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[TTHQ Staff]

BEING STREET SMART
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Sy Harding

GOLD SHOULD SHINE IN 2005! December 30, 2004.

The gold sector did not have a good year in 2004. Gold bullion gained roughly 5%, while gold stocks, as measured by the various gold stock indexes, lost almost 10% for the year.

However, the gold sector continued to be volatile and therefore exciting, providing great opportunities for traders and market-timers. For instance, although gold stocks lost almost 10% for the year on a buy and hold basis, they enjoyed four separate double-digit rallies of 14% to 34%, each of which lasted a few months (only to be followed by significant sell-offs each time, and a loss for the year for buy and hold investors).

So what are the gold sector’s prospects for next year?

You can bet it will continue to be volatile. The gold sector is quite small, all the gold stocks combined not worth as much as one large industrial stock like G.E. or G.M. Therefore it doesn’t take as much money flowing in or out of the sector to produce large swings in direction. That’s true whether gold is in a bull or bear market. For instance, this year, in spite of gold being in a new bull market since 2001, gold stocks suffered a decline of 32% in just 6 weeks beginning in late May. If that happened to the Dow or Nasdaq it would be considered a market crash. Yet from another low in July the gold stocks enjoyed a 34% rally to their Dec.1 highs. If it took even several years for the general stock market to make that much, rather than just a few months, it would be considered a nice bull market. The volatility is not new. In 1991, in the middle of gold’s long bear market, gold enjoyed such a bear-market rally that gold stocks gained more than 100% in a matter of 9 months. Such is the way that moves are amplified in the gold sector.

My newsletter issued a sell signal for gold on December 1, and I expect that although gold stocks are already down 11%, they have further to go on the downside. But after some further decline, I believe gold will find an important bottom and resume its bull market.

I have a number of reasons for that expectation.

In the big picture, gold tends to move opposite to the stock market. It was not a coincidence that while the stock market enjoyed its record long bull market of 1982 to 2000, gold suffered its 19-year long bear market, in which it plunged from $850 an ounce to $350. Nor was it a coincidence that gold began its current bull market in 2001 just after the stock market entered its recent 3-year bear market. I expect the stock market will run into serious trouble again beginning sometime in 2005, and that would be supportive of gold.

Gold also tends to move opposite to the U.S. dollar.

The U.S. dollar has been in a serious 3-year decline since 2001, which also provided support for the new bull market in gold, (gold rallied from $350 an ounce in 2001 to $457 at its recent peak on December 1).

The dollar may have periodic rallies when other countries intervene in currency markets or take other steps to try to strengthen the dollar against their own currencies. But they’re not liable to be successful without help from the U.S. And for its part, the U.S. just does not have any reason to want a strong dollar. The U.S. economy is mediocre at best and corporate earnings are starting to soften. One of the biggest problems is the U.S. trade deficit, where month after month imports into the U.S. exceed exports by record amounts. About the only tool the U.S. has to reverse that situation is to allow the dollar to decline in value, which makes foreign goods more expensive in the U.S., and U.S. goods less expensive in foreign countries. So far it hasn’t worked to reverse the trade deficit, and until there is some sign of the deficit reversing Washington has little choice but to continue its approach of claiming it has a strong dollar policy, while allowing the dollar to continue to decline.

Gold is also often seen by investors around the world as a safe-haven for financial assets in times of turmoil and uncertainty. Conditions in numerous parts of the world certainly remain such that unexpected events could trigger the perceived need of a safe haven for assets at any time. That has many advisors recommending that even conservative investors have a small percentage of assets in the gold sector.

As I have been since 2001, I am still long-term bullish for the gold sector, and only expecting an intermediate-term correction of a month or two before the upside will resume.

But while I expect the gold sector will shine in 2005, providing ample opportunities for traders, volatility will probably continue to make it difficult for anyone trying to buy and hold the gold sector through the volatility that goes with the territory.

Sy Harding is president of Asset Management Research Corp., DeLand, FL, publisher of The Street Smart Report Online at www.streetsmartreport.com and author of 1999’s Riding The Bear – How To Prosper In the Coming Bear Market.