Wednesday, October 31, 2007
A Gold Bull's Torment
by David Yu
The price of gold had finally punched through $800 an ounce in the after-hour trading. It's quite an accomplishment considering what we had to go through to get here. The most difficult period, for me, was the 2-year span from 2004 to 2005 where the price stayed range-bound between $400 and $450. Every time it made a run for $450 just to get beaten down over and over again. I didn't know how the heck I kept myself motivated enough to continue accumulating gold bullions and gold shares, but I did. And, I didn't know how the heck I kept myself motivated enough to continue encouraging my friends and family to invest in gold because they never did. None of them did. Not one person that I had talked to had ever bought even an ounce of silver.
Being a caring person that I am, I had gone as far as giving some of them silver bars and silver Eagles just to see if I'd get them going. That didn't work either. Everyone's so interested in real estate then that, I'm sure, some of them might've thought I was a little nutty. I can't really blame them because I also happened to start issuing warnings of a possible housing market top in my housing market technical analysis newsletter, debuted in April 2004, right in the midst of the housing market boom. Some of my friends asked to be removed from my mailing list. Nonetheless, I was perhaps the first one using the MLS (Multiple Listing Services) statistics to apply technical analysis technique to the local housing market.
The 2nd most difficult time for me as a gold investor was in May 2006, when the price thrust above $700 but quickly retreated below $600. When the July reactionary high fell way short of $700, I thought, "Oh boy, we're going back to the $400's again". Fortunately, subsequent lows had all been higher than the June intraday low of $555. By the time the price went above $600 again in October 2006, I knew that we could kiss $500 range good-bye.
And the 3rd difficult period for me is now where an ounce of gold is valued almost as much as a share of Google. Some analysts gave Google the target price up to $850.
What's wrong with this picture?
Strictly from profits point of view, Google is a much better investment than gold. I could've paid $100 for a share of Google in 2004 rather than $400 for a troy ounce of gold plus all the storage charges. Google had gained 700% in 3 years while gold had gained just 100%. But, that's not the problem. I'm O.K. with getting 33% annualized return for investing in gold. I'm just not O.K. with the revelation from Google's parity with gold.
Despite lukewarm receptions from my sphere of influence, I've been diligently investing in precious metals, foreign currencies, and oil, all these years as a Dollar bear. The Dollar had lost about 40% of its value since 2001, and all these investments had worked out very well. So, why's this a difficult period?
This is a difficult period because, for the time being, the weakening dollar has actually enhanced the growth of the economy and the value of paper assets more than hard assets. Here's taking a look at the latest GDP from this morning. According to the Dept. of Commerce, advance estimates of Real GDP increased at an annual rate of 3.9% in the third quarter of 2007 (see Chart 1 below). The falling Dollar, believe it or not, has a lot to do with this growth story and nothing to do with the doom and gloom.
Chart 1
The real value of gold is in currency form, not commodity. Gold's intrinsic value will not be fully realized until it accomplishes that ultimate goal. Right now, outside of gold investment community, most people still look upon gold as just a commodity, precious or not. As much as the Dollar had plunged into one new low after another, there's little sign of anyone abandoning the Dollar or Dollar denominated financial assets YET. In fact, for now, the more the Dollar deteriorates, the more the economy grows. And, that is another round of suffering gold bulls will have to endure for a while. As long as gold continues to move in line with the stock market, we know we're not there yet. The good news is that it means we're not even half way through this gold bull market yet.
The Fed had actually learned its lessons from the 2000-2001 recession (see GDP chart above). And, it's making certain not to go down the same path again. I'm sure the Fed's very proud of its accomplishment so far. As to what lessons the Fed had learned and the falling Dollar's effect on the economy, please tune in next time for more details. Due to time constraints, this is as much as I can do for this Wednesday evening.
Before I bid you good night, here's the updated EPS (Earnings per Share) chart as of 10/31/2007. The median EPS had improved a little bit today. It's no longer negative. The Median EPS shows a tiny gain of half of a penny from a year ago, though the Average EPS is still down 3.12%. Nothing to write home about. Since I've written about the EPS so many times already, I'll let the picture do the rest of the talking.
Chart 2
Have a wonderful evening!
email: dyuguard-2@yahoo.com