Gold Market Update

Happy New Year, my friends! This is John van Eck speaking to you on January 2, 2001. Our next Update will be on January 16, 2001.

The price of gold climbed higher to $ 275.20 an ounce last week before closing the year at $ 272.00 an ounce, down 5.7% from the end of 1999. After reaching $ 322 an ounce last February, steady pressure brought the price to a five week level of $ 265 an ounce in October/November. We believe this was an "intermediate bottom". It was a 4.7% improvement over the $ 253 an ounce 1999 "bottom".

The prices of gold mining shares significantly under-performed bullion by making record lows during the October/November gold price weakness. Since November 17th the Philadelphia Gold/Silver Stock Index climbed 22.8% to the end of last year, but was 24.4% below the end of 1999. In our opinion, share prices are still substantially undervalued.

The huge U. S. boom, in our judgement, has entered a classic business cycle correction or readjustment period. Four bubbles appear to be bursting. First, the great speculative NASDAQ Composite Index is down over 50% from its March peak. Corporate earnings growth expectations have been sharply reduced. Second, the dollar has declined 11% in terms of the euro from its November high. Third, corporate debt market spreads, especially "junk bonds", and downgrades have climbed to distress levels. Fourth, U. S. gross domestic product growth fell from 5.6% in the second quarter of last year to 2.2% in the third quarter. Surveys of consumer confidence are at two year lows. The governor of The Bank of England, Sir Edward George, said last week that, "The latest data suggest that (the U. S. slowdown) may be sharper than we needed and sharper than is desirable for the world economy… If America really sneezes we all catch cold".

Investors should know that gold has been a prudent deflation as well as inflation hedge. Gold is a means of insurance against financial stress and monetary disorder. As stocks underperform during recessions, investors become more risk-averse and seek to preserve rather than grow wealth. Portfolios are redirected toward cash, T-Bills and gold. Gold is a default-free (counter-party risk-free), currency risk-free, politics risk-free and computer terrorist risk-free monetary asset. Historian Bob Hoye states that in the five previous bubbles gold has climbed for three years on average after the bubbles burst. Following the last bubbles in London and New York gold's real price doubled. Post-bubble gains in 1825, 1873 and 1929 have progressively increased.

Economists increasingly believe that the Fed may begin to cut interest rates early next year. The consequences of such actions are not predictable. Cuts may cause (1) a further weakening of the dollar, (2) a new bubble with higher inflation or (3) a "soft landing". Cuts may fail to prevent a recession. A major problem is the huge growth in business and household debt from $ 3.4 trillion (105% of GDP) in 1982 to $ 13.4 trillion (134 % of GDP) on September 30, 2000. This debt was supportable when the economy was growing at a 5% rate. However, at a 2 to 3% growth rate, no one knows what bad debt problems might surface or how long it will take to correct them.

After Japan's boom burst in 1990 the Bank of Japan gradually brought interest rates down to almost zero and the government had at least 10 stimulus packages to attempt to forestall a major correction and to lift the economy out of its post bull market slow-down. Its ratio of gross debt to GDP soared from less than 60% in 1990 to 130% currently. It is heading toward 150%, the highest debt ratio of any industrialized country. These policies have failed to cure its excess bad debts, excess employment and excess capacity. The governor of the Bank of Japan recently said that the prospect of deflation was back on the horizon. Japan's Nikkei 225 index ended down 27% last year. The yen has already declined 6.5% since its November high against the dollar. Correspondingly, the yen price of gold has climbed 10% during this period. If confidence in Japan's economy and currency continue to erode, Japan's investment demand for gold portfolio diversification could grow substantially.