It is the Darkest Before the Dawn

 

by Dr. Richard S. Appel
June 17/05

This piece is dedicated to and is for the benefit of the stouthearted souls who held fast to their belief that gold stocks remained in a major secular Bull Market. Despite the past many months of torture that they were forced to endure, they remained undeterred in their conviction. As difficult and gut-wrenching that it was to maintain their belief, they recognized the underlying torrent that already carried gold to a multi-year high, and they had the patience to hold their stocks while awaiting the resumption of the gold equity Bull Market.

During the past year and a half, those who followed the major gold producing companies suffered greatly. They experienced 25% to 40% losses. However, those who purchased the junior exploration and developmental companies fared fare worse. In many instances they sustained 50% and even 80% markdowns in their portfolio values. To the dismay of all gold believers these staggering gold stock losses occurred against a backdrop of a higher gold price. The underlying eternal metal that they either mined or explored for, reconfirmed its secular Bull Market by staging a major advance to new highs, while leaving the gold stocks essentially in the dust.

My reason for sharing my thoughts at this juncture is to lend my support to the gold investors whose second-guessing may still lead them to jettison their shares. I recognize how trying and difficult that it has been to watch your share prices fall, then rise, only to decline to increasingly lower levels during the past many months. We all experienced the hope that each price rise brought that the bottom was finally reached, while every following decline raised questions about our belief in the gold Bull Market’s existence. Was I wrong? Had gold and gold stocks again entered a new Bear Market as all of the pundits wrote and shouted? These and other doubts have crept into the minds of all of us. My hope is that you continue to hold onto your stocks just a little longer as I am doing. Because I believe that our pain and suffering will shortly evolve into a period of joy, generated by a long overdue and important price advance that will both confirm our belief and richly reward us for our wait.

The focus of this missive is primarily devoted to those who are invested in the junior gold and other nascent exploration companies. Not only gold shares but the entire junior resource sector has been affected by the gold share weakness. It can be extended to include the gold producing company investors, but it is becoming increasingly likely that they have already emerged from their correction lows, for reasons given below. Unfortunately, this is not yet the case for the junior sector stockholders. Their stocks may have longer to wait for their turn to move substantially higher, before they too join the senior ones in a unified price advance.

A stronger gold price is the catalyst that drives higher both the major, intermediate, and junior gold stocks. With gold rising, the producers are bid up in price because investors believe that they will earn more as gold’s higher price generates increased company revenues. The younger companies are aggressively purchased because their shareholders are confident that their success will be accompanied by similar, significant price advances. Additionally, as with all markets, it is as though the rising tide generated by a Bull Market carries all of its member’s prices to loftier heights.

THE REASONS BEHIND MY BELIEF

Why do I believe that major factors are in place for a sustained major up-wave in all segments of the gold complex? Simply put, it is for both fundamental and technical reasons. First gold.

Within the past few days gold broke out to Bull Market highs in euros and the Japanese yen. Today, it posted a new high in the Swiss franc and is on the verge of similarly entering new, high territory in the British pound. It is only a matter of time before the yellow metal will enter new bull phases in all of the major currencies. When that occurs the fireworks will begin.

New buyers are already entering the market as many investors in the Eurozone and other parts of the world are beginning to move aggressively into the yellow metal. Whenever a major breakout occurs technicians automatically begin buying the superiorly performing item. If gold can remain above 350 euros and maintain its new Bull Market highs in the yen and Swissy, it will attract a far wider audience. Importantly, before the recent failure to ratify the European Economic Community’s Constitution, the euro was seen by many as quite desirable and as a stronger currency than the dollar. Now that questions have arisen about the future of the EEC and by extension the euro, gold will be viewed by an increasing number or investors as being a sound investment. This in and of itself is attracting renewed, global interest in gold.

The catalyst creating these events is the worldwide excessive monetary creation that is not only being aggressively executed by the U.S. but by all of our major trading partners. It is as if all of the first tier countries are trying to depreciate their currencies in order to remain economically competitive in the global marketplace. The unabated strength in the Commodity Research Bureau Index, as well as the inflationary implications of the rising Producer Price and Consumer Price indices, attest to this fact. The recent CPI had a respite after three consecutive months of +5% annual increases due to temporary lower energy prices. However, this process reversed itself this past week when these prices surged sharply higher. Further, the +30% increase in oil prices this year alone has not yet entirely filtered through the economy, and oil is now on the verge of recording a new all-time high. The higher costs associated with producing numerous goods, as well as the increased price of moving virtually everything, will certainly be passed through to the consumer. This will ultimately push prices higher. Gold is not lost to these events!

The net commercial trader’s short position as stated in the weekly Commitment of Traders Report is another indication of gold’s future trend. The commercials primarily consist of the bullion banks, the gold producers and the major consumers of the metal. Historically, this group is composed of the most savvy gold traders who as a group are seldom wrong. Importantly, gold bottoms frequently occurred whenever their net short position receded to near or below its present level. Further, today gold rose to touch a major descending trend-line that goes back to its Bull Market high in early December, 2004. If it pushes but a few dollars higher it will signal a major break-out and attract even more interest.

Additionally, on the demand side, we are approaching the annual buying season for the gold jewelry trade. This is the period when jewelers purchase gold to satisfy their jewelry fabrication requirements for the approaching Christmas Season. This is the primary reason for the pronounced annual gold market strength during the July to November period.

All of this is occurring with the dollar exhibiting strength. When the greenback’s secondary upward correction within its secular Bear Market ends, its positive impact upon gold will be breathtaking.

Finally, the gold stocks. I was invested in the gold complex throughout its 1970's Bull Market as well as through its Bear Market that terminated in August, 1999. Rarely, other than at Bear Market bottoms have I seen such depressed conditions as they are today, when the gold stocks were as severely battered. Gold is trading at about $435, yet the stocks appear priced as if gold was in the mid $300's. They are enormously oversold and undervalued in my opinion! Further, both the XAU and HUI have carved out near perfect head and shoulder bottom formations. All that is needed is for the XAU to remain above 90, and the HUI to similarly work above 197 for the completion of these potentially explosive patterns.

Today, both the XAU and HUI broke decisively above these levels. The XAU gapped higher, thus creating one of the most powerful bottom price formations, an island reversal. If these indices remain above today’s levels for a few days they will have completed their bottoms and the major and intermediate gold stocks should begin to soar.

Historically, correction lows and especially Bear Market gold bottoms, were often first sensed by those who invested in the major gold producing companies. This motivated their investors to begin acquiring these shares prior to gold marking its final nadirs. The juniors on the other hand typically did not ascend from their depressed lows until they first witnessed a sustained price rise in both gold and the producing company stocks. In a similar fashion, the shares of the intermediate gold producers were slightly delayed but followed closely on the heels of the large producers. It was only after gold and the major and mid-tier producing companies were trending higher, that the junior company followers gained sufficient confidence in gold’s direction to venture into the exploration companies, the most speculative stock group within this sector.

I believe that the vast majority of well-managed junior companies have already posted their corrective lows. Further, not only are their share prices selling at distressed levels, but they have had the opportunity to advance their projects during this extended, difficult time for their shareholders. If anything, in my opinion, they now offer enormous price appreciation potential. This is amplified because their risk versus reward equations now greatly favors their ownership. However, for reasons given above we must likely first experience a sustained rise in gold and the primary and secondary producing companies before the junior sector joins the advance. Yet, given today’s price action of gold and the producing stocks, I doubt if we will have long to wait.

There may only be one major obstacle left to overcome. Before the entire gold stock universe charges sharply skyward we must first absorb the selling pressure that is destined to enter the market. At the first sign of gold stock strength, many of the remaining frustrated, beaten-down stockholders who weathered the storm thus far, will succumb to the lingering fear that will drive them to sell their shares. It may not significantly affect the producers, but this will likely inhibit an immediate aggressive advance in the junior shares. I sincerely hope that the reader is not among these who become frightened at exactly the wrong time. For if I am correct, those who sell now will eventually loathe the day that they allowed themselves to be tricked out of the market, just when the tide had turned in their favor.

Remember, there has been a lack of bidders for the past number of months. This has kept many investors in the market because they feared that they could not complete their sales without driving their stocks far lower and further increasing their losses. Further, many of these investors will view any strength in the market as an opportunity to sell their remaining shares for fear of further losses. When bidders enter the market these individuals will “hit the bids” wherever they appear.

This is normal market action and could create a number of temporary price reversals! Even many of those who will be buying stock during the next several weeks will do so with “one foot out the door”, and will exit at the first sign of adversity. Do not allow yourself to be swayed from your positions when these counter-trends appear. By summer’s end I feel confident that this extended, frustrating period will be far behind us. And, we will all be well rewarded for our faith, confidence, courage and patience. My suggestion; just hang on a little longer.

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.

Tell a friend: