Patience Will Be Rewarded
by Dr. Richard S. Appel
February 03/04
All great Bull Markets spend the majority of their time in corrective modes. After each period of upward progress exhausts itself, a far longer time ensues before the next up-wave emerges. This is when the markets correct the excesses created by the excited late-comers, whose frantic bidding drove prices beyond sustainable levels.
It is typical for a secondary Bull Market correction, and the often lackluster
initial rise out of its new higher base, to last twice as long or longer
as the emotionally charged price rise that it followed. In fact, the present
Bull Markets in gold and especially its mining shares, bear testament
to this statement.
Gold’s corrections during this Bull Market have been of shorter
duration and far less severe than those of the major gold producers. Similarly,
the price declines among the junior gold exploration stocks have been
far steeper and longer lasting when compared to their major gold mining
counterparts. These events are normal. They are dependent to a large degree
upon the type of investors and the level of speculation that these differing
groups bring to their respective markets.
Those who are steadfast believers in gold acquire their gold holdings either purely as a means of protection or as a hedge against the profligate spending and actions of our governing leaders. They view gold bullion as the purest and safest asset with which to protect their wealth. They may earmark some of their bullion commitments as a trading vehicle, but by and large they are in gold for the long run. They are indeed the core group and strong hands of the gold market, and presently comprise the majority of physical gold investors. The remainder of those investing in gold are generally looking for a trade and currently comprise a small contingent. Because most gold purchasers will not lightly separate from their gold holdings, advances and retreats in the gold price offer the least volatility when compared to the two groups of gold stock participants.
Investors that favor the major gold producers are more speculative than
the core group. Their members may contain a large number of the former,
but while they desire the protection of a gold investment they are looking
for more leverage and the hope for greater profits. They invest in time
tested major producing companies. They do this with the belief that higher
gold prices will drop to the company’s bottom line as greater profits.
And, they anticipate the price-earnings multiplier to generate far higher
percentage gains for their stocks when compared with any rise in gold.
Most of the major mining shares are available for sale at any time. Further,
this contingent attracts a large number of traders that are speculating
in a higher gold price, without really believing the underlying facts
favoring a gold Bull Market,.
This group has “one foot out the door” at all times. They
will not hesitate to jettison their gold share positions at the earliest
sign of a gold reversal. Compared with gold, the producing company shareholders
have far fewer among them that are in it for the long term. This leaves
a much larger component than those investing in gold, who will move in
and out of the market. The presence of this group creates far greater
price volatility in the stocks, than in the yellow metal itself.
Now we come to the junior gold exploration stock investors. I use the
word “investors” with my tongue in cheek. In truth, we are
all speculating in this sector at best, and gambling in it at worst.
The exploration market attracts people for a number of reasons. First,
it offers the hope and dream of enormous profits. We have all been drawn
to this market sector because of the true but infrequent stories that
emanate from it. These surround companies that traded for pennies but
found great economic ore bodies, or even one that appeared to offer such
potential, and witnessed their share prices skyrocket to enormous heights.
Tales of companies attaining the $20 level are often told. Others, that
have risen to $50, $100, $150 or even more attest to the possibility of
investing one’s money in a $0.25 or $0.50 stock, and garnering a
fortune in return. At this point I believe that anyone investing in this
field should go to my website www.financialinsights.org and read my essay;
“How To Profit On The Road To Failure”. It will bring you
down to earth and will help you better navigate and even profit in this
market.
The second primary group of individuals that enters the junior market
is composed of those who are either true believers in gold, are gold or
stock speculators, or are somewhere in between. They recognize the leverage
that the primary gold producers offer to a higher gold price, but they
desire an even greater profit potential than can be attained from investing
in them. I fit into this category. We realize that a gold Bull Market
will lift the share prices of the vast majority of companies in this group.
Further, given the opportunity to “strike it rich” with one
of our companies, it gives the exploration stock participants an added
incentive.
Unfortunately, this sector not only bears the promise of substantial profit,
but it also generates the severest losses. While people who invest in
gold producing stocks have “one foot out the door” those who
participate in the juniors have all but their baby toe out the door. Our
greed draws us into this market and sets us up to bolt when our varying
maximum levels of fear and pain are triggered. This mentality generates
the greatest price volatility of the three markets.
A junior resource Bull Market creates a series of great peaks and deep
valleys. When gold is sharply rising company after company sees its share
price soar when they announce exciting exploration results or acquisitions.
However, when gold weakens or trades sideways in price this market tends
to drift lower.
When the exploration stock sector approaches or is at an intermediate
top, such as we experienced early last Spring, no one wants to miss out
on the perceived and seemingly guaranteed higher prices. The result is
a bidding of the shares to extremely overvalued levels. I use the term
“extremely overvalued” in a relative sense. Since none of
these companies actually have anything concrete upon which to determine
real value, let alone earnings, they must be viewed on a relative basis;
what does one company with a certain market capitalization have to offer
compared with the others in its class. Then, the great excesses that are
produced at the temporary peaks are gradually bled out of the market during
the ensuing, seemingly interminable declines.
The bidders have left the market. That primarily leaves the sellers to
control the price levels until a renewed gold rise again brings excitement
and capital into this market.
With the absence of a new, extended gold advance company after company
experiences lower prices. This occurs whenever someone sells his shares.
It continues until the general investor mentality in this sector again
gains confidence that a new gold up-trend is in place.
At each corrective, junior stock bottom the final “weak hands”
jettison their shares. Since there are few true believers, the exploration
sector bottoming process is quite extended when compared to even that
of the gold producing companies. It takes time before the last few holdouts
have suffered sufficient pain to motivate them to take their losses, and
sell their final shares. This is the reason why this most speculative
group is the last gold complex segment to awaken and resume its Bull Market
advance.
I first invested in gold stocks in1972. During the following decades I
found that a few conditions have virtually always held true during gold
Bull Markets. Prior to major gold bottoms the primary gold producers typically
strike their nadirs and develop up-trends several months before gold.
Then, the initial gold advance is attended by increasing prices for the
shares of the major gold companies. This is followed, and often by several
months, by the junior companies ending their correction and joining gold
and the majors. Finally, all three sectors move higher in unison..
I believe that the odds greatly favor that gold has posted its low for
this correction. It firmly vaulted above the roughly $415 to $425 zone
that has foiled all of its advances since1989. This was accompanied by
a dearth of commentary regarding its immense Bull Market significance.
This is not surprising given that most gold believers are still not truly
confident in the existence of gold’s Bull Market.
It is normal in Bull Markets for areas of strong resistance to be transformed
into zones of important support after they are ultimately surpassed. When
gold finally vaulted above the $415-$425 area late last year it quickly
bolted to nearly $460 before retreating. To date, the $415-$425 zone has
already presented a great deal of support for the eternal metal.
Other reasons that confirm my belief in gold’s Bull Market and an
impending higher prices are that the commercials, the bullion banks, gold
producers and major users of the metal, have sharply reversed their net
short position. This is now at or near similar low net short levels that
have supported earlier significant gold price advances. Further, given
our two wars and soaring budget and current account deficits, the dollar
is destined for far lower levels. However, and this is my one caveat boding
against a higher, immediate gold price, the U.S. dollar should trade higher
at least in the near term.
The U.S. Dollar Index 80 area has offered major support for over 25 years.
If the dollar doesn’t stage at a modest advance for at least the
next few months, it will indicate how truly weak it really is. While the
dollar is flat or rising, gold will be hard-pressed to stage anything
better than a tepid advancing trend.
Similarly, the odds favor that the gold producers have posted their lows.
They are awaiting a signal to join the noble metal when it again sharply
advances.
The junior exploration stocks are in a different stage. Their price action
indicates that, while some companies are still probing for their nadirs,
the better managed stocks have passed their lows and are beginning to
creep, and in some cases leap higher. Money to finance the better “stories”
is becoming plentiful, and there is much concrete evidence that there
are willing buyers for the shares of an increasing number of companies.
These are conditions that have attended the incipient stages of earlier
junior Bull Market advances.
All but the most hardened and well-seasoned investors buy near the tops
of all markets, and sell at or near their low points. While the lows for
most of the markets described above may not have been posted, I am confident
that they will be shortly. Of utmost importance, this is the area where
the great bargains emerge in all great Bull Markets. It is the stage where
the pros take their largest positions. This is the time to make educated
purchases, not sales made out of fear. These markets may begin to rally
within a few weeks or it may take a few months. But when they do I am
confident that your patience and confidence in them will be richly rewarded.
The above was excerpted from the February 2005 issue of Financial Insights © January 30, 2005.
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
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
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