."State of the Gold Market" Craig Harris President: Harris Capital Management, Inc. CTA January 29, 2003 Given the dynamic world situation, I thought I'd like to share some of my most recent thoughts on the gold market publicly. First of all, I'd like to refer everyone to my "thoughts for 2003" to understand some background thinking that is critically important. My thoughts for 2003 touched on some basic underlying themes that now appear to be playing out. I've been telling my clients I feel like I have the script to a bad movie and it's playing out in real life before my eyes. So, with all that said I'd like to discuss the gold market. I've been on record as saying that the Financial Engineers have the market contained, and I still believe that. One thing that continues to amaze me is the complete lack of understanding of this market by supposed "experts." Many of these "experts" are talking about the bull run in gold as if it's transient, overdone and unsustainable. Anyone who says that has immediately disqualified themselves from being taken seriously by myself for one simple reason. Look at what's happening to the US dollar (As I have predicted). If you look at the price of gold when the US dollar index was 120 and now the price of gold when the US Dollar index is now below 100, you will find that gold has done only a few percentage points more than maintain a perfect inverse correlation. What does this say? It says a couple of things. First of all it tells me that gold is indeed again being viewed as a currency. It also tells me that it still appears to be managed under a "stealth gold standard." A lot of people talk about the market being ready to soar. While I think that's certainly possible given the certainty of war in IRAQ, I think the most likely case is that gold will continue to be a proxy for a short position in the US dollar. In the spirit of full disclosure, I have been short the US dollar index from around 111 and long gold from very near the bottom... but I'm not talking my positions here... I'm giving the opinion that drives me to hold the positions and trying to explain a market that apparently is not very well understood. That said, where do we go from here? Well, all the folks that concentrate on mine supply and mountains of facts/figures and data are barking up the wrong tree right now. My analysis is much more simple. I'll quote from my newsletter to clients this evening to hopefully give you some insight into what I believe the real driving forces are in the markets now. As far as the state of the Union address goes, I was just about a bull's-eye on target. Here's what I said Sunday night. "In looking forward to the markets next week, we need look no further than the State of the Union Address. Will it be used to declare war? FTW is reporting below that they think it will, but I don't think GWB would be that foolish. I do think the speech (wrongly) will concentrate on IRAQ. I also think that the day after the speech, it will generate more negative comments from the foreign press and I do not believe it will be well received in the US either, particularly by the financial markets. I guarantee that Murdoch & company will love it though. I think it's likely to be another ugly week in the markets based on the speech. I expect to hear a rehash of the same old dubyaspeak." So, I was right on the content and the effect on the markets. I watched the quote screen while the speech was going on and as soon as he started to dwell on IRAQ, the entire world started to head south... it was amazing to watch the whole financial world throw in the towel. The Nikkei ended near a 19 year low. The S&P futures were down about 3 points within a few minutes after the speech and then down over 10 points when I woke up in the morning. Europe got crushed with an avalanche of sell orders. I hate to keep saying I told you so... but I did. As I was saying last night, I feel like I have the script to a bad movie and it's all going according to that script. Anyway, I seized on one statement like a laser beam, and I did an "uh oh" just like I did when he said "axis of evil" last time. Anyway, after the speech was over I realized I was right, because it was the top headline on Drudge. 'THE COURSE OF THIS NATION DOES NOT DEPEND ON THE DECISIONS OF OTHERS' The foreign leaders are going to barf all over that one. He might as well have looked into the camera and said "world... this finger's for you." The whole second half of the speech had a very Romanesque tone to it... I could picture him wearing a robe and the audience waving swords and wearing armor. The idea that the US should dictate to the world what to do and how to do it was a basic underlying assumption which no one in the room doubted or would ever challenge. Meanwhile, at the coffeemakers and watercoolers around the world today, I'm sure the discussion will go something like "can you believe the pompous audacity of those bastards?" Additionally, he provoked North Korea again maybe without even realizing it. It seems that the North Koreans feel like they have the right to pursue whatever weapons programs they would like... and from their perspective I can see their point. There are several relatively new nuclear states like Israel, India and Pakistan that aren't part of the Nuclear Non proliferation treaty and I think they feel like they have as much right as anyone to possess Nuclear weapons. There's a big double standard going on here and the rest of the world sees it. When The Us makes statements like were made last night, it does nothing except inflame and enrage, and destabilize. Look for more caustic North Korean comments to follow. So... the US dollar is sinking because the foreigners are throwing in the towel on the US, mainly because of the foreign policy. The kicker is that at the same time the foreigners are throwing in the towel, there is an unsustainable level of valuation given the fundamentals and prospects going forward for the US Dollar. Foreigners have to re-invest 40 billion dollars a month back into the US just to maintain the status quo. They are becoming increasingly less likely to be willing to do that. You cannot understand the gold market today if you do not understand the currency markets and the geopolitical environment, Period. Throw out your charts and books full of data and start reading global international news if you want to understand the gold market today. Gold is trading as the alternative to fiat currencies and an inverse proxy for the US dollar index. It's just that simple in my opinion. Before I finish up here... I have a couple of thoughts to consider going forward. The first thought is that from all the reading I do... I'm concerned that at some point gold is going to get mixed up with the T word. In other words, The government wants to know what everyone is doing with their money and physical gold is not traceable, or not easy to trace. That combined with the fact that the government is going to have a big problem if the price of gold goes through the roof gives very strong motivations for restricting ownership and calling it a terrorist tool. I've read a lot that is pointing my opinion in that direction... be forewarned. The second thought is that I've been saying for years that if China was smart they would be exchanging their huge hoards of US dollars for gold and doing it quietly. I think that may be in process. I'm here to tell you that if China dumped its US dollar reserves en masse for gold, it would have a worse effect than a thermonuclear warhead on the US economy. We would experience stagflation the likes of which the US has never seen... be forewarned on that as well. This is all my opinion folks, take it as that. Don't make investment decisions based on what someone else thinks... come to your own conclusions. There is risk in every position or trade, and particularly in the current environment, there is a lot of risk and uncertainty going forward. Be very careful. January 29 2003 Craig Harris President Harris Capital Management, Inc. CTA http://www.harriscapitalmanagement.com bcharris@gate.net Mr Harris offers a free 30 day trial subscription to his daily market letter. For a free trial please contact bcharris@gate.net. The risk of trading commodity futures contracts can be substantial. You should therefore, carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. If you choose to open an account with Harris Capital Management, a Risk Disclosure will be sent to you. Please read it carefully before you invest. ### Harris Capital Management, Inc. CTA is a futures broker and registered Commodity Trading Advisor, meeting the needs of futures traders worldwide. They provide a high level of personal service to discriminating clients around the world, while offering commission rates comparable to discount brokers. All clients are handled directly by Mr. Harris. Copyright ©1995-2004 Harris Capital Management Inc. All Rights Reserved. ______________ 321gold Inc Miami USA