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[Rogerdodger]

GOLD RUSH MAY STALL AS FALLING BUCK REBOUNDS By MIKE NORMAN New York Post online edition February 29, 2004 -- Gold prices have jumped 50 percent since November 2001 and some individual gold mining stocks are up much more, but some new developments suggest that the future may be somewhat less shiny for the precious metal. There are lots of reasons behind the rise in gold, but you can mostly chalk it up to a falling dollar, declining central bank gold sales and reduced hedging by mining companies. Those same factors, though, are likely to lead gold prices right back down from their lofty levels. Let's start by looking at the dollar. The greenback has been falling since February 2002, and the decline accelerated last fall when the G-7 gave a nod to weaker buck. A falling dollar raises inflation fears and gold is typically considered a hedge against inflation, so not surprisingly, investors started buying and gold rose. But the G-7 may have just told the markets that "enough is enough." At its recently concluded meeting in Boca Raton, the group sent a message that a further weakening in the dollar would not be tolerated. Some central banks, like the Bank of Japan, have been backing this view with hefty dollar purchases. Investors may be starting to pay attention. In the past week, the dollar has risen nearly 4 percent against the yen and about 2.5 percent against the euro. A dollar rebound would temper the whole inflation argument, making gold less appealing for some investors. Another bearish development could be the renewal of the so-called "Washington Agreement." The original agreement, which was signed in 1999, limited European Central bank gold sales over a five-year period. It was a significant step in halting the slide in prices. European central banks hold over 13,000 tons of gold and they had been steady sellers for years. They could crush the price of gold if they wanted to. The Washington Agreement will probably be renewed this year, but not without increases in official selling quotas. Germany has asked that it be allowed to sell 600 tons of gold. That compares with a measly 29 tons that it sold over the past five years. Other European countries will probably follow Germany's lead because it makes sense for them to do so. Selling gold is a politically painless way for countries like Germany, France and Portugal to pay down their deficits and avoid fines for having breached mandated deficit limits. Finally, there was the report last week from Virtual Metals, a gold industry consultant in London, saying that some mining companies may be getting back into the hedging game. When a mine hedges it essentially sells future production now, either by using the futures markets or through other, complex financial arrangements. This action tends to have a depressing effect on the price of gold if enough mines do it. According to Jessica Cross, Virtual Metals' CEO, "Smaller companies have started to hedge again to finance new exploration projects. We may already be poised on the verge of a new renaissance for gold hedging, albeit of a more modest and defined purpose than in previous years." This is important because it would represent the first time in nearly two years that producers become active sellers again in the gold market. Add it all up and the picture is starting to look a little top heavy, suggesting that gold's luster may soon be about to fade. MIKE NORMAN is an international economist and the Founder and Publisher of the Economic Contrarian Update. He is also a Fox News Business Contributor and a regular on The Cost of Freedom.

[SevenOfEleven]

Isn't the argument that "a low dollar raises inflation fears" a bit bass-ackwards? It's inflation that causes a falling dollar.

No no no, you're confusing 'what should be' with 'reality'.

Vacume scenario demonstrating fiat reality:

ACME Collectibles issues 400 collectible certificates every year with an established supply/demand liquid price of 1,000.00 per certificate. Every year these have been tradeable for 1,000.00 in goods. This year ACME did the same in January, and, true to record, their paper traded at 1,000.00 apiece. Near the end of Q1 ACME, for whatever inane reason, decides to issue twice the amount of certificates. Now, look what happens to the poor sucks who paid 1K/per for the initial certificates! Suddenly, all things being equal, their certificates are instantly worth half of what they paid and trade for only half the goods. ACME's action has caused hyperinflation.

Right now all authoratative banks are playing a very dangerous game with the US leading the herd (hey - their fiat is the 'world reserve' currency). In the face of potential deflation the US has run it's magic paper printing presses at a staggering rate to stave off deflation by inducing the ACME effect. Trouble is, in the real world it doesn't work like it does in a perfect world (the ACME vacume - a place with 'all things being equal' and all things simplified). In the real world their's unemployment locally, job exportation, and other fiat printing presses (can you say 'JAPAN', for starters) countering with defensive ACME manuevers. And now we've got China and the EU to contend with as well. Why should they be happy to sit back and watch their fiat rise (effectively deflating the value of all it purchases).

And that's just my little tip of the known iceberg. Even seasoned financial experts (of which league I'm very far from being included) in most cases will answer the question of 'how does money work' with 'Nobody really has a firm grasp on a solid answer to that question right now'. It's a tangled web with bankers and politicians at the spinning helm.

I revert to watching charts because I believe almost all fundamentals can be derived from them, and that one can get a far better grasp on what's around the near term bend by reading them because they're nothing more than an audit trail of votes cast with dollars - not words. And - patterns tend to repeat themselves. Doug proves that constantly with ChartSmarts.

Just my Seven cents...