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The End of the Beginning...

By Tom Dyson, publisher, The Palm Beach Letter
Friday, February 3, 2006

I have something so important to tell you that I got out of bed in the middle of the night to write it down.

It’s about gold.

Jekyll and Hyde is how I’ve been feeling about gold. On one hand, gold is the ultimate store of value in a world flooded with paper money. Sooner or later, investors will want to exchange this paper for real stuff and gold will soar... well beyond $1,000 an ounce. There’s no doubt.

On the other hand, my contrarian instincts feel harassed by all the current interest in gold. I attended the Vancouver gold show last week. I saw attendees lined up two-deep along the back wall of a stadium-sized lecture hall... at 7:15 on a wet Sunday morning. There’s simply too much optimism right now, I felt.

My observations from Vancouver culminated in Monday’s DailyWealth column titled, “All Bull Markets Have Horns.”

“Like the experience of the 70s,” I concluded, “I expect the gold market to experience a severe but temporary correction this year... which will give us a good chance to buy gold at cheaper prices. The bullish sentiment I’m seeing in the gold market at this time is unsustainable. Trade accordingly.”

What wishy-washy garbage! I wish I’d concluded my essay like this instead:

“It is early rather than late in the game. Constant reminders of investor hesitancy and skepticism convey a sense of paralysis by those on the sideline. Skepticism is what makes a market healthy, and I believe that is what prevails. 

Nevertheless, volatility is increasing and will serve to reinforce skepticism. While I expect 2006 to be a good year, we should not be surprised by further volatility, and in fact we should welcome the skepticism it regenerates.”

This quote was taken from an article about gold by one of the top gold fund managers in the business, John Hathaway. He manages the Tocqueville Gold Fund (MUTF:TGLDX).

Simply put, Hathaway believes the bull market in gold has just begun... but 2006 will contain wild swings in the gold price... and these swings will offer good buying opportunities.

This is the idea that was keeping me awake... gold price volatility. I predicted a correction in my last DailyWealth column. That was the wrong way to say it. It’s volatility I expect.

Gold cleared $570 an ounce this week.... for the first time in over 26 years.

“Four digits no longer seems like a stretch to me,” continues Hathaway. “Rather, it would seem that gold would be correctly priced at $1,000, just to catch up to other commodities like oil, base metals, natural gas, and platinum.”

The way Hathaway sees it, you can divide a bull market into four phases: the beginning, the end of the beginning, the beginning of the end, and the end.

Right now, we are in the ‘end of the beginning’ phase. The ‘beginning’ phase - also known as the ‘stealth’ phase – is now over.

In the stealth phase, the market moves higher, but no one really knows why, so the press doesn’t really discuss it, and the public at large doesn’t notice. Then you see a few fireworks – like we’ve had in the gold market over the last few months – and suddenly everyone sits up and pays attention. That’s when you know the stealth phase is over.

More people are talking about gold these days. Media awareness has increased. And the attention is attracting new money into gold. These are the hallmarks of the ‘end of the beginning’ phase.

As the price advance continues, the reasons for the bull market become more apparent. This is the third phase... the beginning of the end. The money on the sidelines turns bullish.

Finally, when it’s obvious why gold is advancing and all the fundamental explanations can be summed up in 8-second TV sound bites or a banner headline in your local newspaper, you know you’ve reached the final days of the bull market.

In Hathaway’s opinion, those days are still well ahead of us, both in terms of “time that must elapse and the magnitude of price appreciation.”

After reading Hathaway’s article, my advice to you on gold is still the same: be either long or very long. But beware, as the gold price rises, so will the volatility. Don’t let it shake you out of your position. No further conclusion is necessary.

Now I go can to sleep.

Good Investing,

Tom Dyson

Market Notes


Our attention is once again brought to the U.S. housing market... this time by the huge increase in quarterly revenue of the nation’s second largest homebuilder, Pulte Homes (PHM).

Pulte reported a 24% rise in fourth quarter sales, blowing through Wall Street’s expectations. Pulte’s backlog of new homes waiting to be built rose 12%. This outstanding growth may already be priced into the market: Pulte is down 15% from its 2005 high.

To gauge the general trend in the homebuilding industry, we turn to one of our favorite charts… the Philly Homebuilding Index. This index tracks the stock performance of the nation’s largest homebuilders.

Right now, the chart is telling us the big run in homebuilder stocks has stalled… and the “salad days” may be over.

The past two years in housing stocks:

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