What Short Memories We Have
Dr Richard
Appel
December 10, 2004
Most of
the below commentary was written prior to Wednesday's $15 gold
price collapse. However, it still remains applicable and further
strengthens my belief that important buying points are approaching
for both gold and the gold equities.
The current disconnect between the price action of gold and the
major and junior gold stocks has set those analyzing these markets
into overdrive, searching for explanations and the reasons underlying
this condition. The lack of follow through in the gold shares
while gold moved higher, has made many professionals steadfastly
state that a major correction in the yellow metal is at hand,
if not the end of its Bull Market. They reason that historical
gold price peaks often occurred after the gold mining and exploration
stocks had previously peaked, and had already begun to decline.
Simultaneously, another ardent segment of precious metal analysts
believe that while the noble metal may slightly decline in the
near term, it will continue to move higher and must ultimately
pull the gold equities with it.
Statements and accusations also abound surrounding the reason
or reasons why the gold stock universe has lagged the precious
metal's surging price. Some refer to the currency appreciation
in many of the large gold producing countries. The increased
value of their currencies against the dollar results in sharp
increases in their dollar costs of production. This negatively
impacts their earnings growth despite the higher gold prices
that they receive. Further, since the junior sector typically
lags incipient major gold producer price advances, members of
this contingent and others believe that they are indirectly affected.
Others state that government officials and their appointees are
shorting the gold shares in an effort to reduce the impact of
a rising gold market. This, to divert the public's attention
from the significance of the dollar's waterfall decline, and
from recognizing the likely affect upon their lives and futures.
I began writing this essay with the intention of discussing my
belief that many companies within the junior gold sector have
become greatly underpriced because they have not participated
in the many month old gold rise. In researching dozens upon dozens
of companies I found that the majority seemed to be priced at
levels commensurate with those that existed when gold was last
in the $390 to $410 range. This was well over a year ago. My
conclusion was to be, and still is, that a substantial number
of the nascent companies which possess important or advanced
projects, offer even greater profit potential than they did at
that time. This is due to today's far higher gold price and the
improved economics that it bestows upon their projects. However,
in studying the various gold and gold stock charts, I stumbled
upon a fascinating and uncanny similarity between today's gold
and gold stock price action with that of an earlier time.
The current price divergence between gold and its shares is strikingly
similar to one that occurred between May 2002, and July 2003.
In May 2002, gold had surpassed $325 for the first time in its
Bull Market. It was accompanied in its rise by both the major
gold producers and their junior exploration counterparts, many
of which also posted new highs. The HUI rose to about 155. In
the ensuing few months, gold corrected to about $290 before renewing
its advance. Yet, despite the fact that gold then continued to
trend sharply higher, both the major and minor gold companies
failed to follow its lead. It was as though they had hit an impenetrable
ceiling. Instead, for over fourteen months the producers, as
viewed in the action of the HUI, traded in a band bordered by
about 95 and its May, 155 peak. Simultaneously, despite some
sharp but short-lived advances, the juniors essentially worked
lower in price, only to strike their correction bottom in July
2003. As an aside, most junior companies made their highs a few
months prior to the HUI's touching its peak
While the gold stock complex was essentially working sideways
or lower, gold went to a new high at $384 by early February 2003.
After that high point gold too retreated and struck its final
$319 correction low in April. It required another advance into
the low $370's and a final pull-back to $340 in July, far above
its $319 low, to convince the gold share buyers that gold was
going far higher.
The June to July, 2003 period was the time when most of the junior
exploration companies posted their lows. This occurred after
nearly a year and a half of frightening, frustrating, general
price declines. If you were in the market you will recall that
when the gold stock sector finally shrugged off its extended
correction, both gold and its stocks quickly made up for lost
time and exploded higher in price.
Fast-forwarding to the present. The HUI hit 259 in early December
2003, ahead of gold striking $427 in January of this year. However,
whereas the HUI has not again approached this point, gold easily
surpassed $427 and continued moving higher nearing $460, before
today's $15 price collapse. Since gold and the HUI parted company,
the HUI has already spent twelve months in a correction mode.
This was accompanied by a far more severe decline in the vast
majority of junior exploration companies.
In a nutshell, the earlier instance from May 2002 to July 2003,
witnessed the HUI correcting while gold traded higher in price.
It was only after fourteen grueling and frustrating months suffered
by the stock owners, and the yellow metal convincing investors
that it was going higher, that the gold stocks ended their correction
and roared higher in price. Today, we have a similar occurrence.
The HUI has already been in its present correction for twelve
months while gold has again moved to new higher levels. Further,
we should not have long to wait, to prove if we are destined
for a repeat performance of the resolution of that gold/gold
stock disconnect. If I am correct, when gold ends its present
decline, the stage will be set for a similar price advance in
gold and its shares, as that experienced when their earlier price
divergence ended. It is amazing how we so easily forgot the pain,
frustration and losses that many of us suffered during the extended
2002-2003 gold stock correction. I guess it is human nature to
do this when we are later presented with great profits such as
those that accrued, when the gold stocks again moved lock-step
higher with gold.
Secondary Bull Market corrections such as we are experiencing
with the gold stocks, typically do not end until the majority
of marginal holders exit the market. In effect, a rising trend
does not develop without a cleansing of the indecisive and unsure
investors. I believe that the strange divergence between gold
and its shares is primarily the result of these two asset classes
attracting different types of investors. Those who invest in
gold stocks appear to require a longer period of pain, confusion
and suffering before the last weak holders are shaken out of
the market. Thus, the longer period required in a correction
before the bull again takes control. Gold on the other hand appears
to find adherents whose weakest hands are frightened out of the
market far more quickly.
In my December 2004 issue of Financial Insights I stated, "Finally,
what the lagging gold equities may be telling us is that the
gold stock complex is refraining from staging a major advance
until there is some form of correction in the metal itself. The
reversal may not be terribly steep or long lasting. It may only
take gold back to its break-out point in the high $420's. However,
the retesting of this range may be the catalyst that is needed
to quell the fears of the gold equity bulls, that gold is truly
heading higher, and charge them boldly into action." I penned
those words before I recognized the similarities that I described
above, and am now more firmly convinced of the validity of that
statement.
My eyes are now sharply focused upon the price action of the
HUI. Today's $15 gold decline caused some initial sharp sell-offs
in the major gold shares. The HUI after being off nearly 11 points
recovered, and closed down 3.52. If gold continues to weaken
or enters a trading range, and the HUI simultaneously begins
to show strength and advance, it will indicate that the worst
is over for gold and the shares. Further, it will foretell that
the bottom is at hand for both.
In this event, I would expect a price advance renewal across
the entire precious metals complex. We may have several weeks
to a few months to pick up the bargains while gold and the gold
stocks consolidate or trend higher. However, the bells are beginning
to ring. They are signaling an impending major advance for gold
and gold share prices.
It appears that the dollar has begun a correction in its ongoing
Bear Market. Weakness in gold should coincide with a period of
dollar strength. In the charts that I have going back to 1972,
the U.S. Dollar Index has only once briefly penetrated the 80
level. It has tested this point on a number of occasions, but
it has always held. Thus, 80 should prove to be strong support
for at least a dollar bounce. It will be informative to note
how strong the dollar reacts during this correction because it
will indicate its true underlying strength. The longer it holds
the stronger is its international support.
This is a difficult time for gold investors. We are on the cusp
of ending yet another long, suffering period for those who invested
in gold stocks. Yet, most of what we hear and read tells us that
we are foolish to believe in gold and that we should put our
trust in the dollar. We have invested in gold and its stocks
to protect our assets, but many of our members have succumbed
to the derisive propaganda that frequents the media and have
reduced or sold their positions. It is imperative that you have
confidence in your knowledge and belief in gold, and trust in
your judgment. This will help you overcome the fear that will
attend your either maintaining, initiating or adding to your
positions. It is at such times that we are shortly approaching
when the largest, percentage gains are made. If you trust in
yourself I am confident that you will reap the rewards that it
will offer.
December 9. 2004
Dr Richard
Appel
contact
website: Financial
Insights
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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