CBS MarketWatch (Sign-up required)
San Francisco, California
By Thomas Calandra
21 January 2003
With the U.S. dollar swan-diving, researchers and economists who aren't affiliated with investment banks are staking claims to looming mayhem in financial markets.
One of the boldest of those forecasts comes from James Turk, editor of subscription newsletter Freemarket Gold & Money Report and a longtime bullion researcher. Turk often takes to calling the dollar 'the peso' in his missives, which have been increasingly precise in forecasting the 18-month gain in gold prices.
Turk calculates a 'fear index' by multiplying U.S. gold reserves by the gold price, then dividing it by M3 money supply. At its most basic interpretation, the index represents the lack of faith most investors have in gold and the surplus of faith they have in Federal Reserve paper assets.
The index at the end of December stood at 1.06 percent, a historic low since 1971, when Richard Nixon took the dollar off the gold standard. 'It means that 1.06 percent of the dollar is backed by gold (the U.S. gold reserves) and 98.94 percent is backed by debt owed to the Federal Reserve and the banks,' Turk explained to me Tuesday. 'It has been my contention that the biggest bubble of them all is not stocks or home prices, but the dollar.'
Cut to the chase: Turk sees gold, currently at $355 an ounce, rising to $366 by the end of January, which is just 10 days away. The price of the metal will reach $934 an ounce by February 2004, he says.
According to Turk, gold remains out of favor much like it did in 1970, when the regulated price of the metal in dollars was $35 an ounce. The fear index's first 'buy signal' came in May 1972, when gold was selling for $59 an ounce. At the time, the index was 2.01 percent and rising.
Gold prices for the rest of the 1970s rose steadily, reaching about $850 an ounce as America suffered through an oil shock, a hostage crisis in Iran, runaway inflation and a faltering dollar and sinking stock market.
In Turk's world, a buy signal for gold only happens when the fear index surpasses its 21-month moving average and the average is rising. Turk calculates the index at the close of each month.
'For the dollar, the primary trend remains down,' says Turk, who founded and operates GoldMoney.com, a transaction system that uses gold grams as its means of payment. 'Conversely, for gold and the gold mining stocks, the primary trend remains up.'
In May 2002, Turk's fear index hit 'buy' territory again, just as the gold price was mounting a lasting challenge of the $320 level. Granted, gold's price in the summer months that followed disappointed some bullion investors. Spot gold's price came all the way back to $302 in late July.
Turk sees his fresh buy signal, the first one since 1994, as the beginning of a steady rise in the gold price. 'I am simply assuming that the fear index over the next 18 months repeats exactly what it did (as measured by month-to-month percentage changes) in the first 18 months after generating its first buy signal (in 1971),' he says.
Turk assumes 7.5 percent annual growth in the Federal Reserve M3 money supply. In 2002, the money supply averaged 7.5 percent growth to $8.5 trillion by the close of the year. He pegs the U.S. gold reserve at 261 million ounces.
Wall Street and commodity analysts for investment banks this month, in an exercise of follow-the-rising-gold-price, are issuing mildly optimistic forecasts for gold.
Most of the professional analysts are in a tight range of $330 to $390 an ounce or so for 2003. None of the pros breathes a syllable of support for a 2003-2004 gold price that is substantially above $400.
Technical analysts are somewhat more convinced that gold will have a lasting benefit from economic turmoil, Middle East war and a declining dollar. Technical analyst Jordan Kotick at the investment bank JP Morgan Chase says gold could approach $430 per ounce in coming years.
The independent front is different. Newsletter publishers, think-tank researchers and other with no ties to Wall Street or London banks are firmly in the $400-plus camp. 'The gold price is headed for $800 to $1,000 per ounce,' says Bill Murphy, publisher of the rabidly pro-gold Web site LeMetropole Caf�.
Murphy also acts as chairman of the Gold Antitrust Action Committee, a controversial organization that gets credit for forecasting a gold price gain several years ago, when bullion was setting modern-day lows. The group believes central banks and investments banks conspire to depress gold prices, and in turn profit by leasing the metal or selling it short in a variety of ways.
'The massive central bank 15,000-ton short position cannot be covered unless gold rises to those levels,' Murphy says about $1,000 gold. 'The jewelry-wearing women (and men) of the world will have to bail the bankers out by bringing their gold to the market.'
For my money, Turk at Freemarket Gold & Money Report deserves credit for his decades of hard-nosed analysis of currency and commodity trends. His current efforts include the development of a Canadian security that would act as an exchange-traded fund for gold.
Another entity, the World Gold Council, is also attempting to create a securitized piece of paper that represents physical gold ownership, for possible trading in the U.S. stock market. The so-called QQQ of gold, so named for the exchange-traded fund that represents gold's nemesis, the Nasdaq 100 technology stocks (QQQ: news, chart, profile), could increase ordinary folks' ownership of gold at a time when commodities gain favor among those who are weary of their stock-market losses.
Turk's gold-price projections call for a $434-$438 gold price at the end of February, 'before heading to above $600 this summer.' Step in step with gold's rise will come a continued decline in the dollar, which fell about 16 percent against the Euro in 2002 while gold was gaining 25 percent for the year.
Turk says the dollar's fall against the currencies of its trading partners could fall 5 percent in the next five weeks. The Euro at midday New York time Tuesday reached $1.07 for the first time since Oct. 25, 1999. The chart below shows the loss of the dollar against the Euro for the past six months.
Gold's spot price at midday Tuesday was up $2 to $357.50.