Taylor on Gold

Gold's technical picture continues to strengthen. A friend of mine noted a very bullish put-call ratio. And at the end of Friday, spot gold closed in New York at $311.70, while the 50-day moving average was $297.37 and the 200-day moving average was $283.49. That is bullish indeed.

When I spoke to Bill Murphy he told me that he had just posted an article titled, "The Fuse is Lit" for the gold market. Bill believes and I think he is right, various events are now converging to overwhelm the manipulators. And based on reports from the trading floor, Bill points out how Goldman Sachs is front running their trading activity. What are some of the converging bullish factors?

• Low interest rates.
• A minimal contango.
• Producer buy-backs.
• High oil prices.
• Strengthening pound, euro, etc.
• A tanking stock market.
• War strains.
• Hedge book blow-ups.
• Panic covering of naked call positions.
• Loss of confidence in financial institutions a la Argentina whose banks are facing default.

CANADIANS CAN NOW PLACE GOLD
IN THEIR RETIRMENET ACCOUNTS

It does seem that the world is gearing up for gold purchases country after country. And when they do, guess which currency they are selling, which may explain why the dollar has been weak. In Canada, a new bullion fund allows Canadians to now invest in gold bullion for their retirement accounts. Following is an article about that fund, named the Millennium Bullion Fund that appeared in Canada's Financial Post on Friday, April 25th, 2002.

"More than two years after it was originally meant to be released, the Millennium Bullion Fund has finally received regulatory approval and is available for sale in Ontario. Registration in other provinces is expected at the end of the summer.

"Managed by Toronto-based Bullion Management Services Inc., the mutual fund trust is invested one third in physical gold, one third in silver bullion and one third in platinum, says president Nick Barisheff. There are no derivatives, futures contracts or options, just the actual physical precious metals, which will be delivered to investors if requested. Up to 5% cash may be held.

"Otherwise, the bullion is held in a segregated vault at the Bank of Nova Scotia, with twice-yearly inspections by auditors at Ernst & Young. Barisheff buys each metal at the prevailing spot price and has insurance to protect against destruction or theft. The annual management fee is 2.25%, which allows the firm to pay dealers trailer fees comparable to other mutual funds. There is also an early redemption fee.

"Barisheff created the fund for Canadian RRSP and RRIF investors who before now have not been able to hold bullion either directly or through an open-ended fund in registered plans. Most RRSP investors participate indirectly through precious metals mutual funds, which usually own mining stocks rather than the underlying bullion. The only other fund to hold bullion is the Central Fund of Canada Ltd., a closed-end fund.

"Barisheff concedes gold stocks or mutual funds offer a more leveraged play but views his new fund as a cash equivalent that hedges against paper-based assets. Gold bullion is up from US$254 this time a year ago to more than US$300 currently, but some precious metals funds are up 100%.

"If the global economy deteriorates the way he expects it might, Barisheff believes physical metals may hold their value better than mere paper, whether stocks or funds.

"For history to repeat gold's rise from US$35 in the 1970s to US$800 in January, 1980, gold would have to rise to US$6,000, a possibility Barisheff can envision.

"He's convinced the global economy of the early 2000s is gloomier than the conditions of the 1970s which contributed to the last surge in gold prices.

"His Web site at www.bullionfund.com outlines the forces he believes will make the last year's runup a mere prelude to what may come. If the artificial supply of leased gold were removed, that alone would make the equilibrium price of gold more than US$700 an ounce.

"Barisheff originally developed the fund with a hope to beating the expected Y2K rush to precious metals. Delays from the Ontario Securities Commission prevented him making the deadline, but the fund finally was approved in January and was available for sale in March.

"Barisheff says precious metals currently offer a "rare risk/reward relationship." While he sees a huge upside, he believes that because the gold price is near its production cost, gold's floor is US$250.

"Demand for gold, silver and platinum outstrips mine supply, he says. With silver, "a situation is rapidly developing in which above-ground stocks will be completely depleted in 2002."

"Barisheff has his eye on a dozen possible events that could trigger the next rise in metals prices. These include war, terrorism, an unexpected collapse in derivatives markets, a move by foreign currency holders to the euro and a court victory by the Gold Anti-Trust Action Committee.

"But haven't latecomers to the gold party already missed most of the run? Barisheff doesn't think so, saying precious metals are still priced near 20-year lows. At US$4.60 an ounce, silver is trading at one tenth of its peak price of more than US$50, while platinum at US$515 an ounce is at half its peak of US$1,085.

"Measured against the Dow Jones industrial average, Barisheff believes gold is still a bargain. In the fall of 1999, the Dow/gold ratio peaked at 45 to 1, compared to a 1 :1 ratio in 1980. Today the ratio is 27 to 1.

"A similar view is dispensed by veteran stock market watcher Richard Russell at his Dow Theory Letters. Russell is bearish on the U.S. market and bullish on gold. He has been doing a series of articles on "fiat" paper currencies no longer pegged to gold, including the U.S. dollar. But this week Russell suggested gold bullion and especially gold shares may have risen "too fast and too far."

"Vancouver-based investment adviser Hans Merkelbach mentions the standard disclaimer that "past performance is not a guarantee for future results," but says new investors in gold mutual funds "won't be disappointed going forward, the odd volatile correction notwithstanding."

"For the next leg upward to occur, Merkelbach believes the XAU (Philadelphia Index) has to break out above its resistance level of 73.75, and the HUI (the Unhedged Index) must break out above 104.83. "A close of bullion above US$ 305 sets bullion up for a fast move to US$320 to US$330, which should add about 20% to 25% in value to gold stocks." Traditional asset allocation advice is to restrict precious metals exposure to 10% of a total portfolio, as insurance against the kind of calamities Barisheff expects. He himself is almost 100% in precious metals bullion or stocks, but warns the difficult part will be knowing when to sell.

"For average investors, he cites the World Gold Council suggestion that a minimum of 6% of a portfolio be allocated to the sector. In the interests of disclosure, that's about the allocation of my personal portfolio to the sector. [email protected]

Gold Stocks - So far this year our gold stocks are up 85.15%. We have a total of 32 gold mining share recommendations in our list. It would be very difficult and expensive for a new subscriber to buy each and very gold stock. Therefore, what we are suggesting in lieu of doing that is that they buy shares of the Tocqueville Gold Fund. Perhaps the new investor may wish to add some individual stocks to their portfolios over time. But given the potential explosive nature of gold (remember it has been artificially suppressed), investors should not waste too much time in gaining some exposure to gold. The lowest risk way to do that is to buy a gold fund, of which we believe the Tocqueville fund is the best. To acquire shares in that fund, investors should either contact their broker or visit.

While we do now own all the stocks that the Tocqueville Gold Fund holds, (specifically companies that sell future production short like Barrick, Placer Dome and Anglo Gold) we do think it is hard to find a better gold mutual fund than the Tocqueville fund. Moreover, John Hathaway is an outstanding and talented fund manager who inspires the utmost confidence in your editor. I recently visited with John and hope to interview him in an up and coming issue of J Taylor's Gold & Technology Stocks. The easiest way to emulate our Model Portfolio without buying every gold share on our list is to allocate 20% of your overall investment portfolio into the Tocqueville Gold Fund. To buy this fund, visit www.tocquevillefunds.com/gold or call the company in New York at 1-800-697-3863.