

"Most people on Wall Street have a very strong opinion on gold, but very few people know what they're talking about," Trey Reik, who runs Clapboard Hill Partners, tells Barron's.

"The fact is, you don't know [the reasons for the spike] until after the peak and you see how it unwinds."

Reik predicts a price pullback to $480 an ounce before the longer-term bull market plays out. Compare that to the bullish James Turk, founder of GoldMoney.com. He foresees gold topping $850 an ounce in 2006.

To his credit, Turk accurately predicted that gold would reach $500 in 2005, while at the time few others followed suit.

Say Barron's: "Turk sees the move above $500 as ‘an international buy signal' that confirms for investors that ‘this move is for real.' He notes that gold has been rising against all of the major currencies - something that hasn't occurred since the 1970s, the start of the last major bull market in gold. He points out that in current dollars, gold's all-time high of $850 an ounce, reached in 1980, would be $2,200."

With the Fed concentrating on inflation and a ballooning U.S. debt load - and the comforting notion that gold will always be accepted anywhere in the world, no matter what - it seems the precious metal should have more room to rise in 2006.

If you're interested but haven't invested in gold before, Barron's recommends starting with an ETF like StreetTracks.

To properly evaluate gold-mining shares, Barron's recommends concentrating on three issues:


"The more massive the reserve growth, the faster the stock takes off," Barron's says.

On his Web site The Conspiracy to Keep You Poor and Stupid, Donald Luskin wrote Wednesday that Paul Krugman - whom Luskin refers to as "the world's most dangerous liberal pundit" - has his facts mixed up regarding the impact of the Bush tax cuts on the U.S. economy.

But, as Luskin points out, Krugman never reveals who these "insiders" are.

Regardless, both the insiders and Krugman have it wrong.

"Lets look at the ‘facts' that Krugman embeds here," says Luskin.

"First, federal tax receipts have undergone a more-than-complete recovery from their plunge between 2000 and 2003 - not ‘a partial recovery.' According to the U.S. Treasury's latest monthly statistical report, November tax receipts were $138.4 billion. Add that to the previous 11 months, and you get a trailing 12-month total for tax receipts of $2.171 trillion. That's the largest amount ever collected in a 12-month period. In fact, we've been setting records every month since August, when we first surpassed the $2.105 trillion record set in April 2001."

Luskin also points out that Krugman's statement that "revenue remains lower ... than anyone expected a few years ago" is likely untrue.

"After all, the word 'anyone' makes that statement an impossible claim on the face of it. The Congressional Budget Office, in its August 2002 Budget and Economic Outlook - written before President Bush's 2003 tax cuts had even been proposed - expected $2.244 trillion in revenues for fiscal 2005 (the fiscal year just ended in September). In the CBO's latest budget update (Oct. 6), it estimates fiscal 2005 revenues at $2.154 trillion. So if the CBO is 'anyone,' then yes - revenues remain lower than expected. But barely - only by $90 billion, or about 4%."

But even that argument is a stretch, Luskin adds, because a deeper look into the CBO's numbers reveals that the budget office also got its numbers wrong.

"In 2002 the CBO estimated fiscal 2005 GDP to be $11.936 trillion. In fact, it turned out to be $12.308 trillion -- $372 billion, or 3% higher," says Luskin.

As he points out, the U.S. economy gets $90 billion less than expected in tax revenues, but we get $372 billion more than we anticipated in GDP.

"Sweet deal, huh? I'd do that trade all day," says Luskin.

"And what exactly happened in the intervening time between 2002 and 2005 that could have caused that wonderful thing to occur? Yep - the 2003 tax cuts."

But Krugman denies that the tax cuts have been at all successful.

"Republicans have turned into tax-cut zombies," Krugman concludes. "They can't remember why they originally wanted to cut taxes, they can't explain how they plan to make up for the lost revenue, and they don't care. Instead, they just keep shambling forward, always hungry for more."

But who wouldn't be hungry for more?

"$90 billion for $372 billion?" asks Luskin. "Bring it on."


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MoneyNews is revisiting gold this holiday week, after the precious yellow metal has lately been in somewhat of a slump. The last time we talked about gold was during the week of Dec. 12, when it reached $528 per ounce. However, it only took a week for gold to slide back...
Friday, 30 December 2005 12:00 AM
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