Gold Continues to Percolate

Call it Middle East tension. Call it economic uncertainty. Call it a flight to quality. Or, call it, " It's about time!" Absent inflation, gold has managed to pop from a February 2001 low of about $255 to a current April futures above $300. This 17.6% rise confirms a change in near-term technicals and possibly fundamentals, too.

My prior analysis identified a rounded bottom and the possibility gold formed a giant pennant from the impressive February rise. Admittedly, I was premature when I bought the first consolidation after this rally, but the formations remained positive.

The breakout from the April consolidation adds strength to bullish conviction. April gold held above the 29100 support and managed to breakout above $300 again.

As gold pundits reiterate, low interest rates should be good for holding this non-interest bearing asset. Opportunity cost is low while upside potential is " high." There are arguments against upside potential, but the logic concerning opportunity cost is solid. Further, if stocks flounder, gold does hold speculative appeal.

Gold bugs point out that mining has produced supply deficits for some time. Depressed prices are primarily due to central bank divestiture. Here, I would be a bit skeptical. My take is that gold production is expanding at a healthy rate. The supply/demand equation has been in balance and the central bank hoard is a reality as opposed to a conspiracy. It represents supply just as the platinum and palladium in spent catalytic converters represents supply.

The real story is the War on Terrorism. Historically, long military pursuits inevitably destroy economic resources. Essentially, we take production and blow it up. Many economists link this to an inflationary cycle. For those that believe in this cycle, gold makes sense now...before the cycle begins to appreciably increase its upward slope.

We cannot ignore the Middle East's traditional propensity to accumulate gold during uncertainty. Certainly, Saddam Hussein should be in panic mode. As one expert on the Middle East stated, " I'm sure more than half his bags are packed and he already has a standing appointment with a top plastic surgeon." Humor aside, we know President Marcos of the Philippines was busy sequestering his ill begotten fortune when realized his time in power was limited.

Today's gold is not like the gold of just a few decades ago. Gold circulates like currency with far greater facility. In fact, the maturity of the gold debit/credit system is astoundingly efficient in a clandestine way. This is to say that .999 fine gold is considered a constant. 1,000 ounces sitting in a New York depository is the same as 1,000 ounces in Switzerland. Thus, if I take delivery from the New York Mercantile Exchange COMEX division and store it in their approved Fidelitrade depository in Rhode Island, I can tender it back to the Exchange against a short futures position...or, to any other depository.

This same convenience is generally honored between foreign depositories. It is a system of debits and credits. The actual movement of gold is not necessary as long as there is sufficient supply in the crediting depository. Even if deficient, the depository can " borrow" the necessary amount from gold held within another certified facility.

In the case of a fugitive, the gold would not be associated with the actual owner. This is because the United States has the power to freeze assets. I'm sure physical delivery would be a prerequisite if Saddam decided to flee...as it would be for Arafat, given the rather expensive taste of his much younger and much more westernized wife who lives in France.

If the Middle East political situation melts down, I believe the U.S. is ready to act unilaterally. Regardless of the noise made in the U.N. and rumblings in countries besides the U.K., we are the only superpower and Bush intends to keep it that way. Interestingly, some advisors and even members of the Senate are talking about " reevaluating" the entire Middle East geography. My sources tell me that a propaganda campaign has already been designed to educate the general public about the fact that the entire Middle East was colonized under England. The region was only broken into the present day sovereignties this past century...from 1916 forward. All the Arab states are barely older than Israel and the West Bank was never intended as a separate Palestinian country. This propaganda is being held in case there is no reconciliation of the Palestinian situation. Hmmm...another reason to favor gold?

Those who have read my book, The New Precious Metals Markets, know that I have not been a strong advocate for holding precious metals. Of course, that book was written before 9/11!?