gold bull article hot off the wire

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    JOHANNESBURG – As gold winds up a blockbuster 2003, a year in which it gained fully $55/oz - or 19 percent - against the dollar, analysts are predicting the trend will continue, as glaring flaws in the US economy push the dollar lower and gold higher.
    Victoria-based economist Martin Murenbeeld, reckons bullion will “challenge $450/oz in 2004”. Using a slightly more bullish scenario, however, Murenbeeld says gold could double this year’s dollar gains, averaging as high as $496/oz in the final quarter of 2004.

    His bullish view is underpinned on the supply side, by the assumption the renewal of the Washington Agreement, the accord that limits the sale of gold by European Central Banks to 400 tonnes a year.

    His view is that the continued absence of the “supply bubble”, the threat of large, uncontrolled Central Bank gold sales, will continue to lend some strength to a market that has long been weighed down by the perception of the Banks’ chronic supply overhang. Murenbeeld believes, though, that a renewed Washington Agreement may see quotas relaxed to 600 tonnes.

    But it is the demand side of the sum, spiced with the prospect of macroeconomic turbulence in the US, that has most analysts excited. According to Chris Hart, an economist at ABSA Bank in Johannesburg, the well-documented structural weaknesses in the US economy are a happy portent for gold. But there is a growing feeling - manifest in the continued dollar weakness and gold strength - that recent bits of positive manufacturing data have only masked the underlying fundamental weakness of the US economy. Consider this, the US is running a sky-high budget deficit, expected to be as high as $495 billion, and the current account deficit, at 5 percent of GDP.

    “Those number are alarming, even for the US,” says Hart. Even the chairman of the White House Council of Economic Advisers, Gregory Mankiw, said last week that the budget deficit was “a concern”.

    Printing cash
    Murenbeeld adds another worry to the pot for the US and most other major economies.

    In his report, Murenbeeld quotes from a recent article in the Economist on future government obligations: “embodied in current tax and expenditure policies are a lot of obligations for which governments have not yet had to make explicit provision…governments often fall into bad habits when their debts get so high, usually resorting to the printing press and using inflation to cut the real value of their liabilities.”

    The essence of the matter, says Murenbeeld, is that when the Baby Boomer generation starts to retire, governments’ financial obligations will mushroom.

    “Given the record debt levels currently, governments will almost certainly be forced to finance the extra obligations by raising taxes, cutting services…and printing more money,” says Murenbeeld. “With gold being the traditional hard asset, and gold investment products proliferating, methinks the long term outlook is therefore quite bright.”

    According to US news site Morning Call, the supply of dollars in circulation has increased by 16 percent over the past two years. Could it be a sign of more to come?

    Declining dollar, declining deficit

    Given the inverse correlation to the gold price, the prospect for a weakening dollar should have gold bulls smacking their lips. Hart believes the dollar is in the formative stages of a “multi-year bear market”, precipitated by a host of structural problems, not least of all a spiralling current account deficit. That’s all good news for gold.

    Of course, a weaker US dollar translates not only into a stronger gold price by virtue of the well-established inverse correlation between the two, but also into a narrowing US Current Account Deficit. According to Hart, the weaker dollar makes imports more expensive, forcing US consumers to buy more locally manufactured goods.

    At the same time, US-manufactured exports become more competitive, with the net result that the current account deficit narrows, assuming of course other major economic blocs are sufficiently strong to absorb a rising level of US imports.

    Scenario One
    In the first of two scenarios mapping the current account deficit under different dollar and economic growth environments, Murenbeeld assumes the dollar index weakens by three points each quarter from now to the end of 2007.

    At the same time, he assumes economic growth in Japan of 1.2 percent; in Europe of 1.4 percent; the UK at 2.6 percent and the US at 3.2 percent.

    “(In this scenario) the current account deficit improved from a negative 5.3 percent of GDP in (the second quarter) to a negative of 2003, to 4.2 percent of GDP by (the fourth quarter) of 2007,” said Murenbeeld in his note. Even with the fairly dramatic dollar slide, the US government will only see a 1.1 percent improvement in its current account situation.

    “That’s all! Even with the phenomenal decline in the dollar,” said Murenbeeld.

    Scenario Two
    In the second scenario, Murenbeeld assumes the same dollar decline but assumes US economic growth of only 1 percent. Under this set of parameters, the current account deficit improves to a negative 1.6 percent of GDP. According to Hart, the lower economic growth should lead to a lower level of imports, placing less strain on the balance of trade. The low growth in the US under this scenario, however, could have cataclysmic repercussions.

    In essence, growth of 1 percent, which would be needed to starve the US of imports and bring the deficit in to line, would plunge the US into “a Japanese-style recession”. And here’s the cash-22; on the flip side of the coin, Murenbeeld says he cannot realistically forecast a level to which the dollar will have to decline if economic growth remains at its current levels and the US looks to balance its current account deficit.

    The solution?
    Both Murenbeeld and Hart concur that economic growth outside the US will have to accelerate appreciably if the US is to be bailed out of its deficit. The problem, however, is that much of the US manufacturing capacity has already been moved to cheaper operating countries, which will leave the US unable to benefit from any growth spurt - no matter how unlikely - in the economies of its trading partners.

    Also, given that the Chinese Renminbi is pegged to the dollar, a weaker dollar will not give the US any comparative trade relief when it comes to China, which is responsible for the largest portion of the US deficit.

    Another ominous sign for the US is that the dollar will only rise, says Murenbeeld, if foreign capital flows back into the US, “ as happened in the second half of the 1990s and the current account deficit is allow to become bigger”.
 
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