Gold Suffers from an Instant Gratification Culture
by Dr. Richard S. Appel
May 12/05
In our world of ever-present lotteries, an exploding gambling industry,
the recently ended 20+ year equity Bull Market, and constantly rising
home prices, Americans have become accustomed, nay addicted, to seeking
action. We seem to be attracted, as surely as a moth is to light on a
dark night, to fast, readily attained profits. We have become a nation
of gamblers who are no longer satisfied with the overworked euphemism,
“long-term investor”. Yes, everyone seems to believe they
are one. Yet, they become impatient with trendless price action or the
earliest adversity. We are no longer willing to patiently wait for our
profits to accrue. We must have them now, or we will find another game
or market in which to play.
Momentum investing has gradually become a dominant element of the investing
landscape. It is primarily practiced in the stock market. There, professional
and amateur players alike chase after the next market sector that appears
to be on the verge of roaring higher in price. Now, it has spread to the
housing industry where investors not only purchase dwellings in which
they intend to live, but a second, third or even more homes for investment
purposes. Money flows into the hottest national markets and pushes their
prices further and further into the stratosphere. This, as investors scramble
so that they will not miss any virtually guaranteed profits.
This mentality is insidious. Not only does it consume those who are immersed
in this endeavor, but it filters through the balance of the investment
community. It is as though the quest for fast profits has spread beyond
the compulsive gamblers, who are driven by their need to be players, but
has also sparked into action the latent gambling instinct in us all.
Is it any wonder that gold’s secular Bull Market cannot attract
a following? Gold drearily began its Bull Market in the summer of 1999.
From its $252 starting point it quickly rallied to about $320, before
it again decayed in price. The slow, tedious decline lasted for a year
and a half before the noble metal posted a double bottom at $255 in January,
2001. Thus, it began its new bull life with a whimper. Should we have
expected the unfolding of its Bull Market to be much different?
After advancing from its $255 low, gold steadily plodded higher. Its rise
was frequently punctuated by frightening price reversals. Each new temporary
peak was followed by a harrowing brief decline that did not end until
its price was10% to 17% lower. Still, every Bull Market high was succeeded
within seven months by yet another. Again and again, these sharp set-backs
took the breaths away from and panicked the members of the gold community.
For the instant gratification crowd it was not a fun time!
The gold stocks were a different story. Here it was far worse! This was
painfully true for even those with an authentic long-term perspective,
and who possessed the will and courage to follow it. In hindsight, another
reason appears obvious why today’s typical investor shunned gold
stocks. Most of those who invested in the gold sector neither recognized
the existence of gold’s Bull Market nor understood the reasons and
causes for its existence.
The major gold mining companies as seen through the action of the HUI,
began their Bull Market during the last quarter of 2000. This was near
the thoroughly depressed 35 level. It boggles my mind that despite the
fact that it has already struck a high approaching 260, few still believe
that a major Bull Market even exists. While each of its three major bull
advances drove prices breathtakingly higher, each following grinding,
gut-wrenching decline tested the resolve of its investors, and drove the
weak-hearted impatient crowd towards the exits.
The HUI’s first important high occurred at about 80 in mid-2001.
It took about nine months before that level was breached by a new major
up-wave. Its next peak at 155 was posted in mid-2002, before a correction
set in. In this case, it was not until about fourteen months later that
155 was surpassed. Now, we are entwined is the present installment of
the Chinese Water Torture as it is applied to gold stocks. At the end
of November, 2003, the HUI nudged 260. From that lofty point it repeatedly
fell and grudgingly rose, and is yet to surpass that point. We have been
forced to endure eighteen months since that peak, and we still find ourselves
with the HUI over eighty points lower. Given the great pain, and the paper
and real losses that have been endured by gold stock investors over this
extended period, it is doubtful that any but the most resolute gold bugs
remain invested in its stocks.
As poorly as investments in the gold producing companies have fared during
the past year and a half, those who invested in the junior companies have
suffered far worse. The exploration and development companies by their
nature are very thinly traded. This exposes them to both wide upward and
downward price swings. It is currently not unusual for many of these nascent
companies to be trading below 50% of their Bull Market highs. In fact,
a large number of these companies have fallen to levels at which they
traded when gold sold below $300 an ounce. Investors in these shares truly
rode an excited up escalator numerous times during their Bull Market,
only to suffer despair each time their stocks spiraled lower.
I believe that few of today’s legion of equity investors have a
sufficient working knowledge of investing and markets to survive anything
but a Bull Market! This prevents them from becoming truly committed to
any investment. How can they remain invested in something if its price
keeps falling, and the only reason that they purchased it was because
some alleged expert or group of experts told them that it was a wise decision?
Or worse yet, because they watched its rising price and wanted to jump
on the bandwagon in their effort to become one of the momentum pros.
The investment media, that has a vested interest in attracting and keeping
money in equities, constantly fills the airwaves with statements like,
“ we’re only in a soft patch”, and that common stocks
will soon roar higher. Not only is this absent in the precious metals
markets, but these same “talking heads” unanimously declare
that gold is at best a sterile investment.
I believe that it is to the advantage of all those who believe in gold’s
Bull Market to recognize and accept the following: it will not be for
a few years at minimum that the masses will realize that gold is even
in a Bull Market. Yes, there will be trickles of newcomers attracted to
each major price advance. Yet, until that time arrives, and the gold price
is far higher, we will continue to benefit from the periodic, short-lived
rallies in gold and silver. However, we will also be forced to persevere
a number of similar sharp or extended price collapses.
For those who invest in the major and junior gold stocks, a different
future should be expected. The brief Bull Market explosions in price will
be followed by similar long extended corrective periods such as described
above. This is when a long vacation should be contemplated using some
of the money that was taken off of the table near each intermediate peak.
After all, the action of the gold complex Bull Market is not yet conducive
to satisfying the expectations of our instant gratification society. Rest
assured, they will ultimately enter gold and its related investments en
masse. When they do, it will be time to prepare to sell them your holdings,
but at a substantial premium to your cost basis.
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,
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