RECORD LOW FOR GOLD SUPPLY, SAYS INVESTMENT VETERAN

By Sara Smith 15:30:54 | 15 April 2008

Citywire

Fund Selector Edition

Gold supplies are at an all-time low and may drop by as much as 15% over the next five years, according to BlackRock’s precious metals investment veteran Graham Birch.

The Citywire AAA-rated manager, whose MLIIF World Gold Fund celebrates its 20th anniversary this month, said that a lack of new production is resulting in tension between jewellery and investor markets.

Birch said that during the 1990s growing mine supplies caused the jewellery market to surge ahead as the prime driver for gold. However, he said the decline in production has seen jewellery demand displaced by investor demand.

‘Investor demand has really come back to life as people have realized that gold is a rare commodity,’ he said.

Supply is low however, as gold exploration in the past 10 years has been minimal and although exploration spending has increased, it can take up to seven years for a mine to become fully functional.

He also pointed out world gold mine production peaked in 2001 but is now falling. It was down by 1% in 2007 and 3% in 2006.

Birch said: ‘During the 1990s, the price of gold was kept low by central banks selling off substantial parts of their reserves, adding to supply in the market. As gold prices fell, gold mining companies scaled back exploration and reduced spending on existing assets. Investment has not kept pace with the subsequent rise in the gold price, so new gold supply is hard to come by.’

Ongoing power shortage issues are adding to the problems seen in precious metal production added Birch.

In particular, power issues in South Africa have had a huge impact on platinum production as blackouts occur frequently and shut down output completely.

The manager warned that the markets will be hearing more about commodities being affected by power issues in the near future.

U.S. Shares in Longest Funk Since 1970S

Credit Crunch Could Prolong Weakness

By E.S. BROWNING March 26, 2008

Over the past 200 years, the stock market's steady upward march occasionally has been disrupted for long stretches, most recently during the Great Depression and the inflation-plagued 1970s. The current market turmoil suggests that we may be in another lost decade.

The stock market is trading right where it was nine years ago. Stocks, long touted as the best investment for the long term, have been one of the worst investments over the nine-year period, trounced even by lowly Treasury bonds.

The Standard & Poor's 500-stock index, the basis for about half of the $1 trillion invested in U.S. index funds, finished at 1352.99 on Tuesday, below the 1362.80 it hit in April 1999. When dividends and inflation are factored into returns, the S&P 500 has risen an average of just 1.3% a year over the past 10 years, well below the historical norm, according to Morningstar Inc. For the past nine years, it has fallen 0.37% a year, and for the past eight, it is off 1.4% a year. In light of the current wobbly market, some economists and market analysts worry that the era of disappointing returns may not be over.

Until last fall, many investors had viewed the bursting of the tech-stock bubble as a nasty but short-term setback. The market had resumed its upward march, reaching new highs in October.

Then the credit crisis began weighing on stocks, as did the possibility of a recession. By March 10, the S&P 500 was down 18.6% from its Oct. 9 record close, nearing the 20% decline that signals a bear market. It has rebounded since then amid the Federal Reserve's efforts to stabilize the financial system, but it remains 13.3% below its October record.

Conventional stock-market wisdom holds that if investors buy a broad range of stocks and hold them, they will do better than they would in other investments. But that rule hasn't held up for stocks bought in the late 1990s or 2000.

Over the past nine years, the S&P 500 is the worst-performing of nine different investment vehicles tracked by Morningstar, including commodities, real-estate investment trusts, gold and foreign stocks. Big U.S. stocks were outrun even by Treasury bonds, which historically perform much less well than stocks. Adjusted for inflation, Treasurys are up 4.7% a year over the past nine years, and up 5.8% a year since the March 2000 stock peak. An index of commodities has shown about twice the annual gains of bonds, as have real-estate investment trusts.

Stocks also underperformed other investments during the 1930s and the 1970s. During both of those periods, stocks would rally strongly, only to fade. It took well over a decade in each case for stocks to move lastingly upward.

Righting the Ship

So far, the current decade hasn't featured the high inflation of the 1970s or the high unemployment of the 1930s. That makes some analysts and economists hopeful that the stock troubles won't be as bad or last as long as they did back then, despite the housing crisis and the breakdown in parts of the mortgage and lending businesses. Many of them hope that the Federal Reserve will do a better job of righting the ship than it did in those prior decades.

Finance professor Jeremy Siegel at the University of Pennsylvania's Wharton School has written about stock behavior back into the 19th century. During the past decade, he points out, the worst years were from 2000 through 2002, when stocks fell sharply. Although the S&P 500 has been inconsistent since then -- rising strongly in 2003, then registering single-digit gains in 2004, 2005 and 2007 -- he considers the bad times largely past. Other optimists agree.

IN A RUT

• The Situation: By one broad measure, the stock market has made no lasting gains over the past nine years.
• The Background: Through history, lengthy stock booms have typically been followed by busts that can last a decade or more.
• What's Next: Some economists believe that current economic troubles are severe enough that the period of stock weakness isn't over.

The Pessimistic View

But Yale economist Robert Shiller, who predicted the market trouble in his 2000 book "Irrational Exuberance," warns that the market still hasn't shaken off its excesses. He and some other analysts think the latest volatility is a symptom of more trouble to come.

"I have to say that this isn't a great time to be in the stock market," says Prof. Shiller. "The housing crisis that we are going through is going to put a damper on the economy that is longer than a recession. I don't see the stock troubles ending as quickly as many people are imagining."

Historically, stocks rise about two years out of every three, for an average gain of 7% a year when controlled for inflation, according to Prof. Siegel. Stocks have shown gains for almost every 10-year period since 1925 -- 98.6% of the time, according to Ned Davis Research.

But when stock investing becomes a mania, as it did in the 1920s, the 1960s and the 1990s, it leads to prolonged periods of subpar performance, according to financial historian Richard Sylla of New York University's Stern School of Business.

Prof. Sylla has examined stock booms and busts back to 1800. He found periods of exceptional strength in the late 1810s and early 1820s, the 1840s, the 1860s and the early 1900s. Those periods were followed by lengthy weakness in the 1830s, the 1850s, the 1870s and before 1920. In a 2001 paper, he forecast a 10-year period of stock weakness.

"When you have extraordinary returns, as we did from 1982 through 1999, then usually the next 10 years aren't very good," says Prof. Sylla. His research suggests that exceptional booms steal gains from the future. When the booms end, returns become subpar, so that average returns over the longer term fall back to the 7% norm. Economists call this "reversion to the mean," the idea that exceptional performance can't last forever.

Bullish investors believed that the bad days were over late in 2002, when stocks rebounded following the technology-stock wreck, the Sept. 11 terrorist attacks and the collapse of Enron Corp.

The S&P 500 rose 26% in 2003, amid hopes for a quick victory in Iraq. In 2004, the S&P 500 rose only 9%. It was up 3% in 2005, 14% in 2006 and 3.5% in 2007. The index is down 7.9% so far this year. Those numbers are not adjusted for inflation, which would lower annual returns by a few percentage points.

The Dow Jones Industrial Average, which had fewer technology stocks than the S&P 500 and suffered less in the bear market from 2000 to 2002, has held up better, but not a lot better. It has risen less than 1% a year since January 2000.

Role of Individuals

Prof. Sylla expects to see stocks turn more lastingly upward some time in the next two years. The market's direction will depend partly on the individual investor. The 1990s stock bubble and the bear market that followed came at a time when more individuals were managing their own retirement savings through 401(k) accounts, individual retirement accounts and the like.

Individual investors helped create bubbles in the markets for technology stocks and for real estate. In recent years, investors have been putting far less money into U.S. stocks than they did during the stock-investing boom. In 2000, at the height of that boom, Americans added $260 billion to U.S.-stock mutual funds, according to the Investment Company Institute, a trade group. Last year, investors took more money out of those funds than they put in -- a net outflow of $46.4 billion.

America's shift toward self-managed retirement could soften some of the stock-market volatility. People appear to be much less likely to move money around in retirement accounts than in other investment accounts, according to economist John Ameriks at mutual-fund company Vanguard Group.

Many 401(k) participants leave their allocations alone for long periods of time, says Mr. Ameriks. If they set up their accounts to send money into stocks each month, those accounts tend to keep doing so through bull and bear markets alike. That may provide some support to stocks.

Some investment advisers say passive contributions like that actually make some sense. People whose retirement accounts have bought stocks each month, year in and year out, haven't done nearly as badly as those who bought in the late 1990s and stopped buying, Prof. Sylla says. While the S&P 500 is down since 1999, it is up since mid-2001, meaning that most stock purchased since then by retirement accounts shows a gain.

Stock Fundamentals

A big problem for the market right now is what analysts call stock fundamentals. Strong corporate-profit gains and low inflation have supported stocks since 2002, but they are becoming harder to sustain.

In a typical year, Prof. Sylla says, corporate profits run at about 5% or 6% of total economic output, after tax. In 2006, that number was 9%, a record. Historically, this number tends to revert to the mean, suggesting that profits now could weaken. "Profits may fall to 3% or 4%" of economic output, Prof. Sylla says.

Spending by ordinary people could have an effect on those profits. Consumer borrowing and spending kept the economy afloat after the stock bubble popped in 2000. Emboldened by high home values, people borrowed at levels rarely seen, pushing down the national savings rate to zero.

That's what worries Prof. Shiller. After studying the housing market, he sees home values continuing to weaken for years. He expects consumers to borrow and spend less, and to rebuild their savings.

A consumer pullback would hold back economic growth and corporate profits, putting a damper on U.S. stock gains and giving investors an incentive to continue putting money into commodities or stocks in Brazil, Russia, India and China. Baby boomers concerned about retirement income could look for safer investments with guaranteed returns, such as Treasury bonds and bond-like products offered by mutual-fund companies.

On the Horizon

"We have to accept that this is no longer a nation of 4% real economic growth. This is a mature nation that no longer has a strong manufacturing base," says Steve Leuthold, chairman of Leuthold Weeden Research in Minneapolis. He believes that another bull market is on the horizon, perhaps following some additional stock declines. But that future bull market, he contends, could be followed by another bear market that could bring stocks back close to where they are today.

Before another lengthy bull run can begin, stocks need to overcome two problems: the hangover from the high prices of the late 1990s, and the continuing effects of the exceptionally low interest rates instituted by the Federal Reserve in 2001 and again today. Those low interest rates helped push corporate profits higher, but also fueled borrowing excesses that led to today's economic problems.

To some analysts, stock prices still look inflated. Prof. Shiller calculates that the S&P 500 traded in the late 1990s at more than 40 times its component companies' profits -- far above the historical norm of 16. (To avoid distortions, he uses average profits over a 10-year period.) Today, the S&P 500 still trades at more than 20 times profits -- still far above average.

"The S&P 500 never got back down to its long-term trend line" after the 1990s, says Jeremy Grantham of Boston money-management firm Grantham, Mayo, Van Otterloo & Co. Mr. Grantham, who has long warned of a prolonged period of subpar stock performance, says exceptionally low interest rates temporarily propped up the indexes.

There are reasons to hope that things won't be as ugly this time as they were either in the 1970s or in the 1990s in Japan, which went into a prolonged slump after bubbles in its housing and stock markets.

For one thing, although inflation has been running above 4% this year, it remains well below the double-digit rates of the 1970s. That's made it easier for the Fed to stimulate the economy without worrying about sparking runaway inflation.

One big question is how much worse investor confidence will get. The bearish Mr. Grantham expects investors to become gloomier, but not as pessimistic as they were during past bad stretches.

"I think the global economy will stay, on balance, not so bad," he says. "There is no reason for people to become as pessimistic as they did even in Japan, and certainly not as pessimistic as in the Depression."

Weak Dollar, Soaring oil push gold to record $970 an ounce

By Stevenson Jacobs, AP Business Writer, February 28, 2008

NEW YORK (AP) -- Gold prices trekked higher Thursday, touching a record $970 an ounce as an inflationary combination of high oil prices and a falling dollar pointed investors to the relative safety of precious metals.

Other commodities traded mixed, with silver extending its highest gains since 1980 and wheat futures retreating further from record territory.
Soaring oil prices, a weak dollar and growing worries that the U.S. economy is sliding into a recession have fed investor appetite for gold, which traditionally is seen as a safe haven from inflation and economic uncertainty because it's known for holding its value. Gold rose nearly 32 percent in 2007 and has gained more than 13 percent so far this year

Also weighing on investors were comments Thursday by Federal Reserve Chairman Ben Bernanke, who told Congress in a second day of testimony that rising inflation was complicating the central bank's job. Bernanke hued to his message that the Fed stands ready to lower its benchmark interest rate to boost the economy, putting further pressure on the dollar and boosting the allure of precious metals.

"You have an almost perfect storm for a bull market in precious metals," said Michael Gross, analyst with OptionSellers.com. "Bernanke's on television and he's pretty much saying the Fed is going to continue to cut rates, and that's really pressuring the dollar and fueling the bullish fire for gold and silver."

Lower interest rates can boost the economy but tend to depress the dollar, encouraging investors to shift funds into hard assets like precious metals and other commodities.

Gold for April delivery added $5.70 to fetch $966.70 an ounce on the New York Mercantile Exchange, after earlier touching an all-time high of $970 an ounce.

Other precious metals also rose. Silver for March delivery added 49 cents to $19.70 an ounce after rising to a 28-year high of $19.845. Nymex copper surged to a record $3.8965 a pound before easing back to $3.87 a pound, still up 3.2 cents.

The dollar's steep decline against the 15-nation euro has been a major driver behind gold's advance from less than $650 an ounce in January 2007. The dollar traded lower Thursday versus the euro, which fetched $1.5197.

Gold News & Views

Gold could break the $1,500/oz barrier

David Rosenberg, Merrill Lynch North American Economist, discusses the resurrection of inflation expectations and its potential impact on gold prices. "We reiterate that gold is in a secular, not merely cyclical, bull market.

Indeed, gold formed a very similar bottom formation in 1999 as the S&P 500 did back in 1982. And, if this plays out like other secular bull markets have in the past – emerging markets, bonds, stocks, oil, real estate – then this is a run that can be expected to last at least another five years and ultimately see bullion break the $1,500/oz barrier.

Reprinted from Merrill Lynch, North American Precious Metals Weekly Report, April 9 , 2007

Gold Rises on Demand for Dollar Alternative

By Pham-Duy Nguyen

April 13 (Bloomberg) -- Gold in New York rose to the highest in almost a year as a decline in the value of the dollar boosted the appeal of the precious metal as an alternative investment. Silver also climbed.

Gold generally moves in the opposite direction of the dollar, which fell to the lowest in more than two years against six major currencies. Before today, gold had gained 6.5 percent this year, while the dollar index has dropped 1.5 percent.

``The dollar weakness is catching up to gold,'' said Ron Goodis, futures trading director at Equidex Brokerage Group Inc. in Closter, New Jersey. ``Gold looks strong.''

Gold  rose $10.20 to $689.90 an ounce on the Comex division of the New York Mercantile Exchange, the highest closing price for the most- active contract since May 17.

The dollar fell to the lowest against the euro in more than two years on speculation Europe's economy will outpace the U.S. Consumer confidence in the U.S. fell in April for the third month. The U.S. currency was also down against the British pound, the Japanese yen and the Canadian dollar.

``Gold's rally is mostly off the dollar weakness,'' said Billy Flahive, a trader at Eagle Futures Inc. in New York. ``If gold can get above $688, there'll be good follow through.''

Gold is Awaiting Its Day

Paul Brown, wrote in the March 3, 2007, NY Times:

A STOPPED clock is right twice a day. The proverbial blind squirrel probably does find the occasional acorn. And all those people who have been arguing for years, frequently on infomercials and in advertisements on talk radio, that the price of gold is going to increase drastically may finally be correct, Bloomberg Markets writes.

The swooning dollar, which has become a proxy for the slowing American economy and its inability to reduce its trade and budget deficits “is making gold Wall Street’s darling,” Pham-Duy Nguyen writes.

“Investors who sell assets denominated in the U.S. currency often buy gold,” according to the magazine. “Declines of more than 20 percent for the dollar against six major currencies led to a gold rally of 22 percent from January 1971 to July 1973 and 95 percent from June 1976 to October 1978.”

An expert tells Bloomberg Markets that the price of gold will top $730 an ounce this year and forecasts that the price will reach $3,000 an ounce within the decade.

The price of gold closed at $642.45 yesterday

NEW YORK (MarketWatch) -- Gold rose sharply Friday, as the dollar fell to a more than two-year low versus the euro, boosting demand for Gold.

Gold  closed up $10.20 at $689.90 an ounce on the New York Mercantile Exchange.  "Gold finally made a successful attempt at overcoming resistance at the $682/$685 level, after the US dollar sank to a 24-month low against the euro and oil prices firmed," said Jon Nadler, analyst at Kitco Bullion Dealers.

"A combination of adverse factors keeps gnawing at the US currency and may leave the Fed in the unwelcome predicament of having to boost rates to throw out a life-preserver to the greenback," Nadler said.   The dollar fell to a more than two-year low versus the euro, on expectations this weekend's meetings of G7 and International Monetary Fund will call for a weaker dollar to help adjust global imbalances.