You are here
China never banned new lending; more false news scared gold buyers
By Dr. Richard S. Appel
www.financialinsights.org
April 25, 2004
Gold, silver, gold and silver equities, as well as
numerous commodities suffered severe losses during the
past several days. Gold and silver, after posting highs
a few short weeks ago of $432 and nearly $8.50
respectively, struck their recent lows of $390 and $5.99.
Both the major gold and silver producers and their junior
exploration counterparts followed the metals' lead, and
quickly sought lower prices.
Similarly, additional commodities including platinum,
palladium, and copper gave back what felt like much
of their recent spectacular gains. It is amazing how the
substantial paper profits, which were created by the
tortuous movements these markets traversed to their
recent highs, could so quickly turn into significant
losses for latecomers.
Yet, even for those early entrants who still possessed
massive profits, the precipitous falls sent shudders
through their startled, trembling bodies and left them
with a feeling of despair.
How could this be, muttered a legion of suffering investors
and traders, if these commodities and stocks are truly
in bull barkets?
You had better get used to it!
As difficult as the past several days have been for those
who are bullish on these markets corrections must be
anticipated, for they go hand in hand with all great bull
markets. If you remember, as recently as during the
period from February through early April 2003, and after
having earlier surged to $388, gold collapsed and touched
$319. This 18-percent loss took two months to unfold,
and suffer we did.
You may have already forgotten that painful time because
it was shortly followed by significant profits generated by
a subsequent $100 rise in the yellow metal's price and
simultaneous soaring share prices.
Earlier, during the great gold and commodities bull markets
of the 1970s, there were numerous brief and a few extended
price collapses that tested the mettle of those participants
who were aligned with the gold bull. The most chilling
setback began from the peak at $200 on January 1, 1975,
the day that gold again became legal for Americans to own.
It terminated a year and a half later in the summer of 1976,
when gold bottomed at $103. It was a grueling,
nerve-wrenching period, but it was followed by gold's march
to its $875 peak in February 1980. Each time that the bears
temporarily gained the upper hand and prices sharply fell, it
similarly sent chills and tremors through the hearts of the
gold bugs of that era. However, in the end, massive profits
accrued to those who stayed the course and rode the bull
markets to or near their conclusions.
Why are we suffering these massive price declines across
the precious and base metals spectrum?
There are a number of reasons for these price breaks.
Most are common threads present in all of these markets,
and others are more specific to individual ones.
As the title of this missive indicates, uncertainty generated
by the lack of a wholehearted belief in the existence of these
bull markets and the fear engendered by this condition have
enormous power and influence. Uncertainty and fear, among
those who profess undying confidence in the bull markets,
have allowed this bear raid to produce cascading price
declines across the precious and base metal markets.
Many investors and traders, including hedge funds and
similar entities of all sizes, jumped onto the rising precious
metal and commodity bandwagons in their quest for
short-term profits. They observed the rising momentum
these markets generated and wanted to join the party.
They couldn't care less if they were buying pork bellies,
corn, or cotton For this reason they were not committed
to the markets and exited at the first sign of adversity.
Further, many then added short positions that magnified
the price markdowns.
To the detriment of all long position holders, the
preponderance of those who purport to be believers in the
precious metals bull market truly still do not yet believe.
They repeatedly heard and read in the popular media that
the economy is improving, that the Federal Reserve and
our politicians have everything under control, and that gold
would never again act as a monetary metal.
These omnipresent statements caused them to question
themselves, their reasoning, and their beliefs. Further,
many of these individuals and groups had leveraged their
positions. They were either on margin or held futures or
options contracts. This placed them in an enormously
stressful position and forced them to be precise in both
their judgment and their timing.
Also, the sharp declines generated widespread margin
calls that forced sales by weak and strong holders alike.
A combination of these situations in turn created a
snowball effect that further depressed these markets as
the earlier longs ran for cover.
Precious and base metals were the hardest hit because
they had risen the most and their prices had become
greatly overextended. For example, silver traded at a
virtually unprecedented 50 percent above its 200-day
moving average. For many base metals -- such as
copper, nickel, and aluminum -- their major advances
were caused by our nascent recovery and by enormous
Chinese demand. These conditions had placed great
stress on the supply of these and other commodities
and metals. The demand was so intense that it
generated staggering base metal price rises of as
much as 100 percent in less than a year.
In the end, it was a combination of the earlier panic to
acquire needed immediate supply, as well as the influence
of hedge funds and others that wanted to profit from
these price rises, that drove their prices to unsustainable
lofty levels and set the stage for the declines that we have
been forced to endure.
One facet common to all markets is that they act as
vehicles for and become controlled by the expression of
human emotions. During a bull market or any important
upward price movement, the rising prices generate much
excitement in the psyche of its followers. As the prices
continue to trend higher most investors and speculators
gradually lose control of their rational judgment. They
begin to project far higher price targets than they had
originally anticipated, and their greed begins to take over.
Simultaneously, they observe other players aggressively
competing with one another. This reinforces their bullish
beliefs and instills excessive and unwarranted confidence
that the market is heading still higher. Unfortunately, at
some point the market is bid to overvalued levels that
cannot be supported. When this occurs the last buyer is
satisfied andprices fall.
Typically, the more overvalued and overextended a market
becomes, the greater will be its ultimate decline. This is
the reason why bull markets rise to levels that often
overshoot all reasonable, value-related, upside projections.
All significant market corrections act to dispel the euphoria
that accompanied the earlier rising prices. In an instant,
investor greed becomes transformed into abject fear -- fear
that even still lower prices are in the offing. This leaves
investors questioning the validity of their beliefs in the bull
markets.
These are but a few of the issues that market players in the
precious and base metal arenas have been forced to struggle
with once again because of the recent price collapses.
Gold and silver were trending far above their 200-day moving
averages when the correction set in. Gold had traded about
15 percent above this average and silver about 50 percent.
Last week gold once again returned to its 200-day moving
average and silver to within 4 percent of its 200-day average.
Throughout the 30 years I have followed the yellow metal, the
200-day moving average has always offered great support
during declines in a bull market and exceptional resistance
to advances during bear markets. On the other hand, silver
rocketed to an area of excess that beckoned the short sellers.
It had risen so sharply and so far above its moving average
that the stage was set for a bear raid. And attack the
bears did.
The shares of the major gold and silver producers broke
below important areas of support. The XAU violated 93
and the HUI 208. This attracted technical short selling.
The market technicians then entered the fray believing
that lower prices were at hand. This helped further
depress the XAU and HUI to their recent lows of 87
and 192, respectively.
Prior to this event, the junior exploration companies had
absorbed a considerable amount of newly free-trading
stock without a significant negative impact to most of
their share prices. The shares were issued during the
latter part of 2003, in conjunction with the unprecedented
amount of company financings that had occurred.The
sale of these shares were allowed by the expiration of
the mandatory four-month hold periods. However, with
the price collapses of gold and silver the downward
pressure on junior companies, combined with the
evaporation of across-the-board bids, most juniors
experienced further weakness and losses.
Much of the damage to the precious and base metal
markets, as well as to the stock prices of companies
that either produce or explore for metals, did not have
to occur. It is true that all these markets had gotten
far ahead of themselves. It is also true that this exposed
their markets to bear raids by both the professional pit
traders who make much of their income from targeting
vulnerable short-selling entry points and, in the case of
gold, by those powers that desire to restrain its advance.
But much of the damage was produced by those who
lacked conviction in their belief of gold's bull market and
who were struck by the fear that the steeply falling prices
generated.
Nevertheless, I for one am steadfast in my belief that we
remain in secular bull markets in gold, silver, gold and
silver shares, and commodities in general. Despite the
difficult few weeks we have endured and the possible
small declines that may temporarily lie ahead, I am
confident that by year's end we will look back upon the
recent events and wish that we had bought more and
sold less.
It will likely be an experience similar to the one we
struggled through when gold plummeted from $388 to $319
during early 2003 only to explode to above $430 an ounce
a year later. When this correction has run its course, the
gold stocks will likely rapidly rise from their bases. This
will leave in the lurch many investors who waited too long
for still lower prices. They won't have the positions they had
hoped to acquire.
---------------------
Dr. Richard S. Appel publishes the Financial Insights
monthly newsletter, from which this essay is reprinted with
permission. The newsletter discusses gold, the financial
markets, and junior resource stocks believed to have great
price appreciation potential. Information about the
newsletter and a special subscription offer can be found
here:
http://www.financialinsights.org
----------------------------------------------------
To subscribe to GATA's dispatches, send an e-mail to:
gata-subscribe@yahoogroups.com
To unsubscribe, send an e-mail to:
gata-unsubscribe@yahoogroups.com
----------------------------------------------------
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/
----------------------------------------------------
COIN AND PRECIOUS METALS DEALERS
WHO HAVE SUPPORTED GATA
AND BEEN RECOMMENDED
BY OUR MEMBERS
Centennial Precious Metals
3033 East 1st Ave.
Suite 403
Denver, Colorado 80206
www.USAGold.com
Michael Kosares, Proprietor
US (800) 869-5115
Canada 1-800-294-9462
European Union 00-800-2760-2760
Australia 0011-800-2760-2760
cpm@usagold.com
Colorado Gold
222 South 5th St.
Montrose, Colorado 81401
www.ColoradoGold.com
Don Stott, Proprietor
1-888-786-8822
Gold@gwe.net
El Dorado Discount Gold
Box 11296
Glendale, Arizona 85316
http://www.eldoradogold.net
Harvey Gordin, President
Office: 623-434-3322
Mobile: 602-228-8203
harvey@eldoradogold.net
Investment Rarities Inc.
7850 Metro Parkway
Minneapolis, Minnesota 55425
http://www.gloomdoom.com
Greg Westgaard, Sales Manager
1-800-328-1860, Ext. 8889
gwestgaard@investmentrarities.com
Kitco
178 West Service Road
Champlain, N.Y. 12919
Toll Free:1-877-775-4826
Fax: 518-298-3457
and
620 Cathcart, Suite 900
Montreal, Quebec H3B 1M1
Canada
Toll-free:1-800-363-7053
Fax: 514-875-6484
http://www.kitco.com
Lee Certified Coins
P.O. Box 1045
454 Daniel Webster Highway
Merrimack, New Hampshire 03054
www.certifiedcoins.com
Ed Lee, Proprietor
1-800-835-6000
leecoins@aol.com
Miles Franklin Ltd.
3015 Ottawa Ave. South
St. Louis Park, Minn. 55416
1-800-822-8080 / 952-929-1129
fax: 952-925-0143
http://www.milesfranklin.com
Contacts: David Schectman,
Andy Schectman, and Bob Sichel
Missouri Coin Co.
11742 Manchester Road
St. Louis, MO 63131-4614
info@mocoin.com
http://www.mocoin.com
Resource Consultants Inc.
6139 South Rural Road
Suite 103
Tempe, Arizona 85283-2929
Pat Gorman, Proprietor
1-800-494-4149, 480-820-5877
Metalguys@aol.com
Swiss America Trading Corp.
15018 North Tatum Blvd.
Phoenix, Arizona 85032
http://www.swissamerica.com
Dr. Fred I. Goldstein, Senior Broker
1-800-BUY-COIN
FiGoldstein@swissamerica.com
----------------------------------------------------
HOW TO HELP GATA
If you benefit from GATA's dispatches, please
consider making a financial contribution to
GATA. We welcome contributions as follows.
By check:
Gold Anti-Trust Action Committee Inc.
c/o Chris Powell, Secretary/Treasurer
7 Villa Louisa Road
Manchester, CT 06043-7541
USA
By credit card (MasterCard, Visa, and
Discover) over the Internet:
http://www.gata.org/creditcard.html
By GoldMoney:
http://www.GoldMoney.com
Gold Anti-Trust Action Committee Inc.
Holding number 50-08-58-L
Donors of $750 or more will, upon request,
be sent a print of Alain Despert's colorful
painting symbolizing our cause, titled "GATA."
GATA is a civil rights and educational
organization under the U.S. Internal Revenue
Code and contributions to it are tax-deductible
in the United States.
