FSO Editorials: "Poor Man's Gold" by David Morgan 08/01/2004

Poor Man's Gold
by David Morgan
Precious Metals Analyst, www.silver-investor.com
August 1, 2004

It has been some time since I have written anything about the economy, politics, gold, silver or athletic endeavors for the public at large. There have been a few essays on the www.FreeMarketNews.com website of which I am a director. Most of these essays were concerned with China. The very fact that China is hosting the Third Annual China International Silver Conference in late October this year should give any thinking person pause for reflection. Go to http://www.silver-china.cn/en/

Another interesting point is what I learned about the real Chinese silver views at the Silver and Zinc conference early this year. It must be pointed out that China is devoting a great deal of time money and energy to study silver.

The Silver Institute has kept us well informed about the real Chinese silver story, yet many investors “feel” China is the exporter of silver at all costs. Readers of the Silver Investor have a completely different analysis and sorry Internet readers these people pay us for our research and will do not give it all away for free. I will give you a hint however, just because a commodity lands on the dock on a given day, it does NOT mean that the price on day is the price received.

Moving on to something interesting about China I ran across in my research this past month. An article titled: “The Chinese Silver Standard Economy and The 1929 Great Depression”

This paper was written by Cheng-Chun Lai and Joshua Jr-Shiang Gau, Mr. Lai from the National Tsing Hau University and Mr. Gau Directorate-General of Budget, Accounting and Statistics-Taiwan. I will not go into any detail about this report other in this domain other than to paraphrase the authors, which state the following.

It is often argued that the silver standard insulated the Chinese economy for the Great Depression that prevailed in the gold standard countries during the period 1929-1935. The general argument that the silver standard was a lifeboat to the Chinese economy remains defensible.

The Silver Investor has had more questions about how silver does during a depression than probably all other questions combined. Therefore, we suggest that any serious silver student look up Blackwell Publishing Asia and read the referenced article.

Have we done our job?

This is an exact excerpt from our January Letter 2004:

What is our view for the year 2004? As the precious metals markets continue to gather momentum to the upside it becomes more difficult to forecast the short term. First, recall several months ago, many asked why is gold performing so well and silver doing nothing. The answer was explained in the silver investor that the futures market had congestion (many long contracts) in the near (spot) month in gold and not in silver. In other words the threat existed that enough gold buyers on the Futures exchanges would stand for delivery, and this caused a mini short squeeze. Some may remember that the Comex indeed increased the margin requirements for gold contracts to cool off the gold market.

This is basically what is taking place now in both gold and silver. CPM group put out an alert early in the month stating that there could be considerable pressure to the upside for both gold and silver throughout the month of December, but warned that the markets could come right back down just a quickly. The point was emphasized that the paper or futures markets are volatile and move quickly in both directions.

At this point in time, what we outlined last month is basically what we think moving forward. Gold above $400 per ounce is profitable for many mining companies. There should be some further upside pressure into January but a short-term top is quite possible in the first quarter of the New Year. Once the buying pressure in gold stops the correction could take gold under the $400 level. If gold were to consolidate around $390 U.S. it would be very bullish.

It would not surprise us to see gold pullback to the $375 area. The kind of pullback we perceive is one where the moves down are subtle and plenty of up days are involved but the short-term trend is to consolidate below the four hundred dollar level for several weeks perhaps.

Silver has a much different dynamic and is a much tougher to project. If there is little pressure on the physical silver market as we move into mid January 2004, other than Central Fund, then expect silver to pull back in sympathy with gold. If there is strong physical demand for silver however, look for silver to continue to climb and gold to follow silver. Because the silver supply is so tight and Buffett may indeed be involved in the current silver situation at some level, we want to be cautious here. (Ed. Note-this had to do with leasing as explained in the Silver-Investor). End of excerpt.

Obviously we missed our call by a few days; silver peaked a few days past the first quarter of 2004. Silver did peak in early April. Our call that silver would outperform gold from January did hold, but we began to get cautious as early as March. We did an update for our email subscribers see below…

Our primary advice for investors was to BUY below 90 on the XAU. As can be seen from the above chart courtesy of Stockcharts.com, this alert was sent in mid April.

More specifically, we cautioned our readers even earlier because by mid March we got concerned that the BULL from April 2003 was running out of steam, so our view was a bit cautious. Many have stated that technical tools cannot work in the precious metals due to so much intervention. It has been our view, that these tools do have merit, but must be used along with independent fundamental analysis. This was our primary reason for being so bold as to state gold had peaked in January but silver would carry on upward. By technical analysis alone, this would have been very hard to forecast.

Currently we are watching what has happened following the break in the XAU and the HUI and gold and silver. Gold being the stalwart, held much more firmly than silver. Silver left two open gaps on the chart and it will take some time for the market to consolidate and fill these gaps.

Our analysis remains that the fourth quarter of the year 2004 will show significant improvement in metals prices and the underlying shares. Additionally, we are looking for significant upside price movement in the first quarter of 2005. Right now, the dollar seems to be showing some strength. The election has most of the attention focused away from investments.