The Better Sleep Principle

Paul van Eeden
Jun 16. 2006

Gold has been under pressure since it peaked on May 12th. The initial downdraft was in sympathy with other metals that were grossly over-bought over the past ten months and were undergoing a correction. Since last week Monday, however, the rate of decline increased as the dollar strengthened because of comments Ben Bernanke made. That more dramatic decline came to a halt Thursday as the dollar-rally petered out.

Gold is now almost back to where it was in the first quarter of this year, before it went on a tear. Is this the end of the correction?

It may be. There is a lot of negative sentiment out there about the dollar and many people understand gold's ability to hedge dollar weakness. But the gold price rallied during the past ten months along with base metals. Even though base metals prices corrected, they may still have a lot more downside left. Should economic growth in the US erode further, other economies would be affected, substantially reducing base metal demand.

From July last year to May of this year the copper price more than doubled and reached a high of almost $4 a pound. During the past month the price of copper fell by about 20% to $3.12, still almost double what it was in July. The rally in the copper price occurred in spite of rising copper inventories -- a clear sign that the copper market does not lack supply. I would not be surprised to see copper back under $2 a pound, or thereabout. And if copper (and other base metals) were to fall another 30%, would the price of gold hold up?

On the other hand, unlike base metals, gold is not a commodity and I believe the gold price will decouple from base metals prices at some point -- I just don't know when.

According to the OECD, the dollar should fall by 35% to 50% to balance the US trade deficit. That corresponds very well to my own estimate of the dollar's over-valuation. My models also indicate that gold should be around $900 an ounce on an inflation adjusted basis, so if we assume the dollar is over-valued by 35% it would peg the current gold price at around $600 an ounce. With gold now under $600 an ounce it looks attractive once more.

I am therefore on the one hand tempted to buy gold stocks since the price of gold is less than I think it should be. On the other hand, if the fund managers that have been pouring capital into metals decide that they want out, the gold price could still come under considerable pressure.

This is where the Better Sleep Principle comes to play. I had not really thought about it but I have for many years now subconsciously followed the Better Sleep Principle in my own investing. It works like this:

If I start worrying about something when I go to bed at night I fix it the next morning. For example, if I own too much of a stock and am concerned about what would happen if the price falls, I sell some. If I don't own a particular stock and I lie in bed worrying that the price would go up before I get a chance to buy it, I buy some. I do whatever it takes to make me sleep better at night.

Here's why you should follow your own instincts to make sure you sleep well at night: it doesn't help if you follow someone else's advice and they sleep well while you lie awake. Investing is a very personal endeavor; only you know what you need to do.

At this point in time I own enough gold stocks that I would be very happy if the gold price rallied. I also have enough cash that I would be equally pleased if the gold price collapsed, since then I could buy even more gold stocks at lower prices. I sleep just fine.

Paul van Eeden
email: pve@publishers-mgmt.com

321gold Inc