Foreign Exchange Market

Ride the golden bull and hang on for life

PUBLISHED : Sunday, 12 September, 1993, 12:00am
UPDATED : Sunday, 12 September, 1993, 12:00am

WHAT happened to gold? To over-simplify, it ended a 13-year bear market in all currencies except yen and is in a bull trend. It moved upwards vigorously to more than US$400 an ounce, then got side-tracked on August 5 and fell to about $365. The technicians will tell you that was a normal 50 per cent retracement.

All quick sharp rises and trend changes result in a direction change for 30 to 50 per cent of the major movement before resuming the major trend. I now expect gold to have only minor ranging for several months before it starts moving up again. I do not expect gold to be higher than US$461 for a year. Then I expect it move amazingly high for many years.

I am pleased gold did drop because too many people were getting over-excited and betting the farm on gold. The mania needed cooling down. I view each fall in a strong young bull market as a buying opportunity, not a tragedy.

Many things combined made gold drop. China stopped buying because of domestic economic problems. Taiwan generally does not start buying until September and October.

Some central banks in Europe sold gold to use the money to defend their currency during the recent Maastricht European Exchange Rate (ERM) turmoil. Some central banks sold when gold was highest to buy back when it fell and make a profit between.

George Soros sold out and no doubt he will buy in later when it is at its lowest range. The Central Bank of Canada sold gold.

Leon On Sunday suggested early enough that for you to make 300 to 400 per cent profit that you buy blue-chip gold mining shares. There is a temptation for you to take the profit.

But now is the time to buy more, and also start buying the second tier of gold mining stocks.

The gold bull is also so well-established now that you can start buying gold bullion.

The best way is monthly dollar averaging. Buy the same dollar amount each month. Your average cost will be well below the highest price. Gold is now positioned to give you many many years of Joy to pay back the 13 hard years.

What makes gold rise in price? Ask 10 people and you will get 10 different answers. Most say inflation, which is nonsense because there has been inflation many times when gold did not rise. In the 1930s, the worst deflation this century, gold rose in price. In 1975, gold fell even though inflation rose.

Perhaps the real answer is gold is a barometer for confidence in government. I have spent hundreds of hours studying why gold rises or falls in price and the only concrete answer I have found is that when people lose confidence in their government, they turn to gold.

In 1993, gold ended its 13-year bear market and a bullish trend occurred. At the same time Japan lost confidence in its scandal-ridden government and booted it out. Germany found Helmut Kohl too socialistic for their liking.

Silver shines brightly BUY silver today and avoid financial decapitation. You don't want to tell your grandchildren that you missed the last train out on the silver bonanza.

Silver is a supply and demand proposition. For four consecutive years the demand has been much larger than the amount produced. Each year, about 200 major new uses for silver are found.

People ask why there is so much demand for silver because all the uses they see are jewellery and dentistry.

One answer is the phenomenal increase in medical care. What they overlook is that doctors, dentists and researchers are making more X-rays, which require silver. The medical and industrial use of photography is starting to exceed consumer photography. X-ray inspection of piping and pressure vessels is growing daily as microfilm replaces filing cabinets in offices.

Silver is a germicidal metal and it is probably the best burn treatment because it is inert in the human body. Silver nitrate is used in newborn babies' eyes. Waterworks and swimming pools are changing from dangerous chlorine to silver, and all airlines use silver filters for drinking water.

Silver is the best electrical conductor of all metals.

Silver is one of the rarest of all metals. Only about 73 parts per billion of the earth's crust is silver. Practically all the silver in the world has already been found.

To me silver will be the great winner of the 1990s.

I believe silver prices will move up faster, and higher, than gold prices. Silver is the most underpriced commodity on Earth and I can see it tripling in value in months, but I cannot say that for gold.

Bank on the futures LEON On Sunday suggested you buy November or December Futures contracts on several commodities including cocoa, coffee, soy beans, corn and wheat; all have gone up except oats so you are well in profit, except with oats.

These are all choppy now and rising one day, falling the next. I suggest you do not panic. Don't yield to the temptation to close the contract now and take your profit.

If there are deep lows, buy more. I am confident they will all strengthen before the year-end and you will end the year happy as a clam at high tide.

I suggested buying silver with September, December and March 1994 contracts. The September contract has expired, giving you so much profit you have to stand on a high chair to see over it.

Yen set to rebound THE most remarkable currency events recently are: The invincible yen has been king for a long time. Now it is weakening against almost all currencies.

Actually, it is consolidating and absorbing all the problems of a divorce case against the last allegedly corrupt government. The fundamentals are so strong it will soon be roaring onward and upward.

The US dollar is a relic of the past. Even Bill Clinton's retroactive tax and telescopic future spending cuts cannot save the old grey mare that ''ain't what she used to be''. If you are wise, you will get your money out of the greenback and any currencies cloned to the 1983 grey mare.

The Swiss franc. Now we are talking about the closest thing there is to real money. No Mickey Mouse currency is in the same league. The nearest contenders are the New Zealand and Singapore bucks and the German mark.

The Australian dollar now wears the dunce cap. It is too pooped to participate. The Australian leadership seems to attract problems like a dog attracts fleas.

The British pound. All the technical factors indicate a weaker pound is on the way.

Spotlight on profits Sell the US dollar against the Swiss franc and German deutschemark.

Sell sterling against deutschemark.

Buy US stock market indices.

Buy German and French bonds.

Buy Eurodollars.

Sell Canadian dollar futures.

Buy into the Malaysian and Singapore stock markets anyway you can, futures or spot. Malaysia is far better than most realise.

Leon Richardson is a well-known financial commentator and investor