Gold Stuck at $293
Jude Wanniski
March 20, 2002


It is not as easy to see the gold direction now as it was when it was at $273, which is when we thought it a buy in early February. Bullion has risen by $20 per ounce and gold shares have tracked that advance. We are still seeing an upward bias to gold, just enough to ballpark gold at $300 at the end of the year from $293 today. This would be the result of fiscal problems at federal, state and local governments, which continue to mount. Remember, tax increases at any level shrink the level of commerce and the need for liquidity. If the liquidity is not mopped up as it would be under a gold standard, paper will become more available than gold, and the gold price will rise. Gold was at its low point early last summer when there was the greatest opportunity for a cut in the capital gains tax. 

Gold is something of a "safe haven" now, not only against the possibility of another terrorist attack, but against the likelihood that equities will have more days like today`s -- with a 133-point decline in the DJIA -- in the near future. All the good "economic news" is probably behind the stock market, while the "earning news" coming down the pike will not support current stock prices. It is not an easy thing to figure, because there are varied price adjustments taking place in up-and-down directions. Analysis using gold as a primary tool is always easier when gold is at a low from its recent highs. Then all the price pressures are down. When gold is halfway up from its recent lows and halfway down from its earlier highs, half the adjustment in prices is going up and the other half is going down. An ancillary problem is that the economic news has been good enough to cause shares of commodity-related companies to already discount an expansion, so their share prices may not be able to climb while the other companies` shares are falling. In that sense, gold is the only commodity or asset of any kind that never has to adjust to itself. At $293, it is right where it is supposed to be relative to its experience with past Fed monetary policy. It is still more likely to inch its way up than to inch its way down, which is why it is a safe haven, especially for funds that cannot short equities.

In that regard, it has been easier for us to give a green light to Japanese equities of late, because the yen/gold price has traveled well above its midpoint and will pull equities up along with commodities. Today`s chatter which blames the selloff on the Fed`s signal that the recession is over, so interest rates may now rise, follows yesterday`s chatter that the market rose on the news that the recession is over. We think we can count on the Fed not doubling the funds rate by year-end (the current bet by the Eurodollar futures market) as long as it sees economic growth not accompanied by inflation signals, which we will not see with gold stuck at $293 and corporate earnings dribbling in without any enthusiasm. Fed Chairman Alan Greenspan does not want to go through that again. We will then just have to wait for the corporate dribblings to gnaw away at bullish enthusiasm. 

The best signs around are that supply-siders may be in ascendance in the Bush administration. The Bush decision to run the off-year campaign on little cuts in capital taxes is a good one. News that Treasury Secretary Paul O`Neill does not like the steel tariff is also good. Our hero, for the moment at least, is Glenn Hubbard, chairman of the President`s economic council, who not only understands supply-side tax policy, but also deflation. His recent comments about Japan`s deflation being a "cancer" on its economy were most welcome in our shop. Maybe President Bush will at last ask him in for some advice.