Gold and Gold Stocks Appear Ready to Soar
by Dr. Richard S. Appel
October 17/04
Much has occurred during the past few months that drew me to the conclusion
that gold and gold equities are approaching a period when they will shortly
resume their secular Bull Market advances. I have recognized and discussed
during this time my belief that the gold price would be under pressure
until after the upcoming presidential election. Further, it has been my
contention that no effort would be spared to maintain orderly stock, bond
and gold markets, in order to help the incumbent remain in office.
During the past few years I noted some of the strange gold price actions
that occurred, the comparisons to which I had not witnessed across my
nearly forty years of studying the gold and gold equities markets. Importantly,
some of these unusual occurrences became quite commonplace in the last
two months. After considering their consequences I am compelled to believe
that sharply higher gold and gold share prices are likely awaiting us
just around the corner.
It is my conviction that our leaders desire to control an orderly gold
price rise as its secular Bull Market unfolds. They are not so much concerned
if gold moves higher, but how its advances play out. They realize that
gold will advance as a result of their actions, but they desire to prevent
the public from recognizing that fact for as long as possible.
For new readers, the reason that politicians shun gold is because it acts
as a barometer, whose price action announces how a government is handling
their country’s fiscal and monetary affairs. When a nation is acting
prudently, their monetary unit is stable on world markets, as are their
domestic prices. Under such conditions, the gold price tends to find a
level from which it does not greatly deviate.
When most countries maintained a gold standard, the last vestige of which
ended in 1971, the noble metal acted to limit a government’s propensity
towards excessive monetary creation. Our leaders could only issue dollars
if they had sufficient gold with which to redeem them. This forced those
in power to live within their means. They could not spend more than they
acquired through taxation. However, when a nation state acts irresponsibly
and overspends their tax receipts creating fiscal deficits, it drives
its balance of payments into negative territory, and both their currency’s
worth on world markets and its local purchasing power falls. During such
times gold senses that the currency is destined to decline, and will rise
in anticipation of that event. This is the real reason that gold, despite
all of the negative rhetoric that abounds, has been plodding higher in
price. Do not forget it has already risen 65% since it posted its 2001
bottom, with neither the awareness nor participation of the general public.
Since the birth of civilization gold has been coveted by man. It was one
of the first forms of money and once recognized for its eternal value,
has been used by virtually all civilizations as their primary form of
money. If we were able to go back in time for sixty or more years, you
would find that it was the prime, universal item used as money. The reason
that it achieved this lofty state, and maintained it for several millennia,
was due to the fact that its use forced politicians to be honest regarding
their issuance of paper money substitutes. Each time a country deviated
from exclusively using gold and issued paper currency in its stead, their
leaders began to debase their money at an escalating pace. In all cases,
this did not end until the banknotes finally became worthless or nearly
so. The only question was how long it took. This is the reason behind
the old French adage that, “even the poorest French peasant hides
gold under his mattress”. It was the result of the repeated currency
changes that France’s citizens were forced to endure. These were
due to their government’s destruction of each new currency that
they issued, to replace the earlier ones that they had inflated to near
worthlessness.
I digressed, again. A number of unusual events have repeatedly occurred
in the gold market for at least the past few years. These go against all
of my experience following the gold market, as well as the laws of probability.
First, gold has rarely traded higher than $6 on any given day. Each time
that it begins a session sharply higher or trades to this level above
its previous closing price, a substantial amount of selling has appeared.
Bill Murphy (Gold Antitrust Action Committee, GATA.org) was the first
person to note these incredible recurring incidents. I sensed that something
was wrong for quite some time prior to his observation, but it was his
bringing my attention to it that first stopped me in my tracks.
He rightly pointed out that this action has helped prevent drawing undue
attention to gold after it began its tortuous, rising, bullish path in
2001. Second, often when the great metal was either leaving a base or
when it suddenly shot higher, it would meet a wall of selling. The last
several days are a good example. Gold, after trading just over $6 above
the prior day’s close last Friday, was not only stopped dead in
its tracks, but it moved sideways on Monday, only to be whacked on the
following day when it gapped down $6, before posting a $7 loss. In the
old days, when gold exhibited an explosive breakout or a sharp run-up,
the momentum typically followed through for at least several days before
a setback occurred. Now, almost like clockwork whenever gold trades strongly
higher selling mounts, and the wind is immediately taken out of its sails.
Still another repetitive telltale trading pattern has been in force. This
time it involves the action of the HUI, the Amex Gold Bugs Index. In the
past the HUI and its precursor the XAU, the Philadelphia Gold & Silver
Index, often reversed direction prior to the yellow metal at major turning
points, during extended gold advances or declines. Gold and the major
producers normally move in tandem. However, the past two or more years
have seen the HUI reverse course on any given day while gold was moving
strongly higher. With few exceptions, the following day gold was hit for
a substantial and often a prolonged string of losing sessions. Some observers
have commented that this action might be the result of information leaking
of a forthcoming attack on gold. Whatever the reason, it has often signaled
an impending downdraft in gold’s price.
I am bringing these extraordinary events to your attention because the
regularity of these strange and recurring anomalies have greatly increased
during the past few months. I believe that the reason for this condition
is the fact that buyers of the yellow metal have become more aggressive,
and thus the need to overwhelm these gold positive forces has similarly
risen. This, in order to prevent a near-term, sharply higher price.
I realize that many readers are quite skeptical of my above claims and
statements. I am not asking you to believe me! However, I suggest for
your own sake, that you keep an open mind and try to more closely follow
the daily price movements of gold and the HUI. It will be easy enough
to draw your own conclusions. But again, you must be open-minded and try
to believe what you see and ignore all of the negative gold rhetoric that
fills the airways. If I am correct, you will have sufficient time as gold’s
great secular Bull Market unfolds, to confirm or refute my observations.
This will allow you to determine for yourself if either the cited abnormal
events are a coincidence, or if official actions or statements occur at
times when gold is soaring, and are used to control its further advance.
In any event, I believe that anyone interested in the gold complex should
closely focus on the trading relationship between gold and the HUI. Further,
you should use caution whenever a deviation from the norm such as I have
described presents itself.
If you invest in gold I believe that it is imperative for you to attempt
to get a “feel” for the gold market. You should at least follow
the daily closing prices of gold and the HUI and compare them with earlier
ones. I believe that this is best done in real terms, not in percentages.
For example, if gold posts consecutive closes of $420, $416, $418, $416.50,
$417 and $415.50 you can sense that it is trending downward, albeit it
slightly. However, if you work in percentage terms you have no reference
point from which to judge its underlying direction. All that you know
is that it was down 1%, up 0.5%, down 0.4%, up 0.2% etc. You will lose
all sense of its trend. If you use this method in following all of your
markets I believe that you will develop a better grasp of their primary
trends.
An advance in gold is the determining factor that will influence the price
movements of both the major producers and the junior exploration companies.
I believe that we are on the cusp of a substantial increase in gold’s
price which will drive it to test the $500 level. I do not know if the
precious metal can muster sufficient buying power to propel it to a new
high prior to the election. However, once the need to strenuously restrain
its advance no longer exists, I feel that it will break free of its shackles
and surprise most onlookers with a burst of strength.
I suspect that November will be attended with a new Bull Market high.
However, precise timing was never my forte, and we may have longer to
wait. Yet, given what appears to be a far greater magnitude of effort
necessary to constrain its price, it is likely that it will literally
evaporate when the last presidential vote is cast.
My only potential caveat is that a number of gold enthusiasts are predicting
a similar scenario. This gives me some pause because I prefer gold breakouts
that are anticipated by as few investors as possible. However, I doubt
if all of we pundits combined have as much influence as the worldwide
audience that gold appears to be finally attracting.
The gold producing companies, as viewed through the action of the HUI,
struck their lows in May. I believe that they will join and make new highs
along with gold. They have completed their bases and await a breakout
to new high levels before they will really roar. The HUI is trading at
227.47 and its Bull Market peak is $258.60. Additionally, it’s 50
day moving average just rose above its 200-day average. They are 208.38
and 207.23 respectively. Thus the HUI’s moving average study has
turned bullish, which is a major plus.
The junior sector is becoming quite interesting to me at present. After
sustaining substantial losses during the springtime they bottomed around
July. From their lows, most companies moved higher and many of them developed
defined upward trends. It appears to me that most of the better companies
have cleaned up their markets; they have absorbed all of the cheap stock
sold by the weak holders. This being said, I believe that they too are
poised to move sharply higher along with gold. I will discuss my ideas
on this topic more fully in the Resource Market section.
The above was excerpted from the November 2004 issue of Financial Insights © October 17, 2004.
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 speculations! 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
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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
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actual results of operations. © 2004 by Dr. Richard S. Appel. All
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