Let's look at this one in two different contexts. The first one is obvious. This is the rolling thunder coming out of the U.S. government warning its citizens of the risk of terrorist attacks. The latest episode of this campaign, which has been going on ever since 9/11, was in the lead up to the July 4 Independence Day holiday. Americans were being warned on a continual basis that the FBI/CIA/Office of Homeland Security/NSA etc. etc. had "evidence" of terrorists planning an attack on July 4.
When there was an "attack" on July 4, by a lone gunman on an aircraft check-in counter in Los Angeles, the reaction was out of all proportion to the event. One statement by an eye witness to the attack sums things up (this is not an exact quote): "They have to change something. We can't go on like this anymore". "They" are, of course, the U.S. government, who are on the one hand assuring Americans that they can "protect" them from terrorists while on the other hand, keeping up an unceasing barrage of warnings about the possibility of a terrorist attack. It is the contradiction which is wearing nerves thin. One minute, Americans are told to "Be afraid - be VERY afraid". The next minute, they are being "reassured" by all the steps (highly visible, of course) that the government is taking to "protect" them.
When we here in Australia saw US TV news footage of the July 4 celebrations in Washington, two things stood out. One was the omnipresent and imposing "security". The other was the quotes (highly selective, no doubt) from Americans at the celebrations. The essence of these quotes was: "I don't mind giving up a bit of freedom in return for my safety" .
As you know, on Friday, July 5, U.S. markets had one of their biggest gains so far this year. The Dow rose almost 325 points or 3.6% - in a half day trading session. Most of the "analysis" of this event centered around what had NOT happened on the previous day. There was no "terrorist attack" (apart from the LA Airport incident) of the nature that the government had been warning about. The government had done its "job" and America was "safe".
As a subsidiary event, some commentators did mention the possibility of a short-covering rally. Why short covering? Well, the Nasdaq and S&P 500 had just dipped below their 9/11 lows, and Wall Street was "SURE" that they wouldn't stay there, having told everyone who would listen that this was the ULTIMATE market "bottom". Undoubtedly, what happened on July 5 was a short covering rally.
And then there is that other market, the Gold "market". And here, the phrase "be afraid - be VERY afraid" is very topical indeed. Spot future Gold closed down $US 1.90 at $US 311.30 in New York on July 3. It hasn't traded in the U.S. since then. The London PM fix on Friday, July 5 was exactly the same as the July 3 Comex close - $US 311.30.
$US Gold has been in an uptrend for well over a year now, since it bottomed in April 2001. From that bottom of $US 255 (slightly above the August 1999 lows around $US 252), $US Gold has climbed an unbroken "wall of worry". This is normal, and highly to be desired, in the first stages of any bull market, especially in a bull market for an investment which has suffered a long drawn-out bear.
Gold first poked above $US 300 in February 2002. The wall of worry worsened. Its last (spot future) close BELOW $US 300 was on April 16. For a month, between March 27 and April 25, Gold traded between $US 298 and $US 305. For another three weeks, until May 17, Gold traded within about $US 2.00 of $US 310. Then, between May 20 and June 4, Gold spurted from $US 312 to 328. Only during that two week period did the "wall of worry" diminish to some extent. As soon as Gold began to retreat, the wall was back. Now, it is more intense than at any time since Gold began its $US 300 plus odyssey in late March.
When the U.S. stock markets began what would prove to be an 18-year bull market in 1982, the wall of worry was firmly in place. Stock investors had been watching the Dow try unsuccessfully to crack through the 1000 point barrier since 1966, 16 years before. They had been dissolusioned for years. They were wary.
But what stock investors never even contemplated was that the government or the financial system would put any impediments in the way of a rising stock market. In 1982, they simply looked at the past history of the market and projected it into the future. The Dow had failed in the past, they prudently through that the chances were good that it would fail again. But this time, it didn't.
Gold investors are, quite understandably, doing exactly the same thing. Gold has "failed" repeatedly in the past, why should it "succeed" now? But Gold investors, unlike stock market investors, have an additional source of worry. Most of them know that Gold is the investment that the government does NOT want to see go up. So Gold investors are afraid. Many of them are VERY afraid.
Why should Gold go up? Anyone reading this analysis could easily come up with half a dozen valid reasons. The real question is why shouldn't Gold go up. And the almost universal answer to this question is because "they" don't want it to go up. That is the reason for the worry which presently assails those holding physical Gold. It assails even more intensely those holding Gold stocks and most intensely of all those holding any paper derivatives based on Gold.
The IMF is openly stating that concerted Central Bank action may have to be imposed to "save" the U.S. Dollar. Foreign investment in the U.S, vital for "balancing" the huge trade, current account, and budget deficits now being run, is plummeting. U.S. unemployment is rising. The U.S. corporate debt market is more a minefield than an investment market. The Fed is trapped, unable to either raise or lower interest rates. Knowing all this, and powerless to "fix" it, the U.S. government is keeping its citizens in a state of chronic anxiety and is making ever louder noises about going to war in Iraq. It should be clear that they have their hands FULL.
In all of past history, anyone who was "afraid" of the direction that their nation was taking and "very afraid" of the potential for financial trouble or disaster could ease his or her fears by owning Gold. At present, all over the world but especially in the U.S., the opposite is the case. The worse the situation becomes, the higher the anxiety grows that "they" are going to "hit" the Gold price again. This is the true measure of the desperation of the present financial situation.
Will Gold be "hit" again? It has already happened. Will this "hit" be successful and drive Gold back below $US 300 one more time? Impossible to say. We can say only three things with complete certainty
First - Gold remains what it has always been, the ultimate "insurance" against financial trouble or disaster. Financial trouble besets the world right now. Financial disaster is a likely and looming end result.
Second - Unless physical Gold purchases were made in the month between late May and late June, an American Gold holder is still in a "profit" position on his or her Gold holdings. Even if Gold purchases WERE made during that period, the "loss" is still much less than in almost any other domestic market. The same is true of those holding Gold stocks.
Third - There is nothing any of us can do about any attempt by the financial "powers that be" to "hit" the Gold price. We can know only two things. First, any successful hit is an opportunity to buy Gold at fire sale prices. Second, ultimately they will fail.
Right now, physical Gold is "risky" only because it is NOT a favoured investment of government. Gold stocks are risky because they are NOT Gold, they are only partial ownership in companies that mine or look for Gold. Gold derivatives are VERY risky because ALL derivatives are VERY risky.
We think that this time, the "gold controllers" will fail. Like you, we don't know WHEN they will fail. Holding physical Gold in such circumstances is much LESS risky than not holding it. As for Gold stocks, in present circumstances one can either trade them or (we think this is a better approach) be willing to give up most or all of the profits so far in the expectation of much bigger profits to come. "Trading" Gold stocks multiplies the risk greatly, the chances of being "whipsawed" are HUGE. Finally, Gold derivatives are only for those who can sleep easy under great risk. In practical terms, only if one can write off one's ENTIRE investment should one trade in Gold derivatives.