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August 31, 2002

A Wall Street Gold Rush

By Kathryn M. Welling

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Richard Pomboy has seen, and done, it all. Very well.

In bull markets and bear. Brokerage in the '60s, research boutique in the '70s, hedge funds in the '80s and '90s. Small wonder that, even retired to ski and golf in the Rockies, he can't resist keeping a very active hand in the markets, albeit these days shepherding only his own (considerable) assets. Which are largely in gold shares. And which he was way early in going into, as Dick is the first to admit.

A tech stock maven when I first met him in the '70s, Dick closed down his first, highly successful hedge fund at the end of the '80s and took a couple-year hiatus from the market, returning in '92 convinced that gold was about to end what was then a 13-year bear market. Oops. But gold did rally in '93, and Dick actually generated fancy returns for his investors for several years before running into grinding frustration as golds sank and techs went ballistic. As gold shares climbed this year, while most others sank, I often wondered what Dick was thinking and doing. Well, I finally tracked him down around the 4th of July and asked. It was worth the effort. -KMW

What do you make of market's latest slide?

We've just lived through a 20-year bull market in stocks and a 20-year bear market in gold and these things are not easily overcome. People are still hanging onto the hope stage in the stock market. I know, CNBC says you don't need to have a capitulation phase, but they are the cheerleaders of the stock market. Experience tells me that you do. You have to go from hope to fear and then to panic. And I don't think we are anywhere near that-though we're closer than we were a few weeks ago. But there are so many other forces affecting these markets-such as the dollar. One of the real risks here is competitive currency devaluations. Eventually, people are going to recognize that they aren't making any real returns in stocks-or, that if they are, those returns are going to be very low. Meanwhile, gold has traditionally done very well in periods of low real returns in the stock market. Gold has been the strongest currency in the world in the last two years.

If it's a currency.

That's true. But a currency is what it traditionally has been, except in the last few decades. Historically, for 5,000 years, it was a currency. We have seen some protectionism lately, but the true issues here are no real returns on assets, and the risk of competitive currency devaluations. Meanwhile, pressure on manufacturers here, I think, is going to dictate that we not get too worried about a declining dollar. Meanwhile, as foreign economies start to recover somewhat-those economies have fewer excesses than the U.S. - they are going to withdraw money on the margin, or at least send less money over here. But we need something like $1 billion a day to fund our deficits.

Only something like 75 percent of all the world's money flows everyday.