Special Gold Outlook for 2004
By: John L. Person, CTA
January 7th 2004

The Issues surrounding the resurgence of Gold starts with the fact that during the twenty-year
period from 1980 until 2001. Gold was in a significant downtrend as shown in Figure 1. During
this time we were in a dis-inflationary trend and stocks were in bull market. Central Banks were
reducing holdings of Gold Bullion and Gold Mines were actively hedging in the derivative markets
placing overhead supply or creating resistance when gold prices tried to rally. In addition, the
dollar was strong against the major foreign currencies for most of that period. These are all
negative forces that weighed on Gold.
Historically, investors have bought Gold during times of turmoil and also as an alternative
investment during difficult economic times. Plus Gold is traditionally viewed as a hedge against
inflation. None of these scenarios existed for any significant time during this twenty year period
with the exception of the Gulf War, the Asian crisis and the collapse Long Term Capital
Management in the 1990's. These events did create short-term spikes in prices.
(Figure 1)
Investors for years have understood that Gold has been a leading indicator of inflation plus the
Federal Reserve Board does watch the prices to help determine monetary policy. For this reason
when gold prices rise it makes headline news. Since the world economies have been in a dis-inflationary
period and once the Federal Reserve switched gears and announced that this is a
concern, why did gold rally?
One reason is .....