In this time of stock market unrest, corporate scandals, a slowing economy and lower-than-expected earnings from companies like
, investors are looking for a safe haven for their money. Increasingly, many investors are again looking at that most classic haven: gold.
Despite suffering a shellacking last Thursday, gold has held up pretty well so far in 2005. Most notably, the yellow metal is outperforming major equity averages, which were down between 5.7% and 12.3% year to date heading into Monday's session.
Gold's relative strength is a sign of its appeal as a long-term investment, adherents say, especially for those worried about the state of the U.S. economy. Some key components that every investor should take a close look at when considering an investment in precious metals are the trade deficit, the budget deficit and the valuation of the dollar.
"With the combination of the problems with our country's financial system, corporate scandals at
, problems at
, our inability to strengthen the dollar, and a major housing bubble, these are all recipes for a much higher gold price," said Bill Fleckenstein, president of Fleckenstein Capital, and a longstanding gold bull.
Gold has often been viewed as an insurance policy against the day-to-day uncertainties of life, and one potential support for the metal are the concerns about economic growth that have "suddenly" cropped up.
Recent economic data show February's trade deficit swelled to a record $61 billion, from $58.5 billion in January. Economists had expected the deficit to come in at $59 billion. The ever-widening deficit was fueled by a 1.6% rise in imports of goods and services. Also, the federal government went from a modest budget surplus in 2001 to a current deficit of $294.65 billion. As the so-called twin deficits grow, the dollar will find it hard to sustain its recent strength, especially if recent signs of economic slowing prompt the
to pause its tightening campaign.
"The twin deficits could turn into a major long-term problem; the U.S. needs to become fiscally responsible," said Timothy Lobach, managing partner at Keystone Trading Partners. "Many investors are being forced to sit on the fence and hold cash positions until the wait-and-see game is over."
It is no secret the U.S. government relies on foreign investors to purchase its debt to keep our economy running. The foreign central banks have helped keep the dollar value stable and interest rates low by purchasing U.S. Treasuries. One main investor in Treasuries is the Bank of Japan. The BOJ bought U.S. Treasuries heavily in 2003 and 2004, when the falling dollar threatened to make Japanese export goods too expensive for the U.S. buyers. The dollar was basically being propped up by the BOJ.
But Thursday's growth estimate cut by the International Monetary Fund was a reminder that the Japanese economy isn't showing real strength right now.
"The Japanese continue to buy the U.S. dollar because their own economy is in the doldrums and the dollar is a safe investment for them," said Lobach.
Indeed, one of the main arguments of hard-core gold bulls is that the global economy is shaky, undermining the strength of all major currencies, which will lead more investors to precious metals.
"I have a positive short-term and long-term view on owning gold," said Fleckenstein. "The dollar, euro, and yen are all weak and gold has the longest track record of any currency ... so why wouldn't someone want to own it?"
The dollar has actually confounded most experts with its strength this year. But the greenback could find harder sledding if signs of economic weakness prompt the Fed to be less aggressive in raising rates than previously expected.
"This week's inflation reports, which are expected to show some acceleration in the pace of price increases, might not be as dollar-friendly as they might have been a few weeks ago," commented Marc Chandler, founder of Terra K Partners and a
columnist. "In the current context, with growth worries, the market may suspect the Fed is in a greater bind as the economic cycle appears to become disjointed from the price cycle."
Chandler, who has "tended to be more dollar-friendly than many
foreign exchange analysts," was nevertheless surprised by the dollar's recent strength and is "still cautious against jumping aboard at this juncture."
The dollar slipped Monday, recently down to 107.45 yen vs. 107.77 late Friday while the euro rose to $1.3024 from $1.2920. As is often the case, gold moved in opposition to the dollar; recently up 1% to $429 per ounce.
For those interested in making a bet on further dollar weakness/gold strength, Fleckenstein recommends two exchange-traded funds, the
iShares Comex Gold Trust
. Both of these instruments give investors exposure to the precious metal without having to worry about storage costs.