Why Gold Is
in a Bull Market
Dennis Wheeler
February 12, 2004
The number
one reason for the new bull market in gold is the deteriorating
financial condition of the United States government. Washington
is in far more financial trouble than you can imagine but I doubt
the gold market has even begun to factor this in.
Yet gold has climbed more than 60% since its bottom at $252 in
August 1999. And the best is yet to come for gold investors.
In 1999, the United States stood supremely as the world's sole
superpower; unchallenged militarily, politically, or financially.
While it held a large debt of around $5.6 trillion, at that time
its finances seemed in very good shape. The budget was running
a surplus and even the off-budget expenditures weren't sending
it too far into the red each year.
In 1999, the U.S. stock markets were booming. Interest rates
were moderately low and a Pax Americana had descended
over the entire world. Or so it seemed.
Since the end of WWII, the U.S. dollar had stood as the center
of the global economy. Every country had to hold dollars, to
buy oil with, if nothing else. The dollar was as good as gold.
The Emergence
of a United Europe
But
countries around the world saw that this dollar supremacy gave
the U.S. an unfair economic advantage at their expense. The U.S.
had been inflating the number of dollars because this gave it
more wealth and more power. Other countries paid for the inflation.
And so, countries around the world, in one way or another, began
to move to curb the U.S. advantages of dollar supremacy. A prime
example of this was the creation of the European Union (EU) and
the launch of its new currency, the euro.
The stated purpose of the euro was to act as a competitor to
the dollar in the global economy. The EU hoped to get the euro
to a position in which oil producers would accept them for oil.
They also hoped it would become a reserve currency, like the
dollar, and that central banks around the world would hold them
as stores of wealth.
Five years later we see the euro has enjoyed moderate success
in becoming a global competitor to the dollar. Not all of the
EU's aims have been realized by a long shot, but they have made
smart progress against the dollar and the country standing behind
it.
Besides this, in 1999 the EU launched a salvo aimed directly
at the heart of American economic supremacy. The Washington Agreement
limited the amount of gold central banks could sell over the
next five years. This was designed by the Germans especially
to weaken American banks who were engaged in the gold-carry trade
a system whereby these banks borrowed physical gold, sold
it into the market, used the proceeds to buy U.S. bonds, pocketed
the money, and hoped to re-buy the gold they had borrowed at
lower prices and pocket that money too.
But the Washington Agreement signaled an end to the bear market
in gold. A new and major competitor to U.S. global supremacy
was born that day and truly a new world order began to emerge.
At that time, in the November 1999 issue of Gold Stock
Report, my headline was Global Earthquake!
And I wrote:
The global
earthquake is completely realigning the political power of the
world in as significant a way as the Cold War did.... The Europeans
have been plotting their ascendancy to world prominence for several
decades. They have now arrived. At least, they have staked their
claim to importance....
The Europeans are very serious about making their currency, the
euro, the competitor to the dollar in global markets. They would
like to have oil, gold, and other commodities priced in euros,
not dollars. To do this they must knock down the dollar in a
competitive way that stops short of war, hopefully.
But the bottom line is this: the era of American hegemony is
over as surely as the Communist Empire fell on the day the Berlin
Wall was torn down. And as the period of American hegemony brought
great benefits to Wall Street, the dollar, and U.S. debt instruments,
the downfall of American hegemony will bring just the opposite.
Investment monies will flow out of the United States. The dollar
will have to compete with other foreign currencies. America will
be hard-pressed to fight foreign wars, as in Kuwait and Serbia,
while counting on European cooperation and goodwill. The Dow
Jones averages should fall. U.S. interest rates will have to
rise to prop up the sagging dollar. And great structural changes
will have to be made within the American system as the country
will no longer be able to export its inflation to other countries.
All of this
has come true except the forecast of higher interest rates. They
are coming. If you notice I even saw that Europe would no longer
help the United States in its foreign wars. It took more than
four years to prove that proposition, but when the Iraq war came
up in early 2003, Europe sat on its hands.
The rise in the euro and the fall of the dollar have not occurred
by accident. This is the successful operation of a united Europe
trying to wrest economic and political power away from the United
States.
And, oh, by the way, the Middle East countries and many of the
Asian countries aren't too thrilled with Uncle Sam, either. (I'll
leave that for another day, though.)
The Great
U.S. Need
The
American system of capitalism and free markets was the greatest
system the world has ever seen. The United States became the
greatest country in world history largely because of its economic
system. But something has gone terribly awry. Success has made
the U.S. fat, lazy, and complacent. Success has proved its undoing.
I'll leave the moral arguments on this to others. Let's just
look at the economic aspects. The wealth created by the American
system just wasn't enough for some reason. America has become
the land of great debt. In fact, the debt is greater than anything
known to human history.
Let's just look at the government's debt picture; this will explain
all you need to know about why there is a great bull market in
gold taking place and why it is likely to continue for a long
time and a long way.
In fiscal year
(FY) 2000, the United States added only $18 billion in new debt.
In FY2001, it added much more $131 billion in new debt.
In FY2002, it added $421 billion in new debt.
In FY2003, it added $555 billion in new debt.
As of January 31, 2004, one-third of FY2004 is over. If the current
pace continues until September 30, the United States government
will add a staggering $771 billion in new debt to its total indebtedness.
And what is that indebtedness, you ask? As of December 31, 2003,
it moved above $7.0 trillion for the first time. Today it stands
at $7.010 trillion. That's a lot.
Now the budget deficit and the total of new debt added are not
exactly the same thing. The latter is larger than the former.
For instance, in FY2003, the budget deficit was a record $374
billion. Still, $555 billion was added in new debt because there
are some expenditures which are considered "off-budget"
in the wacky scheme of accounting Washington employs.
As for this year, FY2004, the Congressional Budget Office now
forecasts the budget deficit will be $477 billion. But the White
House estimates that number will come in at $521 billion. Either
way, a new record for adding debt will be hit and the pace they're
on now will take them to a total indebtedness of $7.5 trillion
by September 30, 2004.
How About
the Future?
The
future looks very grim despite the pledge of the Bush Administration
to "cut the deficit in half within five years." President
Bush just submitted his FY2005 budget to the Congress. It calls
for a deficit of $337 billion in FY2005. Ah, but it does not
include any money for Iraq and Afghanistan and we hear he plans
to ask for an additional $50 billion for the wars there after
the election.
The President's forecasts also assume a 13.2% increase in federal
tax revenue next year. That seems like a pipe dream to me as
the only people doing better and making more money lately are
gold and gold-stock investors.
It won't surprise me if tax receipts are flat to down. And with
$50 billion more for the wars, I forecast the budget deficit
next year will again hit a new record and be far above $500 billion.
This will put new added debt up near $800 billion and run the
total U.S. indebtedness to around $8.5 trillion.
There will be no let up in the bull market in gold because the
number one factor in this bull market is the deteriorating financial
condition of the United States government. No one in Washington
has any program that will arrest this deterioration. Even the
Bush program, if it came true, would add another $450 billion
to the debt next year, bringing the total debt to $8.0 trillion
by September 30, 2005.
This is the best-case scenario. I imagine something worse than
that will be reality.
The End
Game
What's
really amazing is that all this debt is being added at a time
of historically low interest rates. The United States, even though
it paid about $330 billion in interest last year, is paying about
as little as possible on this huge, huge debt.
It's not quite as good as a zero-percent credit card, but it's
close. And if you have a lot of money on a low-rate credit card,
your best course of action is to use your good fortune to pay
down your debt so that when the low rate runs out, you'll be
in better shape.
The United States government is doing just the opposite. It is
using the low interest rate it is paying as a justification to
run up ever-larger amounts of debt.
At some point interest rates will rise, making the interest
payments astonomical. If interest rates doubled, they would
still be historically low-to-moderate. But if the amount of interest
the United States had to pay doubled, that would add $330 billion
to the deficit and the amount of new debt added. And that amount
would grow annually. The danger is something like this happens
and then the interest on the debts spirals out of control and
an Argentine-type collapse happens to the United States government.
That would certainly be the end game but maybe it will happen
and maybe not. For our purposes it is enough to know that the
situation in Washington continues to deteriorate and that is
the number one cause for the bull market in gold.
Gold will move far higher in price. In a few years I expect it
to at least take out the old all-time high of $800. It's going
far higher than that, believe me.
Taking Advantage
In
my newsletter, Gold Stock Report, I have a portfolio
of about 20 stocks through which you can take advantage of the
bull market in gold to make a great deal of money for yourself.
Today, as a courtesy to you for reading this entire article,
I'll give you two of the very best.
First, Arizona Star (AZS:TSX Venture, C$.5.80) owns a 25% interest
in the huge Cerro Casale copper/gold mine in Chile. The current
feasibility study says there are 25 million ounces of minable
gold and 5.1 billion pounds of minable copper at Cerro Casale.
Arizona's portion of that comes to over six million ounces of
gold and 1.25 billion pounds of copper.
If we give Arizona a value of $100 for each ounce of gold, then
you see its market cap should be $600 million. With only 40 million
shares outstanding, that would give it a price of US$15. The
price is nothing like that, but only a fraction of it.
This stock is going higher and higher. It began 2002 at C$.63.
It has gone higher and it will go a lot higher still.
Second, Guyana Goldfields (GUY:TSX Venture, C$.80) is one of
the few gold stocks with a strong asset base that has not been
developed these first two years of the bull market in Canadian
mining shares. But this will be the year for this company.
It was just announced that GUY will be trading on the Toronto
Stock Exchange probably by March 10. Also, it was just
announced that drilling has begun at the Aurora mine in Guyana.
This mine has produced more gold than any other mine in that
country's history with the exception of the Omai mine. From past
exploration, we believe the amount of gold at Aurora is somewhere
between 900,000 ounces and 5.0 million ounces. A 10,000-meter
drill program is now underway to determine a closer approximation.
Even if it's 900,000 ounces. Multiply that by $100 and you get
US$90 million. There are 21 million shares outstanding; so each
one could have a value of US$4.28. Currently they trade for US$.63.
There's a lot of upside here, even if the mine turns out to be
not much bigger than we presently know it to be.
Think for a moment what happens if the mine turns out to be several
million ounces. Then you're looking at a stock well above $10.
I think it should be quite a year at GUY.
Physical
Gold
Every
one, even the Chairman of the Federal Reserve, should own some
physical gold and silver. My counsel is that you buy a little
each month as you can. And then use a portion of you profits
from successful gold stock trades to buy larger amounts. Many
of my subscribers in Gold Stock Report do this
and are very happy.
For instance, if you invest $6,000 in a stock and it doubles
and you sell it. Keep $2,000 for taxes. Invest $2,000 in physical
gold. And keep $2,000 for asset appreciation and do it again
from a larger base.
I find this to be a great strategy that works. Some day physical
gold in the hand will carry a great premium to it, even if there
is no great collapse of the society around us. So buy and hold
physical gold.
All the best to you.
Dennis Wheeler
Archives
Dennis Wheeler
is the editor of Gold Stock Report, now in its 12th year.
Published by Soundview Publications in Atlanta, GA, Gold Stock
Report is one of the largest gold newsletters in the world.
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to be on-the-mark, the subscribers consistently make money on
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