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They Won't Believe Until Gold is Much HigherDr Richard
Appel March 31, 2006 - Across the past several years gold's price has risen from its $252.50 nadir to a recent $572 high. Yet, despite the fact that it has more than doubled in price, few individuals or investors truly recognize that its Bull Market even exists. Since 1999, the eternal metal has plodded ever higher. It experienced both excited sharp advances and frightening declines. Violent upwaves were often followed by price reversals that tested the mettle of the steadfast gold-bugs. Some were thrown from the bull's back, but numerous others could not be shaken from the market. For those who trusted their judgment and understood the underlying fundamentals driving gold's unrelenting ascent, the recognition of the truth helped sustain their determination and kept them invested. It is common for secular Bull Markets to be accompanied by not only skepticism but also by fear and disbelief. Despite the fact that substantial profits accrued to those who early understood that gold was destined to be propelled far higher in price, the average person still can not fathom gold's destiny. While it seemed obvious to a few, the reality remained elusive to the average man. For good or for bad, it could not have been any other way. For, historically, it is not until the final stages of any Bull Market that the public enters and drives the market price to dizzying heights that culminate in final tops. I penned an article, "So Few Believe" in November, 2003, that I hoped would help investors recognize that gold was indeed in a primary Bull Market. Just as today, I attempted to share my insights with those who would follow my reasoning with an open mind. I tried to educate the reader so that he would recognize that gold's fate was sealed. Not much has changed since 2003, regarding the public's awareness of the yellow metal's secular Bull Market. They still remain unaware and are likely to continue until the final bull stage. The primary reason underpinning gold's Bull Market is fostered by the actions of our government. Our nation has been moving along a path where our Fed and government's actions have undermined not only the present but the future value of the dollar. This is due to the ongoing policies which if anything have become more damaging and progressive, thus predetermining gold's destiny. That is, to trend higher for the foreseeable future as it responds to the flood of inflationary dollars that our Federal Reserve and government continues to produce. The purchasing power and exchange value of currencies, that are only backed by faith in the integrity of the issuing government, is primarily determined by supply and demand. If the rulers of a country expand their supply of money in excess of the increase in goods and services offered on their markets, they cheapen the worth of the already circulating currency. Similarly, if a country inflates its monetary aggregates, their unit's ability to purchase other currencies diminishes. In both cases this reduces the amount of things that their money can purchase. In the nation itself the cost of goods and services will be driven higher by the increased number of monetary units available to bid for them. On the currency exchanges, they will purchase fewer units of the legal tender of other countries as the sellers of the over-issued money overwhelm other currency offerings. This is where gold shines. It prevents governments from an excessive creation of paper, or now electronic, money. Under the discipline of gold a governing body cannot create more of their monetary units than they have gold to back them. This is the beauty of gold! It disciplines governing officials and forces them to live within their budgets. They cannot summarily issue money to pay for their overspending without suffering the consequences. Gold has been the only item that mankind has always desired and repeatedly recognized as true money. From the beginning of civilization it was the sole item that has endured the test of time, and offered civilized man a benchmark of value. Originally, governments tied their money to gold. They included precious metal in their coinage to foster confidence. It was truly the sole substance that was both coveted and universally accepted as something of eternal value. From peasants to emperors, gold represented lasting wealth. After all, it always required long hours of arduous sweat and labor to recover a small quantity of the lustrous metal from the bowels of the earth. Further, it was something that could not be duplicated. These were among the reasons why gold entered the world's monetary system. However, I must wonder if the primary reason for its desirability was that it kept their governments honest. It prevented politicians from debasing their money by issuing greater amounts of monetary units beyond the quantity of gold that they possessed to back them. MOST INVESTORS HAVE DIFFICULTY UNDERSTANDING GOLD OR THE MARKETS In the U.S. the media compares gold with copper and pork bellies. They discuss its value as they would any commodity. We are frequently told that "gold is too volatile" to be a sound investment. This, despite the fact that it has lagged behind the price rises of most metals. We are bombarded by negative gold statements. Further, not only our officials but the press, espouse the belief that neither our budget nor our balance of payments deficits matter. Decades ago, similar domestic bureaucrats also told us that budget deficits don't matter. For those who remember they said, "because we owe it to ourselves". However, the truth is that they do matter! If they aren't eliminated the dollar credits that must be created to fund the overspending, will eventually destroy the dollar's purchasing power, our bonds, and potentially our economy. This occurred in the late 1970's. Inflation rose well into the double digits, interest rates hit 20%, American business markedly slowed and, not surprisingly, gold touched $875 an ounce. Yet, in part I must acknowledge that they are correct, at least in the short term. As long as our citizens allow the deficits to build, and the rest of the world remain deceived and continue to accept our paper and electronically created dollars for their products, it truly doesn't matter. Unfortunately, the time is moving ever nearer when this will change. In fact, we are beginning to hear the first rumblings of a move away from the dollar. Numerous countries are starting to shy away from the greenback. Japan, China, Russia, and a number of other nations are making efforts to reduce their dollar accumulations. China seems to be at the forefront by seeking assets for which they can trade their massive U.S. currency holdings. Additionally, Iran is attempting to launch a euro based market for oil. If this comes to pass, whether in Iran or another nation, the world's need for dollars will enter a waterfall decline. For the dollar to remain relatively strong it will require further American ingenuity. Our government will have to create new reasons to convince the rest of the world to continue holding dollars. Most Americans are ill prepared to recognize the importance of gold, or to even fathom the complexities of the financial and economic world. Mathematics is one of the primary building blocks that is necessary to understand the intricacies of the financial universe. In our youth most of us had our first introduction to this discipline in the classroom. When I went to elementary school I had one teacher. She taught us a number of different subjects during the school day. She did it all. Math is in and of itself a subject that can be quite intimidating. In fact, many of us were taught by teachers who themselves were uncomfortable with the topic. I am certain that they did their best. But in the case of those in my generation it is likely that numerous educators inadvertently instilled their hesitation if not fear of the subject into their students. Is it any wonder why numerous highly intelligent individuals continue to shy away from anything mathematic. If this is the case, how can they possibly have a full command of what occurs in the financial realm. Thus, they are forced to rely upon the media or alleged experts who themselves may have their own agendas, present misinformation, or know little more than do they. Today, the gold market is experiencing yet another correction within what I believe will prove to be its greatest Bull Market. It has probed the $530-$535 level from where it arose unscathed, and is now within striking distance of its bull high. While its $534 low may prove to be the point from which it will continue to trend higher, I feel that further backing and filling and possible lower levels should not be ruled out. Gold's 200 day moving average is $486.42 and its 50 day one is $554.97. At Friday's $556.75 London second fix, the yellow metal again tentatively moved above its 50 day average, while it continues to trade far above its 200 day line. This indicates that it remains in an overbought condition. To my mind it would be healthy for its market to work off this condition. If gold trades in its current range or even probes yet a lower zone, it will build a strong base from where it can initiate its next substantial advance. THEY LIKELY WON'T BELIEVE FOR QUITE SOME TIME Given the virtually universal refusal to even consider that the eternal metal is in a Bull Market, it seems to me that it may take quite a while before the masses first begin to view gold differently. It may not be until far later in it's bullish ascent that the average person begins acquiring the yellow metal. This will likely result when the dollar is far lower on international markets, inflation is patently obvious to everyone, and the government's statistics will become widely questioned. Only then will gold be sought by the man in the street. Until that time, the average American will neither understand or believe. Do not despair. For when they do we will likely witness a massive price rise that will bring back memories of late 1979 and early 1980.That was when gold rose from the $400 range to $875 in less than six months. You had to be there to believe it! And, perhaps you will have another similar opportunity before this gold bull takes his last breath. It will only be then when they will believe, but prices will be far higher. In fact, the final explosive advance will be created by a late-coming panicked public, just as it was in gold's 1970's Bull Market. And, I hope that we will both be sufficiently perceptive to sell them our holdings when the world once again clamors for the eternal metal. The above was excerpted from the April 2006 issue of Financial Insights © March 26, 2006. Dr Richard
Appel Appel Archives. I publish Financial Insights. It is a monthly newsletter in which I discuss gold, the financial markets, as well as various junior resource stocks that I believe offer great price appreciation potential. Disclaimer. Please visit my website www.financialinsights.org where you will be able to view previous issues of Financial Insights, as well as the companies that I am presently following. You will also be able to learn about me and about a special subscription offer.
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