GOLD IN THE NEWS
YOU ARE A SUSPECT - by William Safire YOU CAN'T AFFORD NOT TO HAVE GOLD - by Richard Russell LETTER TO RICHARD RUSSELL WHAT'S GOOD FOR THE GOOSE - by Michael Peltz PIMCO SURPASSES VANGUARD 500 - by Josh Friedman 'FOUR DIGIT GOLD PRICE IN 5-10 YEARS' - HATHAWAY - by Tim Wood BRACING FOR OCTOBER - by Justin Lahart WHAT IS IT ABOUT OCTOBER? - by Yuval Rosenberg BUFFETT EXPECTS MARKETS TO GET WORSE - by Jon Ashworth SO MUCH FOR THE BOTTOM - by Justin Lahart MANAGER VIEWS: GOLD COULD HIT $1,000 - by Justine Trueman COMEX GOLD OPENS WITH RALLY AMID MARKET JITTERS YOU ARE A SUSPECT WASHINGTON �If the Homeland Security Act is not amended before passage, here is what will happen to you: Every purchase you make with a credit card, every magazine subscription you buy and medical prescription you fill, every Web site you visit and e-mail you send or receive, every academic grade you receive, every bank deposit you make, every trip you book and every event you attend � all these transactions and communications will go into what the Defense Department describes as "a virtual, centralized grand database." To this computerized dossier on your private life from commercial sources, add every piece of information that government has about you � passport application, driver's license and bridge toll records, judicial and divorce records, complaints from nosy neighbors to the F.B.I., your lifetime paper trail plus the latest hidden camera surveillance � and you have the supersnoop's dream: a "Total Information Awareness" about every U.S. citizen. This is not some far-out Orwellian scenario. It is what will happen to your personal freedom in the next few weeks if John Poindexter gets the unprecedented power he seeks. Remember Poindexter? Brilliant man, first in his class at the Naval Academy, later earned a doctorate in physics, rose to national security adviser under President Ronald Reagan. He had this brilliant idea of secretly selling missiles to Iran to pay ransom for hostages, and with the illicit proceeds to illegally support contras in Nicaragua. A jury convicted Poindexter in 1990 on five felony counts of misleading Congress and making false statements, but an appeals court overturned the verdict because Congress had given him immunity for his testimony. He famously asserted, "The buck stops here," arguing that the White House staff, and not the president, was responsible for fateful decisions that might prove embarrassing. This ring-knocking master of deceit is back again with a plan even more scandalous than Iran-contra. He heads the "Information Awareness Office" in the otherwise excellent Defense Advanced Research Projects Agency, which spawned the Internet and stealth aircraft technology. Poindexter is now realizing his 20-year dream: getting the "data-mining" power to snoop on every public and private act of every American. Even the hastily passed U.S.A. Patriot Act, which widened the scope of the Foreign Intelligence Surveillance Act and weakened 15 privacy laws, raised requirements for the government to report secret eavesdropping to Congress and the courts. But Poindexter's assault on individual privacy rides roughshod over such oversight. He is determined to break down the wall between commercial snooping and secret government intrusion. The disgraced admiral dismisses such necessary differentiation as bureaucratic "stovepiping." And he has been given a $200 million budget to create computer dossiers on 300 million Americans. When George W. Bush was running for president, he stood foursquare in defense of each person's medical, financial and communications privacy. But Poindexter, whose contempt for the restraints of oversight drew the Reagan administration into its most serious blunder, is still operating on the presumption that on such a sweeping theft of privacy rights, the buck ends with him and not with the president. This time, however, he has been seizing power in the open. In the past week John Markoff of The Times, followed by Robert O'Harrow of The Washington Post, have revealed the extent of Poindexter's operation, but editorialists have not grasped its undermining of the Freedom of Information Act. Political awareness can overcome "Total Information Awareness," the combined force of commercial and government snooping. In a similar overreach, Attorney General Ashcroft tried his Terrorism Information and Prevention System (TIPS), but public outrage at the use of gossips and postal workers as snoops caused the House to shoot it down. The Senate should now do the same to this other exploitation of fear. The Latin motto over Poindexter"s new Pentagon office reads "Scientia Est Potentia" � "knowledge is power." Exactly: the government's infinite knowledge about you is its power over you. "We're just as concerned as the next person with protecting privacy," this brilliant mind blandly assured The Post. A jury found he spoke falsely before. GOLD'S DAY IN THE SUN I'm a total believer in this saying. I ought to be, since (I believe) I'm the one who actually coined it: "Things that you expect to happen usually take longer than you expect; but, once they get under way, they unfold much more quickly." That's exactly what's happened with the gold market. And it was completely predictable (reminding me of another saying, which is equally true: "Just because something is inevitable, doesn't mean it's imminent"). In any event, most gold stocks have recently doubled. Many, like Harmony, have tripled. Some, like Nevsun, and El Dorado, have been ten-baggers. Presumably, many of you did as I urged, and "backed up the truck" any number of times over the past two years. Of course, many did not; or, at least, not to the degree they wished they had. And everybody, I'm sure, is asking themselves what to do now. Take profits, because it may be another of gold's numerous false starts? Or buy more, because it may be the start of a real bull market? Let me be as clear as possible about this. Any of the false starts in gold over the past two years could have led to the start of a real bull market; I treated them as such and bought more. But things actually are off and running now. This bull market has just begun, after a bear market that's run over 22 years since the previous peak in January 1980, when gold hit $850, and silver hit $50. I expect it will continue for several years, and by the time it's over gold will not just have gone through the roof, but to the moon. To pull a number out of a hat, $1,000 seems reasonable, $3,000 easily possible. And, actually, those aren't completely arbitrary numbers. They're just a matter of arithmetic, taking various measures of the number of dollars outstanding and dividing by the amount of gold in the US Treasury. The arithmetic is important if you believe that gold will again be used as money to back the currency, as I do. But that's the big picture. There are other things, however, that are more to the point for a speculator. The annual deficit of newly mined gold over industrial consumption (1,500 tonnes, or 53 million oz.). The apparently huge short position in the metal established by bullion banks and mining companies. The fact that gold production will actually be dropping for years to come. The fact that far more gold is being produced out of reserves than is being added to reserves. The fact that many of the world's governments have already sold a great deal, or all, of their gold. The fact that the world's monetary/financial/economic position is almost a carbon copy-- but much, much amplified-- of what it was in 1971, when the great bull market that took the metal from $35 to $850 started. The fact that a whole generation has grown up knowing absolutely nothing about the metal or the companies that mine it. And there's a lot more. My opinion is that these stocks are going to go completely insane on the upside. They're going to be wilder than the Internet stocks. By the time it's over every cat or dog that has "mining" or "resources" or "gold" in its name will be selling for $5, or $10, or $50 a share-- much the way anything with a "dot-com" or "net" in its name recently did. The public, innocent of any fundamental knowledge, will buy them the way they bought the Internet stocks. TAKE THIS RATE CUT AND STUFF IT NEW ORLEANS - The skeptics just don't buy it. Russell expects the price of gold, now at $320 an ounce, to equal or exceed the nominal level of the Dow average, now at 8,770, at some point. "Gold will cross at $3,000 an ounce, with the Dow at 3,000 or lower," said Russell. INSIDE THE FED, DEFLATION IS DRAWING A CLOSER LOOK Alan Greenspan and his colleagues at the Federal Reserve have spent their professional lives fighting inflation. But in the fall of 1999, central bank officials gathered at a country inn in Woodstock, Vt., to talk about the opposite: What would they do if faced with deflation, or widespread falling prices, and they already had cut interest rates to zero? Deflation is dangerous because it makes it hard to boost the economy by cutting interest rates, and because it makes debt, now at a postwar high in the U.S., harder to repay. At Woodstock, researchers brainstormed about possible ways the Fed could spur spending, such as adding a magnetic strip to dollar bills that would cause their value to drop the longer they stayed in one's wallet. At the time the chance of deflation in the U.S. seemed remote. Inflation was low, but the economy was booming and the Fed had lifted short-term interest rates above 5%. Today, deflation no longer seems so remote. Prices of consumer goods, as opposed to services, are falling for the first time since 1960. By the Fed's preferred measure, overall inflation was just 1.8% in the year through August. Fed policy makers have cut short-term interest rates to a 41-year low of 1.75%, and investors expect them to cut rates again in coming months to as low as 1.25% -- perhaps starting at their meeting Wednesday. The U.S. economy is struggling with the collapse of a gigantic stock mania. Sinking prices for telecom services, to name just one conspicuous example, are already making it harder for some businesses to support their heavy debts. Overseas, Japan is in its fourth year of declining prices even with interest rates near zero, a result of a decade of economic stagnation that followed the bursting of its real-estate and stock bubble. China has experienced intermittent deflation since 1999 and a few economists think Germany may be close. The International Monetary Fund projects that inflation in industrialized countries this year will hit 1.4%, its lowest level in more than 40 years. Fed officials and most private economists still think deflation is highly unlikely. While the Fed is expected to cut rates either Wednesday or in December, that's more out of concern about slow growth, not deflation. Most Fed officials feel that the 1.75 points of rate-cutting room they have left is plenty to get the economy growing briskly again. Still, they are all thinking more about deflation. "Whereas this possibility wasn't even on radar screens in past recoveries, it is in the range of plausible risks now," Al Broaddus, president of the Federal Reserve Bank of Richmond said last month. "We need to be alert to this risk." Shouldn't consumers be happy when prices fall? That depends on what causes deflation. When technological progress leads to rising productivity, or output per hour of work, the economy can produce more each year with the same workers and equipment, and companies can cut prices while increasing sales. Between 1865 and 1879, manufacturing output rose 6% a year while prices fell by 3% a year. Wages were basically unchanged. Deflation is more worrisome when it results from declining demand, as it did during the Great Depression when prices tumbled 24% between 1929 and 1933, bankruptcies mounted, thousands of banks failed and the unemployment rate hit 25%. It is a central banker's nightmare. William McDonough, the 68-year-old president of the Federal Reserve Bank of New York, recalls his father taking him in the late 1930s to see breadlines and "people in jail who were there for stealing food for their families." The Depression, he said in a speech in March, "was a very real thing to the people who created the Federal Reserve's mandate and they never wanted it to happen again." The 1930s demonstrate that deflation is most dangerous when debt burdens are heavy, as they were in the 1920s and are today. "When a deflation occurs ... without any great volume of debt, the resulting evils are much less," Yale University economist Irving Fisher wrote in 1933. "It is the combination of both ... which works the greatest havoc." A company borrows on the assumption that rising sales volumes and prices will enable it to repay the debt. As prices fall, it becomes more difficult to make payments on debt. A company may be forced to cut wages or jobs, or go bankrupt. The same applies to households that suffer falling income and have to cut spending to service debts. If too many businesses and households do this, the result is depressed demand that fuels further deflation. "The more the economic boat tips, the more it tends to tip," Mr. Fisher wrote. Another risk from deflation is that consumers may delay spending because they expect goods and services to get cheaper. However, there's little evidence that has ever happened -- even in Japan. More troublesome is that deflation makes it impossible for a central bank seeking to jump-start the economy to get inflation-adjusted interest rates -- the ones that economically matter -- below zero. (When inflation is at 3% and the Fed cuts rates to 2%, the inflation-adjusted rate is minus 1%.) For that reason, modern central bankers consider a low inflation rate -- typically between 1% and 3% -- ideal. The U.S. is now in the lower part of that range. Most economists say it would take another massive shock, such as the Sept. 11 terrorist attacks, or demand persistently growing slower than supply to create so much excess capacity that prices fall. Macroeconomic Advisers LLC, a St. Louis, Mo., consulting firm, estimates the economy would have to get so bad over the next four years that it pushes unemployment up to 7.5% from the current 5.7%. "It's a pretty ugly scenario that's required," says the firm's chairman, Joel Prakken. The odds of deflation also are damped by the fact that inflation has been low and stable for years. As long as businesses and consumers expect that to continue, and set prices and wages accordingly, the deflation risks are diminished. Tilted Toward Deflation But a few economists think current economic circumstances are tilted toward deflation. The 43% plunge in stock prices since early 2000 will pressure households for years to spend less and save more. Should home values also see a major decline, families' ability to repay mortgages and spend on other items would fall further. Deflation doubters say the U.S. won't suffer deflation again because the Fed won't let it. "There's a much exaggerated concern about deflation. It's not a serious prospect," asserts Nobel Laureate Milton Friedman, now at the Hoover Institution. Mr. Friedman, the best-known proponent of the view that prices rise and fall with the quantity of money in circulation, says, "The cure for deflation is very simple. Print money." At the moment, with the money supply growing briskly, he argues, "Inflation is still a much more serious problem than deflation." Since at least 1997, the Fed's professional staff has been studying deflation and the problem of how a central bank stimulates the economy once interest rates are already at zero. Mr. Greenspan and other Fed policy makers have been thinking more about it lately. They devoted a chunk of their January policy meeting to the subject. New Fed governor Ben Bernanke, a Princeton University economist who has studied the 1930s, is to give a speech on deflation later this month called "Making Sure It Doesn't Happen Here." Deflation today would likely be more serious than when prices declined in 1949 or 1955 because Americans are so much more in hock. Total debt, excluding the federal government, now equals 158% of gross national product. The last time debt rose to that level was in the late 1920s. Indeed, both the 1920s and 1990s saw a surge in new forms of debt-financed consumption -- installment plans in the 1920s, "cash out" mortgage refinancings in the 1990s. But the fact that consumer debt has doubled since the 1950s to 90% of personal income isn't of great concern to Fed officials. They attribute it to a more sophisticated financial industry that has made credit easier to get, and to the rise in home ownership which means many people have substituted mortgage payments for rent. During the Depression, mortgage default was a cause of considerable hardship, because of the structure of the mortgage market, says Kent Colton of Harvard University's Joint Center for Housing Studies. Homeowners generally had to pay the entire principal back in five to 10 years. If they couldn't refinance, they defaulted. At the depths of the Depression, some 40% of mortgages were in default. The defaults and declining home values also contributed to the failure of thousands of banks and thrifts. Now, thanks to mortgage insurance and the creation of mortgage agencies Fannie Mae and Freddie Mac, homeowners can pay their mortgages down over 30 years and easily refinance to take advantage of lower interest rates. While delinquencies on both credit-card and mortgage payments are on the rise, the problems have been concentrated among subprime borrowers, or those with poor credit. The corporate debt burden, which has also doubled since the 1950s to 89% of revenue, is more worrisome. One indicator of investors' concern about companies' ability to pay back the debt is that yields on medium-quality corporate bonds are 2.7 percentage points higher than those on safe Treasurys -- the widest spread since 1986. "Companies simply aren't coming up with the cash flow they thought they would when they took on the debt," says John Lonski, chief economist at Moody's Investors Service. Automobiles illustrate the pressures. In the 1950s, car prices rose about 0.5 percentage points a year faster than inflation, says Sean McAlinden, chief economist at the Center for Automotive Research in Ann Arbor, Mich. Car makers' productivity was rising rapidly, and sales were advancing 3% to 4% a year. In today's dollars, manufacturers earned about $1,500 per vehicle. Today productivity is growing more slowly, the world is awash in idle auto factories and a strong dollar is holding down the price of imported vehicles. As a result, Mr. McAlinden says, new car prices have fallen 0.2% a year since 1996 and profits per vehicle are down to about $400. That is making investors increasingly nervous about auto makers' ability to repay huge debts, which are mostly to finance customers' car purchases. As recently as 1980, Ford Motor Co. had the highest available credit rating; now, its bonds trade as if they were junk. In the 1930s, Mr. McAlinden says, "we had both deflation and absolute falling demand. This time we just have falling prices." So far. A renewed recession, which would drive down auto sales, is "the most frightening prospect this industry cares about," Mr. McAlinden says. Less Relevant? Fed officials argue that they applied these lessons last year, cutting rates 11 times, and say the lessons are less relevant now, with the economy growing, albeit slowly. But Martin Barnes, editor of the Bank Credit Analyst, a Montreal-based forecasting journal, warns that prices received by most businesses are already declining. While a near-term rate cut by the Fed might help, he says, it "is not going to prevent deflationary pressure from intensifying over the next few months." The federal government could also fight deflation by boosting spending or cutting taxes, though the recent surge in the government's budget deficit could make that more difficult. If the Fed cut its target for short-term interest rates to zero, and still feared deflation, its next steps are largely untried. It could purchase large quantities of government bonds to lower long-term interest rates and perhaps prompt investors to shift assets to stocks. It could purchase more government securities from banks, leaving banks flush with newly created cash to lend. It could try to create inflation by purchasing foreign currencies to drive down the dollar and push up the price of imports. But Fed economists who studied these strategies in late 2000 were skeptical. If interest rates were zero, then even if the Fed did pump banks full of cash by purchasing government securities, the banks would have little profit incentive to risk lending out the money -- the return from leaving it in their vaults would be the same. Indeed, the Bank of Japan has tried this "quantitative easing" for the past year, and the economy is still in a slump. Driving down the dollar would fail if other countries tried to depreciate their currencies, too. Other proposals, some possibly not legal, were for the Fed to lend to private companies or buy things such as stocks, real estate or even goods and services, such as used cars. And then there are those magnetic strips. Marvin Goodfriend, a top economist at the Richmond Fed, proposed at the Woodstock conference that a way to stimulate the economy if interest rates are already at zero is to levy a fee on banks that keep cash on deposit with the Fed rather than lending it out, and to find a way to make currency worth less the longer it goes unspent -- thus the magnetic strips. When someone deposited a bank note, a "carry tax" would be deducted according to how long it had been since it was withdrawn. These charges for holding on to cash would effectively create negative interest rates. "Asking people to carry around some one-dollar bills that are worth 99.4 cents and some that are worth 98.4 cents would be a terrible nuisance," Alan Blinder, a former Fed vice chairman, observed at the Woodstock meeting. He added, "Prevention is far better than the cure." YOU CAN'T AFFORD NOT TO HAVE GOLD Extracted from the 30 October, 2002 issue of Richard Russell's Dow Theory Remarks Every bear market is different. Each bear market has its own way of generating losses. Because the greatest and most speculative bull market in history ended on September 23, 1999, I expect this bear market to generate the greatest losses in US history. I'm trying not to be pessimistic. I'm trying to be realistic. That's the way I see it. How do we survive this bear market? What do we do to come out as "whole" as possible. I wish to God I knew. I don't know because I don't know what lies ahead. My guess is that almost every class and type of asset will be hurt. I've taken refuge in bonds and gold. Bonds because I think the Fed is going to drive rates down in Japan-like fashion. So far I've been right. But with the money that the bonds are throwing off I put into T-bills and gold. Why gold? Because if this nation lapses into deflation, debt is going to be crushed, wiped out. People will be looking for something that is immune to bankruptcy. That something is gold, the only financial assets that can't be bankrupted because gold is pure money, cash. Gold has a 5000 year history of being accepted as real money. Nothing else qualifies. Nothing takes the place of gold. But what if the Fed is successful in inflating us out of danger-- I don't think this can happen. But if it does happen, then the dollar will buy progressively less and gold will tend to hold it's purchasing power. Let me put it this way -- either way you can't afford not to have gold. LETTER TO RICHARD RUSSELL Dear Richard, What will happen when we can no longer borrow (receive our money)? It doesn't matter where prices of goods and services go. Our purchasing power will vanish. No country with large external debts have ever experienced deflation when the credit dried up. They have all met with inflation, big time. If you believe that the rest of the world will lend the U.S. (work for the U.S. for free) 1,5000,000,000 dollars a day (and rising) forever, choose deflation. WHAT'S GOOD FOR THE GOOSE Gold is coming back from a long southward trip.... It's time for a mental readjustment. The price of gold is poised to go higher�potentially much higher. With interest rates at 40-year lows, the opportunity cost in physically owning gold, which doesn't pay any interest, is no longer a big concern. Gold has also benefited from the recent uncertainties around the world. Talk of invading Iraq, new terrorist cells, more corporate scandals, and a double-dip recession will drive up the price as investors seek safe havens. Those moves could be sharp, sudden, and short-term, but gold should get a more sustainable boost from a weak dollar. After all, in many ways gold is just another currency. AS STOCKS RALLY, DOW 4,000 IS IMMINENT SAN FRANCISCO - The U.S. stock market's dramatic October rally is about to dupe the majority of investors, say the folks who forecast the market decline in January 2000. If Robert R. Prechter Jr.'s Elliott Wave International forecasts are correct, as I am confident they will be, the current rebound in stock indexes will go down in history as comic relief on a battered fiscal stage. Steve Hochberg, chief market analyst at research firm Elliott Wave, says the stock market, as measured by the Standard & Poor's 500 Index, likely will rise another 5 percent before beginning a horrific drop. "There is a possibility we could go up to 990 on the S&P 500," Hochberg told me Thursday morning from Elliott Wave's Georgia headquarters, just before the market opened. "But our preferred view is 890. In our view it is a bear market rally, and we take out the Oct. 10 low." On Thursday morning, the S&P 500, a broad measure of the stock market, rose 3 percent to 885. The stock market's sharp swings this summer and autumn have discouraged investors. "High volatility is completely normal in a bear market," Prechter told me Thursday. The 30-stock Dow Jones Industrial Average will lose half its value in the next six months to about 4,000 on the blue-chip index, says Prechter. When it's all over several years from now, the Dow will trade below 1,000, Prechter says. Hochberg, who worked as a strategist at Merrill Lynch in the early 1980s, joined Prechter's Elliott Wave after learning the storied market technician had won a trading championship in 1984. "I said, 'What does this guy Prechter know that I don't?'" Prechter is president of Elliott Wave International. His 1978 book, "Elliott Wave Principle," was among the first to forecast a tremendous rise in stock prices. His 10th book, "Conquer the Crash," makes a compelling case for a vast and rapid deflation of monetary assets. Prechter gets credit for forecasting the bull market in stocks that began in the early 1980s. Prechter and Elliott Wave theories also correctly forecast the sharp decline in equities that began in January 2000 on the Dow and March 2000 on Nasdaq. In November 1999, Prechter gave his now-famous "case for a bear market" speech at the New Orleans Investment Conference. Prechter and his Elliott Wave team also told subscribers, just after Sept. 11, 2001, that stock market indexes would get walloped, then rebound quickly. Accountant Ralph Nelson Elliott developed Elliott Wave theory in the 1930s. The premise is fractal: that all events -- psychological, physical and technical -- repeat themselves. In financial markets, market trends occur in five waves. Reversals, or pauses, develop in a three-wave pattern. According to Prechter's analysis, the Dow has completed five waves since the 1974 recession. Prechter, in an earlier interview, said the decline that began in January 2000 will play out for several years. "What's going to happen when the stock market finally bottoms? You'll be able to go in there and buy stocks that used to trade at $85 a share for maybe half a dollar or a quarter of a dollar." IS GOLD A SAFE BET FOR THE SELF-PRESERVATION SOCIETY? Generally, when equities are performing badly, gold tends to be strong, which is why interest has picked up. Graham Birch, manager of the Merrill Lynch Gold and General Fund, says demand for the commodity from private investors was low in the 1990s because shares were booming and gold was stuck in a prolonged bear market. But with the tables now turned, he believes, it presents an excellent investment opportunity. "There was too much certainty in the world and people didn't think they needed gold," says Mr Birch. "[But] uncertainty in the markets is back and I can't see it disappearing [in the near future]. In the last couple of years the price of gold has gone up and I think there's scope for it to get more expensive relative to equities." Dougie Watt, investment manager of Britannic Asset Management's Far East Pacific Growth Fund, agrees with the case for having some exposure to gold. "It's a safe haven during times of fear and risk aversion, which is what we've got at the moment," he says. "It's been a relatively good performer, with returns of about 14 per cent this year � much better than most equities. I think gold will be reasonably well supported and outperform other asset classes over the next six months." BANKS ALLOWED TO CONSIDER GOLD, FOREX LIMITS AS ONE At long last, gold is to be treated akin to foreign exchange (forex) currency and not just as an idle precious metal or commodity to be stuffed up in vaults. Globally, gold is considered as forex and is part of bullion banks� forex dealings. ...the open position in both gold and foreign exchange as one, giving clear indication that gold will now be treated similar to foreign currencies. PIMCO SURPASSES VANGUARD 500 (The following are excerpts from the above article; any accents are added.) "Bond king" Bill Gross has a new crown: His Newport Beach-based mutual fund now is the nation's largest. Gross' Pimco Total Return fund ended September with $64.6 billion under management, while assets in the former leader, the Vanguard 500 Index stock fund, sank to $62.8 billion. The rise of the Pimco bond fund and the decline of the Vanguard stock fund illustrate the dramatic shift in U.S. financial markets over the last two years. As the now 30-month-old decline in stocks has devastated equity fund portfolios, many Americans have shifted money into the relative safety of interest-bearing government and high-quality corporate bonds. In an interview Monday, Gross acknowledged that a spike in interest rates--now near generational lows--would depress prices on most bonds. More recently, he said the Dow industrials could fall to 5,000 before the bear market is over. "Stocks stink and will continue to do so until they're priced appropriately," he wrote. GLOBAL CRASH FEARS AS GERMAN BANK SINKS Stockbrokers around the world are braced for a potentially calamitous week as alarm mounts over a looming, Thirties-style global financial crisis. A leaked email about the credit-worthiness of Commerzbank, Germany's third largest bank, yesterday increased fears of the international stock market malaise exploding into a fully-fledged banking crisis. Commerzbank lost a quarter of its value last week, raising the spectre of Credit-anstalt, the Austrian bank that collapsed in 1931, sparking global depression. US stock markets have fallen for six consecutive weeks, to their lowest levels in five years. European markets have collapsed even further, wiping out nearly half of the value of European corporations in this year alone. Japan is struggling to put together a plan to save its banking system, riddled with bad debt after a decade of recession and falling prices. Now the German economy threatens to follow. 'There are strong parallels to the Thirties after an unsustainable "new era" boom,' says Avinash Persaud managing director for economics and research at State Street Bank. 'Then, the stock market decline was not just steep, it was long, taking three years to reach the bottom.' 'Commerzbank being affected is a sign of the severity. But in today's crisis risks have been offloaded from the banks to the markets and ultimately our pensioners, which makes the problem more difficult to deal with,' he says. The leaked email about Commerzbank was in response to an inquiry from a US investment bank about rumours of huge losses on credit derivatives, which aim to spread risk. Figures due to be published on Friday will show that a toll of stock market falls, rising joblessness and war fears is finally denting the spending habits of Americans. Economists fear that the result may be a 'double-dip' US recession, taking much of the world with it. Europe's finance Ministers, including Chancellor Gordon Brown, will meet in Luxembourg on Tuesday amid deepening concern about the stability of the financial system. Tomorrow evening, the Eurogroup of finance ministers, excluding Brown, will discuss reforming Europe-wide tax and spending rules along the lines of the British system, taking stronger account of economic difficulties. In the US, the concern is that Alan Greenspan, chairman of the US Federal Reserve, has insufficient room to cut interest rates if the economy falls into recession. 'The [Bush] Administration has two lines of action: tax relief for the rich [and] reliance on the Federal Reserve. Both are without effect,' says US economist JK Galbraith in an interview with The Observer. 'FOUR DIGIT GOLD PRICE IN 5-10 YEARS' - HATHAWAY DENVER -- This year's Denver Gold Forum opening luncheon was a bull spectacular quite unlike previous years. It was just surprising that salmon was served for the main course instead of bear meat. Hosted by Toronto junior IAMGOLD [IMG], it was an opportunity to promote the company's total onslaught approach to gold � it's not good enough to mine it, you have to bank it as the truest cash and pay your shareholders with it. Shareholders can't receive nuggets through the mail, which is why IAMGOLD has selected GoldMoney to supply a digital form of the metal for its distributions. GoldMoney chairman, Clifford Press, extolled the virtue of goldgrams (each "gg" is worth about $10) as an asset with no liability or sovereign overlord, is non-repudiable and unburdened by traditional clearing functions. That said the chink in the armor is the fact that the reason for owning physical gold is possession. That suggests GoldMoney dividends may be liquidated speedily and en masse, but that remains to be proven. Tocqueville Asset Management's John Hathaway was on hand to remind everyone why liquidation, especially into dollars, might be foolish. Reprising many of his previous commentaries, Hathaway said: "Having suppressed the normal functioning of capital markets over the last two decades, the Federal Reserve and economic policy makers have set the stage for a protracted period of sub-par investment returns." Consequently, he believes there will be an inflection point involving a mass emotional and psychological shift toward gold; principally because of dissatisfaction with existing returns and a fear for the future. The problem, surely, is not a shortage of regulation and oversight, but a surplus of dishonesty at every level. Hathaway's topline indicator remains the spread between AAA and BAA corporate bonds. The gap is steady above 12 points and although it has eased in recent weeks, it is at its widest in a decade, but short of the early 1980s record of 28 points. He has no doubt that gold's current twitchiness above $320 is a prelude to a repeat of the coincident 1980 peak in the gold price and quality spreads. Hathaway is also watching the share prices of the "money center banks", alias JP Morgan, the trade weighted dollar, the housing GSEs, mortgage insurer share prices and the slope of the yield curve. All told, he's looking for shudders along the spine of a zombie political economy. That four digit gold price? He thinks we'll see it when the Dow Jones Industrial average and price of gold cross over once more. The Dow at 5,000 isn't likely to trigger the golden stampede (after all we're going to see Nasdaq wend its way below 1,000 points), but 1,500 points on the big industrial board may yet do the trick. Ouch; unless you've allocated some of your portfolio to gold. Graham Birch wrapped up the luncheon with just that advice. He is the brain behind Merrill Lynch Investment Manager's world beating gold fund, which is a great advertisement for the firm's advice to allocate 5% of a portfolio to gold. So far there has not been much uptake on the idea, but when it happens it should be significant considering MLIM assets under management are worth 6 times the combined value of the world's public gold companies. A hedge fund manager I spoke to on the sidelines of the event agreed that acceptance of gold in the "traditional" community was slow, but warned not to be misled by the pedestrian pace. He said he had seen a vastly increased level of interest from sectors that would not previously have touched gold with a barge pole. "This takes time to work though the committees, but it is happening," was his encouragement. Birch reinforced that with a graph showing his cumulative money flow which turned up strongly late last year and has powered past the May peak even though the gold price is only just working its way back up to those levels. Most importantly, the money coming in is "sticking", rather than flying out at every hint of a retracement. Birch also worries about the institutional obstacles for gold, primarily in terms of entrenched investment cultures that have to be overturned. But he sees it taking place, just as the hedge fund manager does, and the bottom line is an incipient increase in gold's investment relevance. Gold Fields [GFI] and World Gold Council chairman Chris Thompson wrapped things up with a rebuke for the industry's stewardship of the metal. He's determined to reverse the rot, starting with a WGC spring cleaning that will see some offices close and poorly performing programs will be slashed. He had no additional information on how the WGC intends to stimulate widespread investment buying, but assured the audience that the organisation was working toward a "complete solution". BRACING FOR OCTOBER NEW YORK - If corporate misdeeds, a sputtering economy and jitters over Iraq weren't enough, now investors get to stare into the maw of the month that's brought us the biggest market declines in history. Yes, October's here again. While Septembers win for the worst historical performance overall, October is the month of the 1929 crash, the 1987 swoon and the stark selloffs of 1997 and 1998. There also was a Friday the 13th in 1989 when the Dow dropped 7 percent (that would be worth more than 500 points at today's levels) and some spectacular swoons in 1978 and 1979. "A lot of people are waiting for that climatic whoosh lower," said Kirlin Securities market strategist Tony Dwyer. And that alone could make it happen, Dwyer and other traders worry. "It's almost like a self-fulfilling prophecy," he said. Not a welcome prospect after the market's recent performance. Stocks dropped sharply in the just-finished third quarter, with both the Dow Jones industrial average and the S&P 500 falling 18 percent, their biggest declines since the fourth quarter of 1987. The Nasdaq fell 20 percent. While theories abound on why some of the most devastating drops have occurred in October, there's nothing very concrete. Some say its because portfolio managers at the many mutual funds that close their books in October are squaring their numbers. Others say that with the waning sunlight, investors begin to hunker down for winter. Maybe investors sell in October because they were trained to long ago: At the turn of the last century, Midwestern banks would draw money from their New York counterparts to pay for grain shipments during the harvest months. This led to a drop in liquidity on Wall Street that would sometimes spark crashes. Whatever the reason, October has been a scary time on Wall Street. October also brings bottoms But historically October has also been the month that turns the tide, and traders are hoping that it will put at least a temporary floor under stocks this time around. "I think we make a nice trading bottom in October," said Larry Rice, vice president at brokerage Janney Montgomery Scott. But Rice despairs that we still haven't entered the sort of environment that breaks the bear's back. It's not enough for stocks to just come down to fair valuations; Rice wants to see them trading cheap. He also thinks the market needs to have some washout days, where investors simply give up on stocks, before long-term investing is a worthwhile pursuit again. Rice could get what he wishes for, according to Scott & Stringfellow technical analyst Richard Dickson. With all the worries swirling around Wall Street, stocks could be set up for a sharp jog down. "We could see an important bottom in October," said Dickson. "It could potentially be very significant for the long-term health of the market. Again, that drop might be self-fulfilling: Worries over a big drop down in October could take a lot of potential buyers out of the market. Take the buyers away, and the pressure sellers exert on the market increases. Even though today's levels may end up being fine places to buy stocks, many would prefer to stick to the sidelines. "This is typically when important market bottoms are built," said Bollinger Capital Management head John Bollinger. "But I'm sitting back and waiting to be shown." WHAT IS IT ABOUT OCTOBER? April may well be the cruelest month, but when it comes to fostering fear among investors, no page on the calendar can match the wasteland that is October. And with good reason: Five of the ten biggest one-day percentage losses in Dow history have come in the days leading up to Halloween, including the great Crash of 1929 and the 22.6% collapse of Oct. 19, 1987. As the 15th anniversary of Black Monday approaches, and with a market guru like PIMCO's Bill Gross predicting that the Dow could slump to 5,000, a look at October's haunted history provides valuable perspective. After all, 1987 was in many ways like today. Spring was a time of investor outrage, congressional hearings, and battered public trust. Reverberations from Wall Street's insider-trading scandals played out in the headlines. A Time magazine cover story wondered, What Ever Happened to Ethics? Its lament: "What began as the decade of the entrepreneur is fast becoming the age of the pinstriped outlaw." If that all sounds eerily familiar, don't get jittery just yet. Back then inflation was above 4% and climbing. To combat it, the Federal Reserve, just weeks into Alan Greenspan's reign, had begun jacking up interest rates. And bond yields were creeping higher, with the Treasury's benchmark 30-year issue topping 10% the week before the crash. "You had a fairly high [price/earnings] multiple, and you also had very, very high interest rates," says veteran A.G. Edwards market strategist Al Goldman. "Something had to happen." The picture is much different today. True, the multiple on the S&P 500, at 18 times estimated 2002 earnings, is still higher than the historical average. But inflation, at 1.5%, is tame, and interest rates remain at rock-bottom levels. A bond rally in early September drove the yield on the ten-year Treasury note below 4%, its lowest level since 1963. The market minders have also fixed some of the infrastructure problems that exacerbated the Black Monday pandemonium. "The lessons that needed to be learned from that experience have been learned," says NASD chairman Robert Glauber, who served as executive director of the task force that investigated the 1987 crash. Now a 10% or 20% drop in the Dow can halt trading and give investors a chance to collect their wits. A 30% plunge automatically shuts the market for the day. Whereas the New York Stock Exchange struggled to handle 600 million shares on Black Monday, a record 2.8 billion shares changed hands there this past July 24. Stocks shot higher that day. Could the market again plummet 23% in one session? It's not impossible. But remember: We have already suffered through a 28-month bear market. And while the panic typical of a crash may not be in evidence, the pain certainly has been. "In a sense, we've already had our October surprise," says Hans R. Stoll, director of the Financial Markets Research Center at Vanderbilt University. Still a bit spooked? Then consider this: Over its 106-year history, the Dow has gained an average of 0.17% in October. That certainly won't put much polish on your portfolio, but it's not nearly as bad as September's average 1.13% loss or the negative returns averaged in February and May. The S&P 500 index has actually been in the black for 30 of the past 52 Octobers. In fact, says Yale Hirsch, editor of the Stock Trader's Almanac, October is a prime time to buy because it often sets the stage for strong rallies in the months that follow. "October" he explains, "is the bear killer." Perhaps then it's wisest to remember the much-quoted warning of Mark Twain, who cautioned that October is one of the most dangerous months for speculating in stocks. "The others," he wrote, "are July, January, September, April, November, May, March, June, December, August, and February." OLD, NEW MINERS SEEK GOLDEN SNITCH A senior Merrill Lynch portfolio manager says he's seeing sharply increased demand for gold investments. Speaking at the Denver Gold Group's Mining Investment Forum, managing director Graham Birch of Merrill Lynch Investment Managers said about $150 million of new money came into his unit's London-based gold funds in the month of September. "That's a record," Birch says. He manages about $1 billion in the natural resources sector for Merrill. Cumulative money flow into the firm's gold investments, largely gold mining companies, has been creeping up since early 2001, when about $300 million was flowing out of the London-based Merrill gold funds. Birch said he is seeing an increase in the share of money from large investors and an increased number of participants looking to diversify their holdings. "I think it's crucial that asset allocators start to recommend gold," he said. As it stands, gold (in its physical form) often is absent from the traditional asset allocation lists of the world's largest investment banks. Institutions such as pension funds that want to buy physical gold on behalf of clients must overcome custodial challenges and a herd mentality that still favors paper investments, even with stock markets across the world approaching six-year lows. Speaking to about 350 fund managers and mining executives, Birch said just $25 billion of new money into bullion would about equal one year's total global production of gold. In this year's first six months, against a backdrop of a weak economy and fiscal turbulence, investment demand for gold doubled to $2 billion, Birch said, using figures from consultants Gold Fields Mineral Services. If gold executives have their way, investors soon may have more choices than mining shares. Several groups, including the gold council, are said to be working on instruments that would act as pure proxies for physical gold, perhaps in the form of an exchange-traded fund that changes hands in real time, like an equity. BUFFETT EXPECTS MARKETS TO GET WORSE WARREN BUFFETT, the billionaire American investor, has given warning that stock markets will get worse before they get better �� but he still believes that equities are a good long-term investment. In an interview, the so-called �Sage of Omaha�� said that the world economy is paying the price for dot-com hype. Mr Buffett said: �We�re in a long correction, because we had an incredible �mass hallucination�, �bubble�, whatever you want to call it. That carries a price with it, which has not been fully paid but which we�ve made a good down payment on so far.� He added: �It�s only in the rinse cycle that you find out how dirty the laundry�s been. We�re in the rinse cycle now.� Mr Buffett has kept his faith in the markets. He said: �Long term, I�ve always been a bull. The American economy�s going to do very well. The UK economy�s going to do very well over time. But you get these periods when markets disconnect from the real world. We had a situation where the markets became totally disconnected from business reality. This was a pretty extreme case, but they get back in sync after a while. If you own equities for 25 years or 30 years, you will get a result that parallels that of business.� Mr Buffett said that unscrupulous US executives took advantage of the late-1990s stock market hype. He said: �You had an erosion of accounting standards. You had an erosion, to some extent, in executive behaviour. But during a period when everybody �believes�, people who are inclined to take advantage of other people can get away with a lot.� Mr Buffett was speaking while in London to promote NetJets, his fractional ownership jet operator. He is seeking acquisitions in the UK, but ruled himself out as a bidder for British Energy, the troubled nuclear power group. SO MUCH FOR THE BOTTOM NEW YORK - The Dow broke to its lowest level since October 1998 Tuesday -- and with it went investor hopes that they'd seen the worst. At 7,683 the Dow has fallen nearly 1,200 points in just one month, a loss of about 13 percent. The Nasdaq has fared even worse, down about 14 percent over the same period. Stocks were in the red out of the gate Tuesday morning, but it wasn't until after the Fed announced in the afternoon that it would hold interest rates steady that the market really started to drop. Although the Fed decision was anything but a surprise, two members dissented, saying that rates should have been cut. That suggested to some traders that maybe the Fed needed to lower rates -- that the central bank has been bullheadedly upbeat about the pace of recovery, and thus has put the economy at risk of slipping back into recession because of its inaction. "The Fed is hanging onto its long-term view," said Miller Tabak bond market strategist Tony Crescenzi. "Some will say this is just excessive optimism." "Anybody who was asleep through all of this is getting jolted awake," said Brett Gallagher, head of U.S. equities at Julius Baer Investment Management. "A lot of people are back to where they were when they originally started investing." Especially if, like many investors, they loaded up on tech. The Nasdaq is back where it was in September 1996 -- when enthusiasm over do-it-yourself investing just began to mount. Any money devoted to the index since then would be under water. And of course much of the cash devoted to tech stocks flooded into the market near the Nasdaq's March 10, 2000, top. The index has fallen 77 percent since then. Although he wouldn't rule out any short-term snap-backs, Julius Baer's Gallagher thinks that stocks have further to fall. In the weeks to come he thinks investors are going to focus on how much "fluff" there is in earnings numbers. Standard & Poor's is set to come out with fresh data on what it thinks U.S. companies' earnings really look like. Meanwhile, the Financial Accounting Standards Board is taking a fresh look at the expensing of options. "I don't see anything fundamental that's going to reverse the market's direction," Gallagher said. "We're going to get a lot of red flashing on our screens." Even for traders that share Gallagher's dour take on the market, right now may not be the best time to sell. For a while now stocks have been what traders like to call "oversold" -- a fancy term for when selling has been so protracted that it looks like it's going to exhaust itself. That, said Kirlin Securities strategist Tony Dwyer, makes it look like the market is due for a big snapback. "Typically you don't want to sell into a whoosh," he said. "Things are so negative now, you're ripe for a vicious, counter-trend rally." But ultimately Dwyer thinks the market is going to head lower still, and when the rally comes, he'd be selling into it. There are some optimists out there, however, who reckon that investors have become far too glum, driving stocks far below where they should be. "The news is so bad, I almost have to jump to the contrarian side," said Jack Baker, head of equities at Putnam Lovell. "If you assume the economy is in the process of turning, I would say you have to start picking away." But that assumption on the economy may get challenged in the weeks ahead. Even economists who think the recovery is on track fret that the next round of economic data looks like it's going to be on the weak side, and that the fourth quarter will be weaker than the third. That doesn't bode well for the market, said Wells Fargo managing director of listed trading Todd Clark. "Stocks won't head higher unless we start getting back-to-back numbers showing economic strength," he said. "We certainly haven't been getting that." GOLD 'QQQ': KEY TO A PRECIOUS RALLY NEW YORK - Would an electronic substitute for physically owning gold boost demand for the metal in times of fiscal turmoil? The World Gold Council, a bullion trade group, acknowledges it is working on a new investment vehicle for gold but offers few details. Experts at a New York bullion conference say they expect such a security, probably in the form of an exchange-traded fund that is listed on the New York Stock Exchange, in coming months. "I think Chris Thompson's product will make a big difference," said Rick Rule, chief executive of Global Resource Investments. Thompson is the new chairman of the gold council, whose charter is to increase investment demand for gold. "If it's backed by the gold council and there is a big, recognizable gold depository involved, it will be a big success." Thompson, the executive who helped turn South Africa's Gold Fields Ltd.into one of the world's largest gold producers, this summer brought on James E. Burton, former chief executive of the California Public Employees Retirement System, as its new CEO. For now, individual investors worried about a financial meltdown have few alternatives to buying bullion bars, gold coins, jewelry and highly leveraged futures contracts. Investors can buy a closed-end fund, Central Fund of Canada, that holds gold and silver in storage. There also are some small, preferred company stocks that act as loose proxies for gold and silver. In addition, hedge funds and mutual funds can buy structured finance notes that represent gold, with a minimum commitment of $5 million. "But these are not backed by physical gold and are essentially the other side of the gold-lease trade," said John Hathaway, fund manager of Tocqueville Gold Fund in New York. The leasing of gold contributed to supply through much of the 1990s as miners practiced hedging their production. A number of banks, including HSBC, Deutsche Bank and others, also offer gold-denominated bonds sponsored by the World Gold Council. "Anything that creates demand for gold is good," John C. Doody, editor of Gold Stock Analyst, said at the New York Institutional Gold Conference on Tuesday. The spot price of gold rose $4 an ounce Tuesday morning, surpassing the $325 level seen as a critical area of resistance. Doody said he expects gold, which has benefited from the relentless decline of equities, and war fears, to reach $450 an ounce in the next two years, in part because of investment demand for the metal. Miners' output of the metal is seen falling about 3 percent this year, the largest drop since 1976 and a bullish sign for gold. Frank Holmes, chief executive of asset manager U.S. Global Investors, estimates investors absorbing 20 percent of global gold mining output - if 1 percent of the 100 million investing Americans sink funds into gold. Global gold output is seen falling 3 percent this year, its biggest drop since 1976. "If we make it easy for investors to buy bullion, demand for it will rise sharply," said Holmes. U.S. mutual funds currently must clear regulatory hurdles if they wish to buy physical gold bars and store them on behalf of shareholders. Gold enthusiasts long have floated the notion of an exchange-traded fund for gold, a bulky commodity that requires insurance and storage fees. Exchange-traded funds, such as the Nasdaq 100 Trust have swelled in popularity because of minimal fees and the flexibility to trade baskets of stocks real time on an exchange. Exchange-traded funds now are available for fixed-income products, via Barclays Global Investors, the creator of iShare funds that track baskets of securities. The bond exchange-traded funds, representing U.S. Treasury bonds, have risen sharply since their July debut as investors flock to the safety to government securities. Treasury bonds and gold are among the best investment classes this year and for the past 12 months, along with certain other commodities, including soybeans, corn and wheat. Gold's price is up 18 percent this year, as is platinum, another precious metal. In the gold industry, there is growing anticipation of the day when gold is available as a tradeable stock. No commodity is yet represented by an exchange-traded fund in the United States. The Securities Exchange Commission and possibly the Commodity Futures Trading Commission would have to approve such an exchange-traded fund, which almost certainly will require real-time arbitrage of prices and day-end storage of gold in audited vaults. "At the end of the day, investors will find they need to own physical gold, which is extraordinarily difficult to do," said Eric Sprott of $1.2 billion (Canadian) Sprott Asset Management in Toronto. Sprott said his clients have a strong desire to own gold. He currently owns 19 percent of Central Fund, a closed-end fund that holds about $140 million worth of gold and silver and trades at a premium to bullion prices. "The world's faith in managed currencies is a source of amazement," said James Grant, editor of Grant's Interest Rate Observer. "Gold will have its day as people confront the immense over-investment of faith they have in dollars, yen and so on." GOLD CONFERENCE HEARS BULLISH CHORUS ON GOLD PRICE OUTLOOK New York - Gold prices are set for a sustained run higher, while the current declines in equity markets and the U.S. dollar are not set to stop any time soon, according to speakers at the 15th annual New York Institutional Gold Conference. Joe Foster, portfolio manager at Van Eck Global Funds, said that the current low interest rates, sliding U.S. dollar versus other currencies, shaky equity markets and the ongoing U.S. war against terror were all supportive of gold. Further, equities remain overvalued and are therefore due further retreats over the coming months, while U.S. debt is set to swell over coming months, he told the well-attended conference. Foster also noted that the gold supply is set to decline over coming years following an extended period of under investment in the exploration sector, which again is supportive for gold prices. Ian McAvity, editor of "Deliberations on World Markets", a tri-weekly investment newsletter, echoed Foster's arguments and said that as price/earnings ratios remain very high, "significant downside risk in the equity sector remains." He added that further growth in the already bloated U.S. budget and trade deficits was likely to increasingly weigh on the U.S. dollar relative to other currencies, offering additional support to gold. Mary Anne and Pamela Aden, co-editors of the "Aden Forecast", the monthly investment letter, also joined in the bullish chorus by saying that "while we've been accused before of being too bullish on gold, we haven't been this bullish for years." Mary Anne Aden said gold was at the beginning of a major trend change counter to that of the global equity markets, which would see "the stock markets now enter a lengthy bear market while it's gold's turn to shine." She noted bearish crosses of long-term moving averages on the Dow Jones Industrial Average that had not been seen in 20 years, while pointing out major positive patterns emerging on the long-term gold chart that suggested an extended bull run for gold ahead. Indeed, she argued that if past occurrences were anything to go by, gold's current bull market was not set to peak until sometime between 2004 and 2006. "These are not just small signals, but major shifts in long-terms trends that have in the past signified a major extended turnaround," Aden said. "In gold's case, this could target at least the $400 level, if not much higher, if we clearly break above there," she said. McAvity was similarly bullish on his price outlook, claiming that any decisive breach of the $340 level would "change the character of the gold market and draw in a whole new set of buyers." MANAGER VIEWS: GOLD COULD HIT $1,000 LONDON - The gold price could more than triple to $1,000 per ounce if western stock markets suffer from a 20 year bear market, says Hugh Hendry, the manager of the top-performing Odey Continental European fund. "I think there are some circumstances where the gold price could go to $1,000. Logically you could construct an argument where the gold price goes up by several times its current value," Hendry said. Hendry, who has invested in several gold mining companies through his hedge funds and the Odey Continental European fund, says a 20 year stock slump is not as strange as it sounds. "I think the equities market will fall for 20 years. From 1929 it was 25 years before the market recovered and some stocks didn't come back for 40 years. When will we see 40,000 in Japan again?" Hendry, a partner at Odey Asset Management, said it was 'ridiculous' that some market commentators think shares will bounce back in the next year or so. "We've seen the biggest bull market in history and history demonstrates that the intensity of any bull market is more than matched by the intensity of a bear market. The S&P is on 37 times earnings. Bear markets end when stocks are on six to seven times." Hendry is also investing in government bonds and says there is a bull market in risk-averse instruments with US and European bonds regularly making new highs. However, despite recent share price rises, he is still very bullish on gold mining stocks. He said South African mining stocks like Harmony Gold Mining and Durban Deep, that suffered falls over the summer have now recovered and many stocks are still trading at reasonable prices. He has been buying shares in Ashanti Goldfields at one times revenue and expects further stock price rises if the gold price keeps going up. LACK OF HEDGING A GOOD SIGN His bullish outlook on gold is partly due to the fact that many gold mining companies have stopped hedging against a fall in gold prices and are taking a positive view on prices for the first time in many years. Even Barrick Gold, a Canadian blue chip famous for hedging the gold price, has been closing down some of its hedges as has AngloGold. "You want to own the unhedged gold producers because if the gold price rises their profits will rise dramatically," said Hendry. However, he is less keen on holding gold bullion as he said gold bars have been confiscated by governments in the past and this could happen again if a government felt its currency was under threat. The United States banned private ownership of gold bars from the early thirties to 1971 when the US got rid of the gold standard so that dollars were no longer backed by gold. France took a similar policy in the early 18th century. A spokesperson for the World Gold Council said such a move would be unlikely these days with the move towards further de-regulation of markets. "You can never anticipate what any government is going to do but I would think it would be extremely unlikely," she said. The Odey Continental European Accumulation fund has returned 14.56 percent in the last year compared to a 21.51 percent fall in the AUTIF Europe (ex UK) index over that period. Over three years the fund has returned 29.80 percent according to data provided by Lipper, compared with the index's 19.87 percent fall. Hendry's fund is also ranked first in the Europe excluding UK category on the Citywire Funds Insider database even beating star manager Anthony Bolton's Fidelity European Fund. COMEX GOLD OPENS WITH RALLY AMID MARKET JITTERS NEW YORK, Sept 5 (Reuters) - COMEX gold popped above the $320 an ounce psychological level to a six-week high early Thursday as investors remained jittery about the economy, terrorism and the risk of U.S. military action against Iraq. December gold rose to $320.80, its highest since July 23, right after the open and at 0915 EDT was up $2.80 at $319.30 an ounce. Dealers said stop-loss buy orders to cancel out previous sales were executed above $319, accelerating the rally. "It was all strong fund buying," said a floor broker. "We came in stronger due to anxiety over next week's (Sept 11) anniversary as well as fears of the Iraq conflict starting soon." Spot gold was quoted at $317.90/8.40, up from Wednesday's New York close at $314.70/5.20 and London's early bullion fix Thursday at $316.20. Gold looked like one of the few safe bets for money managers after U.S. President George Bush said on Wednesday that he would ask the U.S. Congress to back his efforts to topple Iraq's Saddam Hussein. Facing intense opposition from overseas, the president also said he would outline the serious threat posed by Iraq's efforts to build weapons of mass destruction at the United Nations. The stepped-up saber rattling dovetailed with market concern that extremists could be plotting another attack on Americans one-year after suicide hijackers destroyed the World Trade Center and part of the Pentagon. The Dow Jones industrial average was down 70 points in early trade as investors looked for safe havens. The dollar was weakening again, coming within a whisker of par with the euro. "I think (gold's) going to remain pretty well supported here," said a bullion dealer. "The Dow is down, bonds are bid, the dollar is weaker and there is still a lot of bad things going on in the world. There is little reason why gold should be materially weaker." The dealer said precious metals players also saw recent producer hedge buybacks as supportive. COMEX December silver was 4.0 cents higher at $4.535 an ounce, in a $4.495-$4.56 range. Spot silver was last at $4.51/53, up from $4.47/49 late Wednesday. The fix was $4.505. NYMEX October platinum was $3.90 higher at $541 an ounce. Spot platinum was at $539/547. December palladium rose $2.50 to $325 an ounce. Spot palladium was at $318/324 an ounce. THERE'S SAFETY IN NUMBERS - TIPS FOR MANAGING THE COMING CRASH; PLUS-PRECHTER SAN FRANCISCO - In the coming bad months and years, a period that will annihilate nearly all paper assets and shrink the oceans of debt and credit sloshing around the world, investors and workers will be asking what they can do to sidestep a meltdown of their personal portfolios. "It a question everyone should be asking themselves right now, and it's not too late," Elliott Wave International forecaster Robert R. Prechter Jr. told me Thursday. "What's going to happen when the stock market finally bottoms? You'll be able to go in there and buy stocks that used to trade at $85 a share for maybe half a dollar or a quarter of a dollar." The coming meltdown, in the eyes of Prechter and others alarmed by the global credit expansion of the 20th century, will include homes, bank deposits, insurance policies, even paychecks. Here are some starter-tips, gleaned from many fine sources, including the Weiss Safe Money Report, Prechter's new book, "Conquer the Crash," and "Crisis Investing" author Doug Casey's International Speculator. -Do investigate the integrity of all money markets, bank deposits and other cash instruments at your disposal. Not all money market accounts or funds are created equal. Those that are based on risky short-term paper, from corporations or even government agencies, probably won't allow you peace of mind in the event of a fiscal meltdown. Several sources, including the Weiss Safe Money Report, Bankrate.com and Grant's Interest Rate Observer, examine safety and liquidity issues surrounding commercial banks and the fund companies that manage money markets. -Do investigate cash equivalents that exist outside of your home country, in the event of political risk. Switzerland's bank reserves, unlike those in the United States, are backed by a 25 percent savings rate that is required of citizens by law. -Do sell all stocks that are losing you money. Do sell all stocks that are making you money. -Don't consider buying any stocks, or bonds, or anything considered a paper asset, unless you are prepared to take a 25 percent loss. Or unless you are prepared to hold for 15 years or longer (just ask the folks who still own Ford Motor) -Don't be lulled into a sense of false security by the interim rallies staged by Wall Street. The rallies are perfectly normal in that they allow sellers to exit with just a bit more cash than they had a month ago, but not nearly enough to make up for losses in this, a third consecutive year of falling equities. -Do buy gold and silver -- coins, bars and even some bullion proxies, such as Central Fund of Canada, if personal storage of the metal is a challenge. If currencies self-destruct from the drag of decades of credit issuance by national and corporate treasuries, bullion almost certainly will become a commodity with monetary status. -Do eliminate as much debt as you can -- credit cards, automobile loans, margin interest, mortgages, second mortgages. The credit overhang in the United States, more than $30 trillion owed by U.S. companies, individuals and the government, is three times gross domestic product, the highest ever. Besides saving you or your home from personal bankruptcy, default or repossession, your elimination of debt will be a service to this country's economy. -Keep your day job, sell the gas-guzzling SUV and if you really see the red writing on the wall, start short-selling some of the major equity indexes, especially the price-weighted Dow Jones Industrial Average's exchange-traded Diamond Trust and its major components, like high-priced 3M. "Why should you be taking a risk with your college money, your retirement money and all the money you worked so hard to save?" Prechter says in the CBS MarketWatch interview. "First thing is, you need to get out of those very risky areas. The stock market is the No. 1 (risk) in a deflationary environment. No. 2 is the real estate market. And the third one is in bonds that have been issued by risky enterprises." While we believe that the above non-affiliated sources have traditionally provided accurate, useful, and informative information, Goldline does not take responsibility for any of the articles or their sources. To request copies of these and future articles, please call .
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