 Is
Gold Fated for an October Sell-Off?
Dr Richard
Appel
September 23, 2004
September 19, 2004 - The gold market appears to have past
its low and has been consolidating in the $400 area. This has
been accompanied by similar price action in the shares of the
stocks that either mine or explore for it. From experience, as
long-term followers of the yellow metal recognize, we have entered
what has been historically the annual best few months for gold.
Thus, if history is a guide the odds highly favor an advance
from current levels. So why am I concerned?
A major confluence of events
has occurred that is extremely bullish for the gold universe.
Some of these have been in place for a time but others have recently
emerged. According to the World Gold Council's statistics, for
over two decades mine production has seriously lagged that
needed to satisfy gold's increasing demand, and the gap is widening.
This has strained the available above ground scrap, investor
dis-hoarding, and central bank sales that have heretofore made
up for the shortfall. In fact, this year's anticipated gold mine
production of 2,500-2,600 tonnes will be outstripped by over
3,300 tonnes of demand. Importantly, for the next few years at
minimum this deficit is destined to worsen. This is due to the
fact that gold production will decline faster than new mine output
is expected to come on stream.
Further, if those at GATA (Gold
Antitrust Action Committee; gata.org) are even reasonably close
to being accurate in their assessment, the major central banks
have little remaining gold with which they can, or will, willingly
part; they are basically scraping the bottom of the proverbial
barrel. Additionally, the major gold producers have become buyers
of the metal in order to reduced or eliminated their earlier
hedges. This in their haste to prevent additional losses generated
by the rising gold market.
Addressing this issue, producer
hedging poured an additional tens of millions of ounces of gold
onto the market for over a decade and a half. Had this not occurred
gold would not have fallen to the depths of its $252 nadir in
August, 1999, and the noble metal would be trading at far higher
than today's price. However, I remain confident that the reversal
of this process will instead act to drive gold higher in price,
as the major gold miners are forced to reduce their net supply
to the market as they offset their hedges.
Recently, Argentina announced
that they purchased 42 tonnes of gold during the first six months
of this year. This may be a prelude to similar actions by other
nations. Also, several months prior to the requisite time for
their announcement, the 15 nations involved in the 1999 Washington
Agreement stated that they would renew their accord. They agreed
to restrict their combined annual sales to 500 tonnes over the
next five years and would limit their gold leasing. Recent rumors
have it that this number may not be reached.
Still another event that is
beneficial for the gold price involves Switzerland. If you will
recall, after the announcement of the 1999 Washington accord,
that country began dis-hoarding 1200 tonnes from its long held
and earlier coveted gold reserve. The Swiss carried out their
plan at a rate of about 25 tonnes per month. They are now approaching
their stated goal and will soon cease these sales. As with the
actions of Switzerland, the above events will all exert
a positive impact upon an already tight gold market.
Only last week, Russia's president
Vladimir Putin appears to have given his citizenry a major reason
to rush into gold. He recently abolished elections for governors,
and eliminated local elections for individual members of parliament.
This is tantamount to announcing his dictatorship and will threaten
the great strides that his nation has achieved in their apparent
fleeting quest for individual freedom. I believe that this event
will frighten numerous Russians and will drive them into gold
for what they will view as their financial survival.
In addition to the above items
that will positively influence the gold market are the ballooning
domestic money supply, the ongoing massive U.S. Federal deficits,
as well as our unsustainable balance of payments deficits. The
latter is highlighted by the horrendous second quarter $166.2
billion current account deficit. This is fast approaching 6%
of GDP which history has proved to be unsustainable. Whenever
a country neared that point its currency suffered a significant
depreciation against those of other nations. It is likely that
the U.S. will be capable of driving our deficit/GDP equation
to a record high level. This is due to the dollar's world reserve
currency status. However, at some point the first nation state
will refuse to accept our dollar, and other countries will follow
suit. It is only a matter of time.
The combination of the burgeoning
money supply with the record fiscal and current account deficits
will act to reduce the dollar's purchasing power as well as its
desirability. This will ultimately translate into its worth declining
domestically as well as on the world's currency exchanges. To
my mind, the effect of an exploding money supply occurring simultaneously
with both budget and current account deficits, adds up to the
underpinnings capable of alone supporting a major secular gold
Bull Market.
If I am correct, the gold Bull
Market is destined to take the breath away from not only today's
skeptics but also from most true gold believers. So why worry
about the future, and especially the month of October, if everything
now appears to be aligned on the side of a rising gold market?
All long-term and even recent
first-time gold investors have already endured various "tests
of fire". The longer that one has invested in gold the greater
the number that had to be survived. We all suffer from deep and
some from possibly irreversible scars. All of this is due to
the repeated setbacks that periodically occurred within the 1970's
Bull Market, through the Bear Market rallies from1980 through1999,
as well as from those secondary price declines that we have sustained
during the present Bull Market.
I want to stress this point
so that you do not forget that all gold up-trends will be punctuated
by declines, and some of these will be quite harrowing! This
is the reason that patience and a long-term perspective must
be stringently adhered to in order to profit, nay survive, while
gold works its way to its peak over the next number of years.
Fast approaching October is
the month that the International Monetary Fund has its annual
meeting. If their upcoming affair is similar to a number that
transpired during the1970's, we may have to live through yet
another temporary set-back in the yellow metal's rise, despite
its golden future.
THE 1970's REVISITED AND A POSSIBLE GLIMPSE INTO OUR FUTURE
The 1970's witnessed gold rise
from $35 in 1971, to its $875 peak in early 1980. These overall
exciting and profitable times were also accompanied by some frightening
price declines that produced devastating paper and real losses.
They accrued primarily to those investors who did not essentially
buy and hold their gold investments through the Bull Market!
It is true that there were a number of adept traders who greatly
profited. A few even far outperformed those that maintained their
gold and gold share positions throughout gold's great advance.
However, the vast majority of traders who attempted to time the
market were severely damaged when gold often reversed course.
They were either left in the lurch when gold rose, or they sold
out near an important bottom after gold had collapsed in price.
It would not surprise me if
there was a major correction within the next year or two. This
could take gold down 30%, 40%, or even 50% from its highs. Something
similar to this occurred when gold touched $200 an ounce in December,
1974. It later posted a $103 low a year and a half later. I believe
that it is prudent to sell a small portion of your holdings into
all strong advances with the knowledge that a correction will
eventually occur. In this fashion you will have some capital
available with which to acquire the great bargains that will
appear at the inevitable bottom. If I am correct and a substantial
correction is fated to occur before gold's Bull Market finally
crests, you will be happy that you did. Even if you ride out
all of the set-backs, take heart! Remember, after striking $103,
gold then resumed its Bull Market and peaked at $875. If an investor
had held through that entire nearly 50% decline, he still could
have quadrupled his money at gold's final top.
My concern about an October
gold reaction revolves around at least three difficult periods
that gold bugs encountered during the1970's gold Bull Market.
These resulted from statements emanating from the annual Fall
IMF meetings. In each instance, coinciding with the conclusion
of these gatherings, were announcements that were extremely gold
negative. They each generated short-lived but sharp sell-offs
across the various gold markets. Given recent events, I have
begun to wonder if we are again destined to endure another similar
time.
Among the reasons that cause
me to view the upcoming IMF meeting with a wary eye, is the early
announcement of the continuance of the Washington Agreement.
The March statement by the members of the accord was a full six
months before it was due to expire. Given the fact that the premature
extension dispelled a major concern overhanging the gold market,
it acted to strengthen its price.
The timing of this announcement
was quite startling to me after having observed the actions of
the various central banks through their decades long battle against
gold. I do not recall another event sponsored by them that was
as positive for gold, save for the September, 1999 Washington
Agreement. Further, there is increasing talk and speculation
that the members to the accord may actually sell less than their
stated 500 annual tonnes over its 5 year term. These two issues
have lent great comfort to the minds of many gold investors and
may act to lessen their concerns, causing them to be emboldened
in their actions. Who knows, any comments emanating from the
meeting that alter the market's current perception of the amount
of gold that will reach the market, may damage it.
Finally, President Bush's intense
desire for reelection needs little discussion. He is barely leading
John Kerry in the polls, and must desperately maintain the status
quo for a few more weeks to remain in the Oval Office. To this
end, I believe that he will do whatever is in his power to maintain
a stable stock market, a level economy, and prevent a rising
gold price.
If common stocks move sharply
lower it will not only harm American investors but may generate
fear, in the minds of our voting public, of an impending economic
decline. Or, a strongly advancing gold price prior to the November
elections may upset the markets. If either of these events transpire,
voters may perceive that President Bush has lost control of the
economy, and may change their vote to Mr. Kerry.
While it is far from certain
that the IMF meeting will end with gold damaging comments, I
believe that it is prudent to maintain some cash on the sidelines.
If my concern proves correct you will have the ability to benefit
and not entirely suffer, both emotionally and from paper losses,
from such an occurrence. In any event, this issue should be
kept in mind during the balance of gold's Bull Market. It has
worked in the past for the central bankers and will likely be
utilized in the future.
When earlier IMF comments occurred
that affected the gold price, the yellow metal was typically
advancing in price. While gold is trending higher, as of today
it does not appear to be a threat to the desires of the central
banks or to the aspirations of President Bush. For this reason,
we may be spared from a near-term attack. However, if gold soon
strongly rises, negative comments will forestall its unfolding
and may help solidify President Bush's hold on the presidency.
Whatever transpires, I am confident that gold remains in a confirmed
secular Bull Market. For this reason its long-term trend will
remain up regardless of any temporary setback.
The above was excerpted from
the October 2004 issue of Financial Insights ©2004.
September 23. 2004
Dr Richard
Appel
contact
website: Financial
Insights
I publish Financial
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that I believe offer great price appreciation potential.
Please visit
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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
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risk of the reader without responsibility on our part. Past performance
does not guarantee future results. Dr. Appel does not purport
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investment advisor. The information herein may contain forward-looking
information within the meaning of Section 27A of the Securities
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2004 by Dr. Richard S. Appel. All rights are reserved. Parts
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