The Beginning
of the End
Dr Richard
S. Appel
May 14, 2004
Many painful
questions and feelings have gone through the minds and hearts
of those who have invested in gold, silver and gold and silver
stocks during their current price declines. In the space of but
a few short weeks, long-time holders of these investments have
watched in awe as their substantial paper profits quickly vanished.
This was far worse for those who recently entered the precious
metals arena. For they have sustained great, real losses. With
the United States slated to generate massive budget deficits
for as far as the eye can see, isn't inflation virtually assured?
Won't the dollars created by the stroke of a key to fund these
deficits also cause the dollar's purchasing power to resume its
sharp decline on international markets? Will not these guaranteed
events fan the flames of domestic inflation?
Gold and silver have already touched lows that are about 14%
and 35% respectively below its recent peaks. The HUI has similarly
declined by as much as 35% from its high, while most of the junior
exploration companies are trading at about 50% or less of their
December to January high points. When will the blood-letting
end? Or, as many of the precious metals non-believers are saying,
have their Bull Markets really ended and, have we only experienced
the early stages of what may yet become devastating losses? These
are but a few of the questions that those who understand the
significance of gold are pondering, both in private and aloud.
Corrections counter to the primary trend are part of all markets
whether bull or bear. However, the magnitude of the recent declines
in these investments, especially in the case of silver, have
both shocked and frightened their followers to their very core.
Yes, silver went nearly parabolic when it rose from under $5.00
to $8.50 in less than six months. Is it destined to continue
its plunge and ultimately fall below its sub-$5.00 take-off point,
as it did in 1997, when Warren Buffet announced that he had acquired
millions of ounces of the white metal?
It is true that the shares of the major gold producers had gotten
ahead of themselves given the rise in the gold price. Further,
the vast majority of the junior explorers had traded at values
that approached what they would be worth if they had already
discovered their pots of gold. These are all conditions that
existed since the end of 2003, and should have served as a warning.
But few, including myself, actually listened. We all knew that
gold was heading substantially higher, but our timing was dead
wrong. Our greed got in the way! This created a condition where
the markets had overextended themselves and were thus ripe for
a more fierce and violent decline than should have been the case.
Are the bears correct that the precious metals complex has taken
its last breath, and that gold will return to its Bull Market
low of $252, or even go lower? Will the gold and silver stocks
decline 50%, 100%, or more in that event? Or, if this is only
a correction, is it still in its infancy and are we still fated
to experience sharply lower prices across the precious metals
sector? On all counts, I think not.
I have been involved in the gold and silver markets since the
early 1960's. During this time I have experienced all of the
ups and downs that accompanied their great Bull Markets in the
1970's, as well as their long Bear Markets that began in 1980,
and finally ended nearly twenty years later. Through this entire
period I enjoyed and profited from their rises, and suffered
during each decline. And I'll let you in on a secret. While the
recent market declines have been quite severe to date, and will
likely fall somewhat further, they have not been extraordinary
to the world of gold.
You may have heard the adage that, "there's no fever like
gold fever." This has typically
caused gold, silver and their shares to become temporarily overvalued
during most up-legs. And, in turn, this has led to more severe
short-term corrections than typically accompany other markets.
These have acted to reverse the periods of overvaluation and
allowed a resumption of the advances from stronger bases and
reasonable valuations. I am confident that this time, it is not
different!
I believe that we are witnessing the beginning of the end of
this down-leg in the precious metals and their shares. I can't
even refer to this as a major correction. I am certain that one
lies somewhere ahead, but I believe that it will occur from far
higher levels. During gold's 1970's Bull Market the yellow metal
sustained an incredible collapse from $200 to $103. This took
about eighteen months to unfold. Yet, from its1976 nadir, gold
reasserted its upward trend and fulfilled its $875 an ounce destiny.
I believe that gold is now probing for a low. Further, I would
be surprised if it falls below the $350-$355 range, which should
offer great support. If this correction is fated to be similar
to its 2003 price reversal, a similar percentage decline in the
noble metal would find it in this zone. The major gold stocks,
as measured by the HUI, should experience similar important resistance
to decline if it should fall to the 150 to 155 area. I would
not be surprised if both of these areas are first tested, and
possibly briefly penetrated, before the final lows are posted
for this decline. The junior exploration companies on the other
hand may have a different fate.
The majority of the junior companies have retreated about 50%
or more from their recent highs. They are at a greater risk than
their senior counterparts. If gold languishes at or below its
current price level it is likely that these small stocks will
drift lower into the summer months, as will their trading volumes.
This is the typical price action for this market, during gold
Bull Market secondary corrections.
I for one will be carefully observing how the juniors fare if
gold builds a base for more than a short period after posting
its final low. It is likely that the make-up of the gold investment
community has changed. Today we have a far greater percentage
of investing Americans. Further, they have become convinced that
they are knowledgeable due to their earlier common stock Bull
Market success. Additionally, many of these investors believe
themselves to be traders. During earlier times, those who invested
in gold, silver and their stocks firmly believed that gold represented
real money. They invested in this sector as a safe haven, when
they felt that our nation was damaging the integrity of the dollar.
They primarily did this in order to preserve their wealth. For
these reasons the make-up of the gold complex investor base,
is far different than it was in the past.
A significant percentage of people view gold as a momentum play
or as a short term trading vehicle. We already know that they
have little commitment to gold and will run at the first sign
of adversity. It will be instructive how the exploration stocks
perform if gold forms an extended base before it resumes its
upward movement. In this event, I would expect them to drift
lower as they have in the past, due to a lack of interest. However,
if these new players appear as bottom fishers, they may generate
demand that heretofore did not exist, and may act to actually
support the junior shares.
The exploration market is driven by excitement! This has typically
resulted from either a major discovery or from a gold Bull Market.
Barring an external event, such as an important metal discovery,
an escalation of the War in Iraq, a major terrorist act, or from
some other positive gold driving occurrence, it is likely that
these companies will perform in a similar fashion as they earlier
have. Further, they are approaching a period known as the "summer
doldrums" when prices typically soften.
I do believe that the majority of the damage has already occurred
to these nascent companies. The stocks that will likely suffer
the worst from this point are those which remain overvalued.
I am confident that when the dust clears, the majority of juniors
will offer attractive prices relative to their perceived value,
and the stage will be set for their next major upward advance..
All of these markets have sustained serious internal damage which
should take at least a few months to repair. The bulls must first
overcome their fear of further declines. They must then reassess
their premises regarding gold's future, and regain confidence
that gold remains in a secular Bull Market. Then, they must observe
the resumption of price advances across the gold and silver spectrum.
This will embolden them to reenter the markets. In the gold stock
sector, if history is a guide, the gold producing companies will
first move higher. This will later be followed by the exploration
companies. All of these conditions will likely have to first
unfold before the gold Bull Market enters its next sustained
advance which allows gold to test the $500 level. For those who
are considering making bargain basement purchases, the time is
approaching, but is not yet here.
Dr Richard
Appel
contact
website: Financial
Insights
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.
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.
CAVEAT
I expect to
have positions in many of the stocks that I discuss in these
letters, and I will always disclose them to you. In essence,
I will be putting my money where my mouth is! However, if this
troubles you please avoid those that I own! I will attempt wherever
possible, to offer stocks that I believe will allow my subscribers
to participate without unduly affecting the stock price. It is
my desire for my subscribers to purchase their stock as cheaply
as possible. I would also suggest to beginning purchasers of
these stocks, the following: always place limit orders when making
purchases. If you don't, you run the risk of paying too much
because you may inadvertently and unnecessarily raise the price.
It may take a little patience, but in the long run you will save
yourself a significant sum of money. In order to have a chance
for success in this market, you must spread your risk among several
companies. To that end, you should divide your available risk
money into equal increments. These are all specula-tions!
Never invest any money in these stocks that you could not afford
to lose all of.
Please call
the companies regularly. They are controlling your investments.
FINANCIAL INSIGHTS
is written and published by Dr. Richard Appel and is made available
for informational purposes only. Dr. Appel pledges to disclose
if he directly or indirectly has a position in any of the securities
mentioned. He will make every effort to obtain information from
sources believed to be reliable, but its accuracy and completeness
cannot be guaranteed. Dr. Appel encourages your letters and emails,
but cannot respond personally. Be assured that all letters will
be read and considered for response in future letters. It is
in your best interest to contact any company in which you consider
investing, regarding their financial statements and corporate
information. Further, you should thoroughly research and consult
with a professional investment advisor before making any equity
investments. Use of any information contained herein is at the
risk of the reader without responsibility on our part. Past performance
does not guarantee future results. Dr. Appel does not purport
to offer personalized investment advice and is not a registered
investment advisor. The information herein may contain forward-looking
information within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of
1934. In accordance with the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995, the statements contained
herein that look forward in time, which include everything other
than historical information, involve risks and uncertainties
that may affect the company's actual results of operations. ©
2004 by Dr. Richard S. Appel. All rights are reserved. Parts
of the above may be reproduced in context, for inclusion in other
publications if the publisher's name and address are also included
for credit.
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321gold Inc
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