WHAT SHORT MEMORIES WE HAVE
by Dr. Richard S. Appel
December 09/04
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.
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
rights are reserved. Parts of the above may be reproduced in context,
for inclusion in other publications if the publisher's name and address
are also included for credit.