 That
terrible four-letter word "Gold"
Ralph Kettell
Archives
October 1, 2003
Just like Frank Sinatra, Gold Bugs love NY, and NY is beginning
to love gold.
The 2003 NY gold show was quite
well attended and everyone was upbeat as would be expected given
that the prime mover behind the show, GOLD, was making new multi-year
highs. The talks by analysts and company representatives were
extremely well-attended with a couple being standing room only.
One of the most interesting
observations was that most of the gold analysts were cautiously
optimistic about the gold shares while the average conference
attendee, aka gold bug, was far more bullish. I think that this
is very hopeful for the gold shares, because if the analysts
were overly bullish the market would be far closer to an interim
top.
On Monday morning, Rick Rule
spoke about the gold shares and was particularly keen on pointing
out that the easy money had already been made and that during
the next phase of the bull market investors would have to be
far more careful. This seemed like good advice, but I was intrigued
that he was so cautious while the golden bull is still so very
young. Then he went on to say that in the current "dot gold"
market, investors needed to be exceedingly careful as gold stock
valuations are so high.
I thought, "Wait just
a minute Rick, what "dot gold" market?" This is
not a "dot gold" market, not even close. One day several
years from now we will get to witness a spectacular dot gold
market, but certainly not now. When it finally does happen, it
will dwarf the dot com market of early 2000. The gold bubble
will suck in everyone, not just gold bugs and the "smart"
money crowd.
The dot com market was a mania
that drew in a large percentage of private and corporate investors
and resulted in outlandish prices for stocks with almost no inherent
value. The sky was truly the limit for those companies that had
little chance of ever turning a profit.
Let's do a side-by-side comparison
of the current gold bull market to the dot com market of the
late twentieth century.
The dot com market began with
the advent of the world wide web. Around 1992 this started as
the Arpanet morphed into the internet and began to be utilized
for more than just communication and data transmission between
government, industry, and academia. At that time, very few investors
had heard the word internet, and it was viewed as quite risky.
Then by 1996 it was a world wide phenomenon and computers were
selling like gangbusters as the prices dropped daily. Communications
companies, with business models that read like Alice in Wonderland,
sprang up right and left and strung fiber from coast to coast
and everywhere in between. The stocks of networking equipment
manufacturers soared. The interesting thing is that as they soared
investors became complacent and somehow the sector became less
risky at enormous valuations than it had been years before at
comparatively tiny valuations. Yeah sure, you can't miss with
these babies!
In 1998 businesses based on some of the most foolish premises
imaginable sprang up to "profit" from the internet.
In the end, the only ones to profit were the Wall Street "Professionals"
who organized the IPOs, and the insiders whose penny stocks went
to $100s of dollars per share. The dot com market was truly a
bubble of bubbles. The singular thing that levitated those stock
prices to the stratosphere was hot air from promoters playing
to the "investors" greed. There was no, none, nada
substance underneath supporting the valuations, but thanks to
CNBC every potential "investor" in the U.S. and much
of the world was learning what a great investment they were not!
The early stages of the tech
bull market were impressive. While they were based on some pretty
optimistic assumptions, the early big gainers in the tech move
were the likes of Cisco, IBM, Microsoft, and Intel. They were
all real companies with real products, but they were sporting
real high valuations. That was while it was still a bull, a very
strong bull mind you, but nonetheless a bull. It had not yet
progressed to the bubble stage where companies with no earnings,
no expectation of earnings, and no business model that contained
a hint of earnings were raising enormous sums of money. The money
raised was not spent on capital equipment, it got spent on rent,
salaries, software, and the closest item to capital equipment
in the internet business, computers. The only problem is that
computers depreciate faster than new cars leaving the dealership.
The money was Gee Oh eN Eeeee, gone!
How does this picture stack
up against the current gold share market? I would say that we
are somewhere around 1995 in comparison. The big gold mining
companies have had a good run, the juniors and exploration companies
have recovered from the depression level valuations of 2000 to
2001, and it seems like happy days are here again. There is talk
of $1,000 plus gold, but the share prices certainly don't reflect
anywhere near that sort of enthusiasm. Most importantly, however,
is that the investing public still doesn't know that there is
a precious metals bull market in progress. I was on a plane last
week and informed the gentleman sitting next to me that we were
in a huge bull market in gold and he was amazed when I quoted
him some very convincing statistics. His initial comment was,
"I hadn't heard a thing about it." My reply was now
you have and you now know more about it than 99.9% of the world
investment population.
Why doesn't the public know
about the bull market in gold stocks? Ah., a most excellent question
grasshopper. It's simply because the powers that be who control
the media and everything else for that matter do not want Mom
and Pop America to find out about it. The only time that gold
is mentioned in the news or on CNBC is when it has a particularly
bad day. "Oh and gold really tanked today, it was down $4.50."
Excuse me, but isn't is still within $10 of a 6-7 year high.
Oh puhleeeze, don't confuse the audience with the facts. I must
confess, however, that in the past few days, even CNBC has started
to make a minimal mention of that terrible four letter word "gold."
We are just now beginning to
enter the second phase of this bull market. The initial accumulation
by the "smart" money has been completed. During the
current phase, the major players on Wall Street begin to discover
that there is a new game in town. At this year's NY gold show,
there were several specialists from the American Stock Exchange
walking around and talking to the exhibiting companies. As they
start to cover this market and more interest is generated there
will be increased liquidity. The precious metals bull will accelerate
to the upside (as is happening right now), eventually it will
get significantly ahead of itself. Then, we will have a long
healthy correction.
After the "cleansing"
period has run its course, the smart money will again begin to
accumulate the gold stocks. It will begin slowly at first and
gradually pick up speed, and finally "everyone" will
discover gold. Gold stocks will be the popular topic at cocktail
parties and black-tie events. There will regularly be front page
articles on numerous financial publications touting gold as the
greatest investment of all time. They will be both right and
wrong. They are right that gold is the greatest investment of
all time, but unfortunately for them the tense is wrong. Gold
will have been the greatest investment of all time once the general
public has discovered it. By 2008 or 2009 it will be the next
bubble market for the masses.
The final blow off of this
bull cum bubble will be spectacular. Aided by computers and online
trading, this bull will dwarf 1979 to 1981. It should inflate
to the biggest bubble of all time. Everyone will be smarting
from the decline in their net worth from the stock market bear
which may still be grinding out then. Their house values will
be in the red, because of the bursting of the real estate bubble
in 2004/2005. The only investments in positive territory will
be gold and silver. When the entire world tries to squeeze through
the wee little door into the gold investment arena, the stampede
will be tremendous.
When we near the bitter end,
the newly enlightened precious metals geniuses will create a
new cadre of day traders. This group will likely not be trading
stocks as they were during the dot com market. No this newly
minted group of day traders will have discovered commodity trading
and the wonderful leverage available. Why play with stocks at
a measly 50% margin, when you can trade gold and silver at say
6 or 7 percent initial margin. As in 2000, the mechanics will
go to their computers between tune-ups and check on their commodity
accounts. Taxi drivers and shoeshine boys will be discussing
trading strategies. That my friends is what a dot gold market
will look like. Sorry Rick, but we're not there just yet!
I understand where Rick Rule
and some of the other analysts are coming from. They are trying
to get investors to take some profits and be careful. This is
certainly good advice, but I believe that the greatest risk to
investors at this juncture is not being in quality gold stocks.
There is just too much chance of missing the big move. If investors
try to get too cute, and play each little move, they could be
very disappointed when gold and silver stocks unexpectedly burst
through their trading channel. Sometimes runaway stocks will
give investors an opportunity to get back on for the ride, but
many times they will just take off and never look back.
Gold Bugs Beware! Don't be
right on your call for significantly higher metals prices and
then miss the ride of your life by selling out too early. You
will be like the lottery winner who spends all his winnings and
ends up poor again. "He was far better off before he won
the lottery and didn't know what it was like to have money."
Investors who didn't know about
the gold bull will wish they had seen it coming, but the poor
gold bug who saw it coming, but missed the ride, will never forgive
himself.
Oct 1, 2003
Ralph Kettell
Archives
email
 Disclosure:
The
author is not an investment advisor and this article should not
be construed as a recommendation to invest in the discussed securities.
The author is merely presenting some possible scenarios and what
the potential risks and rewards associated with an investment
in these securities could be. The author has not been paid to
write this article, either in cash or securities. The author
is a share holder of these securities along with about 15 to
20 other mining companies. The author sells shares from time
to time to rebalance his portfolio as well as invest in other
opportunities which present themselves.
Disclaimer:
The
author's objective in writing this article is to make potential
investors aware of the possible rewards of investing in this(ese)
security(ies) and to elicit interest on their part in this stock
to the point where they are encouraged to conduct their own further
diligent research. Neither the information, nor the opinions
expressed should be construed as a solicitation to buy or sell
this stock. Investors are recommended to obtain the advice of
a qualified investment advisor before entering into any transactions.
_______________
321gold
Inc
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