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US faltering, boon for gold (From Miningweb)

  1. US faltering, boon for gold

    By: Stewart Bailey


    Posted: 2002/05/06 Mon 17:14 ZE2 | © Miningweb 1997-2002


    JOHANNESBURG – Gold continued its bull run today, breaking through the $312/oz level as investors continued to feed on negative US economic data and a weakening dollar.
    The Japanese government's removal of deposit guarantees, political unrest in the Middle East, rising oil prices, producer hedge buybacks and a looming decrease in new mine supply have all been touted as reasons behind the latest sustained run in the gold price, but the metal's latest growth spurt has been aided by the weak US currency, which has finally started to show signs of weakness as the spin put on a recovery in the world's largest economy starts to fade.

    Chris Hart, a senior economist at ABSA Bank in Johannesburg, paints a bleak picture for the US, a far cry from the market's jubilant forecasts of a turnaround in the first quarter. "The US GDP growth figures (5.8 percent) were a bit of a charade; 3.7 percent of it was on increased defence spending and 1.5 percent from credit extension," said Hart.

    At the heart of the US economy's malaise is the country's massive current account deficit, which is running at about 4 percent of gross domestic product. Looking closer to home, a relatively small 1.5 percent deficit in the South African current account in 1988 caused a slide in the rand which the currency is still struggling to recover from.

    Hart says the US deficit costs the government $1.5 billion a day to finance; this shortfall is made up from foreign capital inflows into the US. But Hart says the capital is already being diverted from the US, evidenced by current strength in the Johannesburg stock market, the rand and a long list of Asian currencies. With the volumes of capital inflows required to fund the trade shortfall, Hart says only small percentage changes to the inflows will create further dollar weakness.

    He says the US economy is currently absorbing 70 percent of the rest of the world's savings. "This poses some serious systemic questions. And if this trend continues, the US deficit could go to 6 percent of GDP over the next year or two. That will simply put more pressure on the dollar," said Hart. The greenback's benchmark price of around €0.92 is also forecast to change significantly over the next year; Greg Potter, a senior trader at Johannesburg bank BoE, says the Euro could strengthen to €0.95 by year-end, while Hart reckons the dollar and its rival European currency could reach parity in the same period.

    But it is not only the trade account which has the alarm bells ringing for professional and retail investors alike. US tax receipts are down, unemployment is up to its highest level in nine years and promised higher corporate profits have failed to materialise.

    An eloquent example of investor disenchantment with the US equity market can be found in the performance of the Nasdaq this year to date, where the index has shed 17.3 percent. The New York stock exchange's composite index has fallen from its heady levels of above 5,000 points in March 2000 to current levels of 1617. Investors have lost their shirts and many are joining the queues of Japanese investors looking for a safe home for their cash. The answer, for at least some of them, is gold; and given the sheer volumes of cash out there, there could still be considerable upside for the metal.

    "My personal view is that this run still has a way to go. My feeling is that there is at least a year or two of a sustained price to come," said Hart.

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