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Saudi central banker disparages gold as Portugal sells 35 tonnes
By Dr. Richard S. Appel
www.financialinsights.org
Thursday, May 13, 2004
Many painful questions and feelings have gone through
the minds and hearts of those who have invested in
gold, silver, and gold and silver stocks during their
current price declines. In but a few short weeks,
long-time holders of these investments have watched
in awe as their substantial paper profits quickly
vanished.
This was far worse for those who recently entered the
precious metals arena. For they have sustained great,
real losses.
With the United States slated to generate massive
budget deficits for as far as the eye can see, isn't
inflation virtually assured?
Won't the dollars created by the stroke of a key to fund
these deficits also cause the dollar's purchasing power
to resume its sharp decline on international markets?
Will not these guaranteed events fan the flames of
domestic inflation?
Gold and silver have already touched lows that are about
14 and 35 percent respectively below its recent peaks.
The HUI has similarly declined by as much as 35 percent
from its high, while most of the junior exploration
companies are trading at about 50 percent or less of their
December to January high points. When will the
blood-letting end?
Or, as many of the precious metals non-believers are
saying, have their bull markets really ended and have
we only experienced the early stages of what may yet
become devastating losses?
These are but a few of the questions that those who
understand the significance of gold are pondering, in
private and aloud.
Corrections counter to the primary trend are part of all
markets, whether bull or bear. But the magnitude of the
recent declines in these investments, especially in the
case of silver, have shocked and frightened their
followers to the core.
Yes, silver went nearly parabolic when it rose from
under $5 to $8.50 in less than six months. Is it destined
to continue its plunge and ultimately fall below its
$5 takeoff point, as it did in 1997 when Warren Buffet
announced that he had acquired millions of ounces?
It is true that the shares of the major gold producers had
gotten ahead of themselves given the rise in the gold
price. Further, the vast majority of the junior explorers
had traded at values that approached what they would
be worth if they had already discovered their pots of
gold. These are all conditions that existed since the
end of 2003 and should have served as a warning. But
few, including myself, actually listened. We all knew
that gold was heading substantially higher, but our
timing was dead wrong. Our greed got in the way.
This created a condition where the markets had
overextended themselves and were thus ripe for a more
fierce and violent decline than should have been the
case.
Are the bears correct that the precious metals complex
has taken its last breath, and that gold will return to its
bull market low of $252 or go even lower? Will the gold
and silver stocks decline 50 percent or more in that
event? Or, if this is only a correction, is it still in its
infancy and are we still fated to experience sharply
lower prices across the precious metals sector?
On all counts, I think not.
I have been involved in the gold and silver markets
since the early 1960s. During this time I have
experienced all of the ups and downs that
accompanied their great bull markets in the 1970s
as well as their long bear markets, which began in
1980 and ended nearly 20 years later. Through this
entire period I enjoyed and profited from their rises,
and suffered during each decline.
And I'll let you in on a secret. While the recent
market declines have been quite severe to date and
will likely continue somewhat, they have not been
extraordinary to the world of gold.
You may have heard the adage that "there's no fever
like gold fever." This has typically caused gold, silver,
and their shares to become temporarily overvalued
during most up-legs. In turn, this has led to more
severe short-term corrections than typically
accompany other markets. These have acted to
reverse the periods of overvaluation and allowed a
resumption of the advances from stronger bases
and reasonable valuations.
I am confident that this time it is not different.
I believe that we are witnessing the beginning of the
end of this down-leg in the precious metals and
their shares. I can't even refer to this as a major
correction. I am certain that one lies somewhere
ahead, but I believe that it will occur from far higher
levels.
During golds 1970s bull market the yellow metal
sustained an incredible collapse from $200 to $103.
This took about 18 months to unfold. Yet from its
1976 nadir, gold reasserted its upward trend and
fulfilled its $875-an-ounce destiny.
I believe that gold is now probing for a low. Further,
I would be surprised if it falls below the $350-$355
range, which should offer great support. If this
correction is fated to be similar to its 2003 price
reversal, a similar percentage decline in the noble
metal would find it in this zone. The major gold
stocks, as measured by the HUI, should experience
similar important resistance to decline if the HUI
should fall to the 150 to 155 area. I would not be
surprised if both of these areas are first tested, and
possibly briefly penetrated, before the final lows are
posted for this decline.
On the other hand, the junior exploration companies
may have a different fate.
The majority of the junior companies have retreated
about 50 percent or more from their recent highs. They
are at a greater risk than their senior counterparts.
If gold languishes at or below its current price level
it is likely that these small stocks will drift lower into
the summer months, as will their trading volumes.
This is the typical price action for this market, during
gold bull market secondary corrections.
I will be carefully observing how the juniors fare if gold
builds a base for more than a short period after posting
its final low. It is likely that the makeup of the gold
investment community has changed. Today we have a
far greater percentage of investing Americans. Further,
they have become convinced that they are
knowledgeable due to their earlier common stock bull-
market success.
Additionally, many of these investors believe
themselves to be traders. During earlier times, those
who invested in gold, silver, and their stocks firmly
believed that gold represented real money. They
invested in this sector as a safe haven when they felt
that our nation was damaging the integrity of the
dollar. They did this primarily to preserve their wealth.
For these reasons the makeup of the gold complex
investor base is far different than it was in the past.
A significant percentage of people view gold as a
momentum play or as a short-term trading vehicle.
We already know that they have little commitment
to gold and will run at the first sign of adversity.
It will be instructive how the exploration stocks perform
if gold forms an extended base before it resumes its
upward movement. In this event I would expect them to
drift lower as they have in the past, due to a lack of
interest. But if these new players appear as bottom
fishers, they may generate demand that heretofore
did not exist, and may actually support the junior
shares.
The exploration market is driven by excitement. This
has typically resulted from either a major discovery
or from a gold bull market. Barring an external event,
such as an important metal discovery, an escalation
of the war in Iraq, a major terrorist act, or from other
positive gold-driving occurrence, it is likely that these
companies will perform in a similar fashion as they
have done before. Further, they are approaching a
period known as the "summer doldrums" when
prices typically soften.
I do believe that the majority of the damage has
already occurred to these nascent companies. The
stocks that will likely suffer the worst from this point
are those that remain overvalued. I am confident that
when the dust clears, the majority of juniors will offer
attractive prices relative to their perceived value, and
the stage will be set for their next major advance.
All these markets have sustained serious internal
damage that should take at least a few months to
repair. The bulls must first overcome their fear of
further declines. They must then reassess their
premises regarding gold's future and regain
confidence that gold remains in a secular bull
market. Then they must observe the resumption of
price advances across the gold and silver spectrum.
This will embolden them to reenter the markets.
In the gold stock sector, if history is a guide, the
gold-producing companies will first move higher.
This will be followed by the exploration companies.
All these conditions will likely have to unfold before
the gold bull market enters its next sustained
advance, which will allow gold to test the $500 level.
For those who are considering making bargain-
basement purchases, the time is approaching but
is not yet here.
-----------------
Dr. Richard S. Appel publishes Financial Insights, a
monthly newsletter discussing gold, the financial
markets, and junior resource stocks. Past issues
of Financial Insights and a special subscription offer
may be viewed at:
http://www.financialinsights.org
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RECOMMENDED INTERNET SITES
FOR DAILY MONITORING OF GOLD
AND PRECIOUS METALS
NEWS AND ANALYSIS
Free sites:
http://www.cbs.marketwatch.com
http://www.capitalupdates.com/
http://www.silver-investor.com
http://www.thebulliondesk.com/
http://www.goldismoney.info/index.html
http://www.minersmanual.com/minernews.html
http://www.a1-guide-to-gold-investments.com/euro-vs-dollar.html
http://www.investmentrarities.com
http://www.kuik.com/KH/KH.html
(Korelin Business Report -- audio)
http://www.plata.com.mx/plata/home.htm
(In Spanish)
http://www.plata.com.mx/plata/plata/english.htm
(In English)
Subscription site:
http://www.lemetropolecafe.com/
Eagle Ranch discussion site:
http://os2eagle.net/checksum.htm
Ted Butler silver commentary archive:
http://www.investmentrarities.com/
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Michael Kosares, Proprietor
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314-965-9797
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Metalguys@aol.com
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Dr. Fred I. Goldstein, Senior Broker
1-800-BUY-COIN
FiGoldstein@swissamerica.com
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