May 10, 2002
SAN FRANCISCO (CBS.MW) -- The possession of gold, Thomas Bailey Aldridge once said, has ruined fewer men than the lack of it.
This column isn't about Aldridge, the American short-story writer who quit school at age 13 to write for 19th-century magazines. I just put it there so you can turn away from this column now if you don't want to hear my view of markets in coming years -- a view that essentially is the gold story with some dollar-trimming and a swollen current account deficit for good measure.
A month from now, a year from now, five years from now -- you choose the timing, because I won't -- the price of an ounce of gold will be three to six times what it is now. By then, the world's money flows will have stopped way short of the fiber-optic fork in the ocean that leads to New York.
By then, the euro will be worth a ton more than 91 cents. So will the Canadian dollar and the Australian dollar. By then, overseas investors long will have stopped hoarding U.S. securities in their digitized central banks or their frosted chalets. (As I write this, the flow of fur-ner money into dollar-denominated assets is falling sharply, to well less than half the average monthly flow of $44 billion we saw last year.)
The world's battered economies, the ones that rely on metals and other natural resources for their livelihoods, like Ghana, Australia, South Africa, Chile, Canada, even Russia, will be less battered. We'll be seeing more folk heroes from the top bullion producers, like South Africa's Nelson Mandela this week, ringing the bell at the New York Stock Exchange, or listing on the Toronto Stock Exchange.
Gold Fields' Chris Thompson presents the bullish story for bullion.
By then, the paper wealth that is the industrialized world's stock and trade will be more paper and less wealth. America's current account deficit, the best way to judge this country's money flows, already will have surpassed an annualized $450 billion. (See definition below of the ticking time bomb called the current account deficit.)
There are some who believe that when the red ink in the U.S. current account surpasses 5 percent of gross domestic product, all heck will break loose in financial markets. Stephen Roach at Morgan Stanley is on record saying a "hard landing" for the dollar, and with it the boatloads of U.S.-linked securities in foreign portfolios, may be inevitable. "A crisis of confidence is not inconceivable," Roach writes. (Six or nine months from now, you can go back to Roach's report and long for the good old days, when a euro was worth just 91 cents.)
I submit that with that swollen account deficit and the dollar's decline will come (has come and is coming) an explosive move up in the price of gold. The $310 metal, up almost 20 percent this year, one day will sell for a price that reflects a cascading American balance sheet. With U.S. households living off their spree of credit-card and mortgage debt, the perpetual stock market and housing market bubbles in this country, and in most of the world's major cities, will hiss, hiss, hiss.
In coming weeks, I hope to bring you several high-profile money managers and (of course) mining executives who state better than I do the case for, as Tocqueville Gold Fund (TGLDX) manager John Hathaway put it to me, "a big number" for the gold price. Whether that big number comes from a sinking dollar, or the $63 billion of gold derivatives on the books of U.S. banks and trust companies (as of Dec. 31), or creeping inflation, shocking deflation or, Lord help us, bigger and more deadly exploding mailboxes, remains to be seen.
Ian McAvity, the longtime newsletter editor whose Deliberation on World Markets provides in my view some of the hardest-to-find historical charts, money flows and hard data on international gold mining equities and gold and silver bullion, says the gold-price trigger may be days or weeks away.
McAvity, who keeps paper files of every chart, stat and mining press release, stretching back 25 years, points to a pending rush by hedged gold miners to reduce the amount of gold they are forward-selling. As Gold Fields Ltd.'s (GFI) top executives, Chris Thompson and Ian Cockerill, put it this week from New York, the forward-sale of gold is a source of supply in a falling gold market, spurred by bullion banks and central banks lending their gold reserves. But in the current market, where gold relentlessly sets new highs, the scramble to close forward-sale contracts -- to de-hedge and go to the spot market for bullion -- is a source of potent demand in a rising gold market.
Editor's Note: It is our humble opinion, along with Bill Murphy, Chairman of GATA that Thom Calandra, in Bill's words, is almost alone in the financial mass media when it comes to understanding gold ... he "gets it."
Why not take a moment to email Thom to say how much you appreciate his fearless reporting on the markets and gold ...