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Oct 31/03 Comment:
Our gold share index fell 3 percent despite the 10% gain in the HUI, the 8% gain in the XAU, and the 7% gain in the Canadian gold share index during the month.

Agnico Eagle's 15% drop didn't do it alone.

Even with that our index was up 4%. What dragged it down was the 8% tumble in Randgold's shares between when we added the stock last week and month end, as well as the 5% decline in Gold Fields' shares.

During October we made some changes to our gold stock index. Anglogold and Goldcorp were replaced with Gold Fields and Randgold resources as we saw more value in the new additions. Over the past two years (since inception) our gold stock index is up almost 100% - though our reported gain is only 38% because of the impact on our cost base of averaging up into a 45% allocation (from 10% in October '01, to 20% in December '01, to about 30% in July 2002, and finally to 45% of our overall allocation last October).

In August we reduced our allocation to gold shares by 1/3 on account of the opportunity we saw in the bullion markets. In other words we expect bullion to outperform the equities in the short to medium term. The plan is to increase the allocation (to equity) again once the Dow collapses!

When we began accumulating our gold stocks our weighting went to the North American producers on account of the hypothesis that the US dollar price of gold would rise fastest, and that there was some newly evolving political risk related to the South African shares at the time. We were right, but since then the valuation divergence between US and foreign gold shares has grown enormously enough to entice us to shift our weighting away from the US producers.

In September we also initiated a short against the S&P 500 after closing our original short in October 2002 (established October 2001 at 1118, and bought back at an average 881 for a 22% gain excluding leverage and commissions). Currently we view this short position as a hedge for our gold share longs on the premise that the gold sector and broad market have been traveling upwards together, and on account of our bearish conviction that the timing is right to be short.

After sitting out the US dollar's bear market over the past year, the Yen has begun to perform well; it's become a leading currency since September. The accepted reasons are official jawboning by the Treasury department that was interpreted bearishly for the greenback.

But more likely, the yen's spring to life is related to the customary / expected market reaction to the relentlessly stubborn and stupid Japanese policy of capping the yen during a US dollar bear market - when prices are below market, demand rises... Say's Law! Uh, economics 101.

Of course, anyone that didn't pay attention in the most basic of economics classes was likely to become a bureaucrat anyway, right?!

For a serious gold price correction to occur, the US dollar "outlook" must improve. That means it doesn't matter if the dollar itself bounces or not, you'll know the dollar outlook is improving if gold prices fall during the bounce.

We don't see anything on the horizon that could improve the US dollar outlook, except if we're wrong about the bear market outlook for the broader market - both in direction and relative strength. Gold prices seem poised to confirm January's primary bull market break out as well as September's intermediate breakout, and I believe they will just as the currency focus shifts back to a bearish view of the US dollar from a positivist view of the foreign currencies.

It's possible (in our outlook) that nothing will happen in November, and gold prices sway back and forth, then break out in December. My gut says December and January will be good months for gold.


As of 31 OCT 2003 Last Allocation 1 month Return on ACB View Transaction History
Silver $5.07 9% - 1.4% + 7%
BGI Gold index 21.42 30% - 3.1% + 38%
Light Crude $28.95 7% - 0.9% + 24%
CRB index 247 4% + 1.2% + 26%
Gold Bullion $385 28% - 0.4% + 24%
S&P 500 - short 1051 8% - 5.5% - 4%
Dollar/Yen - short 110 14% + 0.9% + 11%


Explanation of Model:
The model, or hypothetical portfolio, was originally conceived on May 24, 2001, but at the time only included four broad asset classes: physical bullion, cash, fixed income, and equities (and only from a long perspective). It was inflexible and we found that it obscured our market calls in some of the commodities, the fiat currencies, and on the short side of the equities markets. Brave souls that we are we decided to make the model more flexible and useful, to the trader in particular. With the introduction of the Daily Outlook in October we found that the old model was even less relevant. Still, changes will not necessarily occur in response to our short-term (daily) outlook unless the move has implications for the medium (intermediate) term. Our hypothetical investor / trader has a big picture outlook and adjusts his portfolio to capture the three to nine month trends that technical analysts refer to generally as intermediate trends. Our thinking is that these are the most important ones to you as well. In each issue of the Global Investment Climate we’ll assess the performance of our distribution, or at least if it so requires.

Take heed, however, that we are neither a registered nor an unregistered advisory service, and that the utility of this model is to reconcile our analysis and highlight conclusions about our outlook for the various asset classes. See DISCLAIMER below. Thus, we are an analytical tool, not an advisory service.

Markets Covered:

  •   Currencies: Dollar/Gold, Dollar/Yen, Dollar/Euro, Dollar/Canada, and the Dollar Index
  •   Commodities: Silver, Platinum, Palladium, HG Copper, Wheat, Lumber, Light Crude Oil, Natural Gas, Coffee, Cocoa, and maybe Cattle
  •   Cash = 30 day T-bill money
  •   Fixed Income: US Treasury bonds/notes - 5, 10, and 30 year US Treasuries
  •   Equities: S&P500, Dow Industrials, Nasdaq, Nikkei, TSE 300, Euro Top 100 index futures, as well as any of the US stock sectors

When and if we trade our model, we usually do it through forward (futures) contracts for their liquidity, flexibility with respect to being short or long, and stronger correlation with the underlying asset (than options for instance).

Leverage can be managed this way, but there are other risks, which you must absolutely check with your registered stock or bond broker. If you've never traded futures I'd personally recommend a visit to the Chicago Mercantile Website. They offer introductory courses at the following link:

Introduction to Futures (before you trade)

The only assets our hypothetical investor takes a position in, which there are no forward contracts available for, are the stock sectors, such as the XAU, or AMEX oil index, or S&P agricultural products index, etc. In this case it is assumed that the investor can buy or sell the index as if there were futures traded on it. In practice, hedge funds would buy or sell a sector by buying most of its components, at least the ones that weigh heavily in the particular index. Moreover, we do not use stop losses, but recommend discussing with your broker whether it would be appropriate for you to do so.

Other Codes:

  • NEGATIVES indicate only that our investor is short something, rather than long. They don't add up mathematically. For example, 30% + -30% = 60% of the portfolio has been allocated. They do not cancel each other out, as if they were simply added or subtracted.
  • VALUES are calculated using the price of the asset on the opening or closing trade as reference points.
  • The BUGOS GOLD INDEX is an unweighted gold index, which includes an originally equal value allocation in between Newmont, Franco Nevada (replaced by Anglogold in February 2002), Placer Dome (replaced by Goldcorp. July 17, 2002), Agnico Eagle, and Harmony Gold mining, ranked accordingly and with respect to their simple statistical influence on this index.

Lastly, since the world is on a dollar standard, we see all currencies in those terms. It is professional to say Dollar/Yen rather than "I am trading the yen." The reason is that one can trade the yen against the euro, or pound, or perhaps even the CAD these days. Also, by choosing one standard such as that, we can see that the negatives in the currency category always indicate a short position against the dollar while the positives indicate long positions in the dollar, against whatever we specify.

DISCLAIMER: The Goldenbar Report is not a registered advisory service and does not give investment advice. Our comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While we believe our statements to be true, they always depend on the reliability of our own credible sources. Of course, we recommend that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you to confirm the facts on your own before making important investment commitments.

Light Green = Entry Transactions
Light Red = Closing Transactions
Units may be odd lot, but is irrelevant for a hypothetical account like this one.

Transaction Record










107 oz



333 units









78 oz



182 units




 $  30,000.00






 340 units


20 units






11 oz



445 barrels



50 units










 95 oz



 $  20,000.00






 18 units









 11 oz



 50 units



 $    5,000.00



 $    5,000.00






 175 units





1585 units









26 units










 20 units


0.93 units






  0.93 units 10,936.00*
32 oz   317.60




9 units   927.00
773 units   19.67
714 units   17.66
9 units   835.00
120 bbl   26.42
  10 oz 319.00
1385 oz   4.43
  19 oz 318.00
  211 bbl 38.00
23 oz   348.40
$8,944   117.50
  26 oz 344.00
  1024 units 22.41
15 oz   377
1132 oz   5.14
  $11,474.92 1005

Copyright©2003 - The GoldenBar Report