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What's Up With Gold?

Craig Harris
Harris Capital Management, Inc. CTA
February 7, 2002

Gold has been getting a lot of attention lately. The World Gold Council had a good summary in which they stated:

"...with no currency performing well to stop capital flowing into the dollar, gold is the only potential home for investment."

So, are we all ready to take our money out of the banks and bury gold in the backyard? Apparently the Japanese are... with the upcoming reduction in deposit insurance, Japanese investors have been withdrawing their savings and flocking to gold. I'm sure that Argentineans wish they had the foresight to do the same.

What we have is a brewing global crisis in confidence. The "big three" in the currency markets are relatively steady versus each other, but investors are beginning to question all of them together. The Enron crisis has kicked off a global crisis whereby investors now have a "reason to doubt."

They can doubt if the company is as profitable as it claims to be, they can doubt whether or not all significant liabilities are being disclosed, and they have seen firsthand how corporate executives, supposedly looking out for their shareholders as priority number one, look after themselves at the expense of their shareholders and employees. This has created a sea change in investor psychology and irreparably damaged the confidence that created the greatest bull market in history. As people recognize that in spite of the market downturn, that the S&P PE ratio is still near an all time high, and the Nasdaq has a negative PE ratio, there is risk and uncertainty going forward. If you add a little skepticism about pro forma earnings, Argentina, Japan, and the war... it makes sense that investors are beginning to question paper assets and financial markets. The term "risk" which throughout the 90's was just an obscure term listed in a prospectus has now been translated into reality as investors open up their brokerage statements and see losses.

My opinion is that the central banks and their cohorts are selling the gold market in a desperate attempt to maintain the illusion that everything is O.K. in the world of paper assets and financial markets... that there is no need for an alternative to fiat money and paper assets... and as of right now they are losing the battle. Will gold soar from here? It should but it will do so only if there is enough buying to overwhelm the bank selling. This is a big issue for them... the global fiat money system is at risk.

February 7, 2002
Craig Harris
Harris Capital Management, Inc. CTA

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