French Gold Sales?

According to Le Monde’s weekend edition of March 25^th-26th, Henri Emmanuelli, chairman of the French parliamentary finance commission, suggested the sale of gold reserves to help fund the socialist government’s mushrooming pension commitments. Prime Minister Jospin, according to the story, “listened with interest” and declared that the idea “was not bad.”  Gold prices dropped sharply in New York, to approximately $280 spot, the lowest price this year. Market Vane’s sentiment number for gold dropped to 26%, the lowest level recorded since the previous lows just prior to the announcement of the Washington Agreement in September 1999.  That low was followed by a 30%+ rally in the gold price.  Oh, and by the way, the French National Bank which technically owns the gold followed up with a statement, yet to be reported by any of the major news services, that it has no plans to sell any gold.  Assuming the French wish to abide by the Washington agreement limitations on gold sales, no French gold could be sold within the next five years.

The news story is typical of the sort that marks an important low.  If the gold price holds around these levels, which I expect, a substantial rally should follow.  I would not be surprised if we make new highs by this summer.

Much more significant than this sensation-grabbing headline is the untold story of the US trade deficit and what it means.  In a word, the deficit holds the key to the unraveling of world financial mania and the resurrection of gold.  The US current account balance as a percent of GDP, according to Bridgewater Daily Observations, now exceeds 4%, the highest in 100 years.  The deterioration is exacerbated by high oil prices, but still reflects numerous other factors.  For example, income paid to foreigners now exceeds income received, in large part a function of the proportion of US government debt held outside the US.  It now equals a record 40%.  According to Bridgewater, “the size and speed of the current account balance alone dictate the unsustainability of the present situation.  The dollar has not been damaged by the US current account deficit because there’s been an inflow of capital that has been equal to or greater than the outflow of dollars from the current account deficit.”

What keeps these fickle flows positive, in our opinion, is nothing more than the perception that the return from dollar denominated US financial instruments is positive.  When this perception changes, as it inevitably must, this virtuous circle will become a vicious circle of rising interest rates, falling stock prices, and rising inflation.  The timing to buy gold stocks and gold mutual funds (don’t forget the Tocqueville Gold Fund) could not be more propitious.

John Hathaway
^© Tocqueville Asset Management L.P.

March 28, 2000