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The Gold
Cycle of the 1970's may reassert itself
Dr Richard Appel
June 14, 2004
With each passing
day the likelihood increases that gold and the stocks of the
companies that explore for it have posted their ultimate low-points
for this corrective phase. After earlier briefly exceeding $430
an ounce, gold touched its recent nadir at about $371 on May
7. Similarly, as seen in the action of the HUI, the gold producers
as a group struck their low on May 10, at about 164. As most
long-term readers know I do not possess a crystal ball. Nor do
I have the ability to either read Tarot Cards or discern the
future by looking at the stars. However, what I do have is a
certain amount of experience, from my decades long participation
in the precious metals arena, that I want to share with you.
As do most actively traded items, gold and gold stocks move in
a series of defined ebbs and flows. They travel from areas where
they are overvalued to zones when they are relatively undervalued.
First, I will attempt to describe the market action that occurs
within an ongoing Bear or Bull Market, and their causes.
During a Bear Market, price movements tend to thrust in
a declining direction until they reach a condition which is termed,
"oversold." This is the culmination of the
build up of panic and fear that engulfs and effuses from the
remaining bullish participants, after they suffered from mounting
losses. It becomes oversold because the item has declined too
far in too short a period of time, and ends in a formation that
is called a "temporary bottom." The Bear Market
then relieves the oversold condition by reversing course. It
temporarily moves higher in price driven to a large degree by
bargain hunters. The market rises until it reaches an area where
it has alleviated sufficient pressure to reverse some of the
distortions that were created by the earlier excessive downward
movement. In essence the market runs out of steam, the short
sellers step in, and the primary downtrend reasserts itself.
You can picture a Bear Market as a zigzagged line that begins
at its highest point, the point where the Bull Market ended,
and gradually works its way to lower and lower levels.
A Bull Market loosely travels in the opposite direction
to a Bear Market. A primary difference is that Bull Markets typically
take longer to unfold than Bear Markets. Thus, Bull Markets tend
to have long, shallow advances while Bear Market declines tend
to be sharp and comparatively shorter in duration.
Within a Bull Market, first a wave of investor emotion and enthusiasm
drives the stock, commodity or whatever to a high level where
it too has gotten ahead of itself. This is called a "temporary
top." It has been driven too far to the upside in
too short a period, and it becomes what is termed "overbought."
The fundamentals have not adequately expressed themselves to
justify the current lofty prices and a secondary correction then
sets in. Then, the market falls or drifts downward, until the
excitement that had carried it to its recent high is all but
forgotten. It is as if the market must first fall back to purge
itself of the earlier excessive expression of emotions, before
it can attack and surpass its recent temporary top. A Bull Market
can be viewed as a zigzagged line which begins at a low level
and gradually works to higher and higher price ranges.
There is much confusion by the average part-time investor, which
encompasses +99% of all market players, surrounding an accurate
explanation of what is a Bull or Bear Market. It is extremely
difficult to define these terms! In fact, I believe that this
is the reason why their definitions are among the most abused
and misunderstood in the field of markets! I have attempted to
describe above the fashion in which Bull and Bear Markets unfold
as they are developing. They work in a series of pulses that
over time carry the markets either to higher and higher levels,
in the case of a Bull Market, or to lower and lower ones when
the bear is in control.
My concept of a true primary Bull or Bear Market is best expressed
by the emotional state of it investors, the values offered by
the item involved, and by money flow and trading volume changes.
Further, rarely does a true Bull Market last less than a year
or two, and they often live far longer. Bear Markets on the other
hand typically require between one-third and two-thirds of the
timeframe of its earlier Bull Market to complete themselves.
Bull Markets are conceived after a Bear Market has essentially
financially decimated the earlier bullish players. Further, the
mood surrounding the terminal phase of a Bear Market is so bleak
that most of the earlier bulls loathe the day that they ever
invested in the market. Additionally, at Bear Market bottoms,
trading volumes are far lower than those that accompanied the
earlier Bull Market peaks that they followed. They could be as
little as 10% to 15% of their former highest volumes. Finally,
when the bear has breathed his last, the item in question has
been driven to such a depressed level that it offers unquestionable
value; they are dirt cheap! Also, their prices have become so
depressed and have caused so much pain that most pundits believe
that a new Bull Market can never again occur, and that prices
will continue far lower. Unfortunately, by this time the earlier
bullish investors have either little remaining capital available
with which to invest, or they are literally terrified of making
purchases for fear of further losses. This was the state of the
gold market in February 2001, when gold had posted its double
bottom low at $255, and when the HUI in November, 2000, had approached
its final bottom near 35.
Conversely, the emotional state of Bull Market participants during
its final stage is one of near universal joy, excitement and
avarice. Future projections are proffered which state that prices
are essentially "going to the moon." The book
stating that the Dow would go to 35,000 is a good example of
the mentality held by the bulls during such times. Further, "this
time it's different" or some similar phrase becomes the
new bullish mantra.
This mind-set and the sharply rising prices attract an incredible
amount of capital which adds fuel the fire. The influx of money
moves the general stock price level to such incredible heights
that overvaluation is the rule of the day. This is accompanied
by swelling trading volume levels. Few care how overpriced are
their purchases because they are certain that they will become
even more overvalued in the future. Reason is thrown to the wind
and the typical mind-set personifies "the greater fool theory";
that some greater fool will step up and buy their stocks at a
higher price when they are ready to sell.
The most confusing concept that I believe the overwhelming majority
of experts and novices alike have difficulty grasping, is that
both Bull and Bear Markets ONLY END FROM EXHAUSTION. They terminate
after the last bull in the case of a Bull Market, and the last
bear in a Bear Market has been satisfied. The final bulls had
invested their remaining capital and the last bears had sold
their leftover shares of stock. Whereas immeasurable optimism
and excitement attend Bull Market tops, Bear Market lows are
permeated by depression, fear and gloom as the last bears panic,
and sell their shares for whatever the market will give them.
As you can see, I have digressed from discussing my topic. Further,
I oversimplified my descriptions in order to help less sophisticated
investors better understand these frequently used phrases. I
felt that a better understanding of the concepts of Bull and
Bear Markets are lacking by most market players and may help
readers in the future. Additionally, this information may prove
helpful in perusing the balance of this missive.
We have all suffered from the present price reversals in gold
and gold shares. This commentary can also be extended to include
silver and silver stocks. The secondary correction began several
months ago when gold had briefly traveled above $430 an ounce
and the HUI had approached 260. At these levels gold had so extended
itself that it was trading well over 10% above its 200 day moving
average, and the HUI had traveled a huge 25% above its similar
average. The junior companies on the other hand had posted their
peaks between the end of November 2003, and February 2004, and
had been bid to levels that approached their deemed values if
they had discovered what they had hoped to find.
In effect, all of these markets had become overpriced. The stage
was surely set for a correction. Yet, all but the most hardened
traders were too excited, emotionally involved, or were too busy
counting their profits to recognize that fact.
This period of overvaluation and extreme optimism gave birth
to the present reversal. This is different than the beginning
of a Bear Market. It is true that the markets had become overvalued
and investor excitement and sentiment had reached peaks. However,
when the final days of the precious metals Bull Market arrives,
the lofty levels of enthusiasm, greed, trading volumes and over-valuations
will pale those that occurred earlier this year.
To date, the correction has taken prices to ranges where they
again offer good value. Further, the excitement and elation that
attended the gold market earlier this year has been replaced
by fear, doubts, confusion and depression. All but the "strongest
hands" have jettisoned their market positions. Additionally,
just as the stage was set for a correction when investor excitement
caused investors to battle one another to purchase more and more
gold or gold shares, today few desire to be involved in their
purchase. This is the reason for the reduced trading volumes
in all of these markets.
During its great Bull Market that began in 1972, and ended in
early 1980, an annual trading pattern appeared that tended to
repeat itself throughout its duration. In this era gold and the
gold stocks often crested during February or March. From that
peak they tended to decline into the summer months and often
bottomed in July or August. After those lows, they rose sharply
into the October to mid-November period, only to again enter
a corrective phase which lasted several weeks. The markets then
ascended until a temporary peak was struck early in the new year.
This cycle was not perfectly adhered to but segments of it did
appear during the majority of years in that timeframe.
The most rapidly rising period was typically from the summer
lows until the mid-late autumn highs. This corresponded with
the time of greatest seasonal demand which was created by the
need for gold by the jewelry trade, as they geared up for the
approaching Christmas Season. The surge in gold and gold shares
that occurred during the early part of the year appeared to coincide
with the Indian wedding season. It is customary in India for
a bride's family to give the newlyweds presents in the form of
gold, and the annual amount of the noble metal taken from the
market for this purpose is quite substantial. It followed that
after the periods of demand generated by the jewelry trade and
the Indian wedding seasons was filled, prices typically fell
off. I would not be surprised if a similar trading pattern
will tend to repeat itself as the present secular gold Bull Market
unfolds. In any event, it is something to watch for and be
prepared.
Given the above, I am becoming increasingly convinced that gold,
silver and the majority of major gold and silver stocks have
or will shortly post their lows for this correction. This does
not mean that we will soon be rewarded with sharply higher prices!
I would not be surprised if further base building occurs before
gold and the primary gold producers again advance and exceed
their recent highs.
The junior gold and silver shares are a different story. Their
annual price patterns differ in a few ways from those of the
major golds and gold itself. They tend to mirror gold's price
movement early in the year and into the summer. However, they
normally languish during the summer months and may not perform
well even if gold moves higher at times. This is likely due to
the fact that many of the players take turns vacationing during
this period. Additionally, historically it is a time when little
good exploration news enters the market to excite it. This will
occur later during the late summer or autumn months when field
results begin to flow. Further, when gold consolidates in price,
as I believe it is in the process of doing, the juniors tend
to drift lower. I feel that many of these companies may have
posted their lows. Yet, barring an important rise in gold and
silver or a major discovery, if history is to repeat, this is
the fashion in which I expect them to trade in the near term.
Musing on other junior cycles, the best annual buying opportunity
for these small companies often occurs during the first or second
week of December, after they have sold off from the highs of
a month or two earlier. Also, the junior sector is often severely
affected by tax-loss selling. This begins during the mid-end
of October and extends well into November and often into December.
They tend to be worse during down market years.
The annual gold cycle of the 1970's occurred within the context
of its great secular Bull Market. However, while it did not unfold
in a textbook fashion in each year, it did generally follow the
price pattern that I have described. I believe that we may be
presented with a similar pattern in a number of future years,
or at minimum experience annual tops and bottoms which roughly
conform to this sequence, as gold's present Bull Market matures.
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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