Gold Market Update

The price of gold continued its upward path during the last two weeks and made a new two year high at $ 311.60 an ounce on Friday, up 12 % since the end of last year. Its strength was largely based on growing net investment demand stemming from dollar, stock market, political and financial fears, combined with sound underlying market fundamentals. Gold is again proving its value as a prudent portfolio diversifier and preserver of capital. Last year it rose 2.5 % while the Dow Jones Industrial Average, the Standard & Poor's 500 Index and NASDAQ Composite Average declined, as they also have so far this year.

Gold mining share prices have performed exceptionally well last year and so far this year. The Philadelphia Gold/Silver Stock Index (XAU), which rose 7 % in 2001, climbed 41 % from the end of 2001 to a new 2 ½ year high last Friday. The Financial Times Gold Mine Index, which rose 22.2 % last year, is up 49 % so far this year. In rising markets the shares usually perform better than gold due to their financial leverage. Also, mines with uneconomic reserves at current prices extend their lives and so become more valuable as gold prices rise.

The ratio of the Dow Jones Industrial Average to the price of gold rose from 1 in 1980 to peaks of 42 in February and in June, 2001, and then fell to a low of approximately 28 in September, 2001. It subsequently rallied to 36.5 in March and lately slipped to 31.8 last Friday. A "reversion to the mean" move could imply that gold could outperform the market for some time.

The probability of a double-dip recession in the foreseeable future, in our opinion, is increasing. Although industrial production rose 0.7 % in March and real seasonally adjusted GDP was reported to have grown 5.8 % in the first quarter, capital spending continued to deteriorate, commercial and industrial loans turned down in mid-February and key housing numbers, the great stimulator of consumer spending, turned down in March. Housing starts fell 7.8 %, the largest drop in 2 years. Housing permits were down 8.8 % and were below the year ago level. Existing home sales fell 8.3 % after record sales in January and February. Sales of new single-family homes fell 3.1 %. Mortgage rates have risen. Fresh applications for mortgages dropped. Also, new durable orders fell by 0.6 %, the second time in three months, the Conference Board's help wanted advertising index fell 1 % and the labor market was still slack. The University of Michigan's confidence index slid more than expected in April to 93 from 95.7 in March. Corporate earnings warnings for the second quarter of this year were still more negative than positive.

The greatest risk, in our judgment, is an increase in instability in the Middle East. Oil prices have already climbed over 30 % so far this year. Crown Prince Abdullah of Saudi Arabia, which supplies about 10 % of U.S. oil consumption, warned President Bush last week that the U. S. must take a stronger stand against Israel or face losing Arab credibility and support. The pro-Israel sentiment in the U. S. makes it difficult to threaten Israel with a reduction of aid. The Saudi royal family is a friend of the U. S. The risk is that the Saudi royal family could be replaced by a radical anti-U. S. government, as happened in Egypt, Iraq, Iran and Ethiopia.