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 Market Commentary/Article: January 28, 2008

 What if gold becomes the next “buzz” word?

 
     This last week the U.S. Fed announced a rate cut higher than expected at 75bps and while the U.S. dollar took a plunge, the price of gold has shot up above $900 and the pressure is on for us to hit a new all time high yet again. The current weakening of the U.S dollar worldwide coupled with the current mortgage and debt crisis within the country, has captivated the attention of investors and economic commentators from across the world. One of the strongest economic indicators of the world’s gold value is the fluctuation of the U.S. Federal interest rates and when these interest rates decline, the gold prices incline. The rate cuts, unemployment rates and the overall U.S. economy’s downturn should keep the gold market stable in the short term, and the gold market’s perspective bullish for the long term.

 
     If gold were to react in the same fashion as it did during early 1980, it is possible that on a “tempered” inflation adjusted bases gold could reach a price well over $3,000 per ounce (“untempered” inflation adjusted from January 1980 to 2008 and we are talking closer to $5000). (See historical charts for that time period at the following URL: kitco.com/charts/historicalgold.html online). While this sounds preposterous, remember back to the technology stock boom of the 1990’s. There were numerous critics who were very vocal when the technology and internet stock revolution began. Critics said that it was unlikely or impossible for investors to see value in a business that was not “brick and mortar”, like the old standby stock: GE, Wal-Mart and American Express. How could an internet company with no hard assets be worth anything? Who would buy that stock? Look what happened to those technology stocks between the early 1990’s and the end of that decade. Technology became a buzz word and the stocks were regularly discussed at the dinner table and at social functions all over the world. Those that took a leap of faith and who got in the game (and who got out at the right time), became instantly wealthy. What if that same phenomenon spread into the gold market?

 
     While the trend for gold has been on the rise, hitting an all time high in value, the “buzz” around gold remains remarkably low. People are not researching this commodity in waves, there has been little increase in the news on the subject and it is not a household topic of conversation. Despite the near 300% rise in the price of gold since 2003, the gold market has been relatively unchanged in popularity. Those who are heavily involved in the gold market are experienced. Some investors dabble with limited interest, but most mainstream investors still stick to blue chip stocks. Why don’t people get excited about gold? Ignorance on the concept of hedging ones portfolio, complacency, and the fact physical gold does not yield a divided are good starters. Maybe it is not considered “sexy” to invest in gold like it was to invest in technology. Investors seem to be much more concerned with the mortgage crisis, the debt crisis, the potential approaching recession and the weakening U.S. dollar, than the price of gold. It may still be too early to expect frenzies like what we saw during the technology boom, but for those that get into the gold market on the upswing, are almost certain to capitalize. ##