gold article from appel

  1. 5,382 Posts.
    I hope this is right and applies equally or more so to silver.

    copy and paste from kitco


    By Dr. Richard S. Appel
    May 8, 2003

    My motivation for penning this article emanated from my recent reassessment of gold caused by my frustration with its markets. I was attempting to ascertain the reasons behind the lackluster performance of the junior gold companies, and the indifferent attitude of most gold observers, to the grudgingly higher move in the gold price. Further, I pondered the likely causes for gold's inability to get out of its own way and move sharply higher, as I believed it was destined to do and certainly should have by now. Why, I asked myself, weren't buyers scrambling over one another to acquire gold and the junior companies? With the juniors, didn't their sharply lowered prices offer great opportunity to profit? And, weren't numerous positive conditions in alignment for the creation of great gold strength?

    I began recounting the reasons that I believed underpinned gold's Bull Market. The Federal Reserve has been pulling out all stops in its effort to aggressively inflate the money supply. Our nation's budget deficits are destined to be enormous by our government's own accounting, and our balance of payments deficit is at an unsustainable level. Further, the Fed appears little concerned about the integrity of the dollar given Greenspan and Ben Bernanke's now famous remarks last November. In fact, this is likely one of the causative factors for the dollar's present downward cascade on international markets. With the dollar collapsing shouldn't gold be soaring I wondered? Additionally, many major gold producers are reducing or eliminating their hedging. Further, they have been forced to lessen their gold sales as they use new gold production to reverse their hedges. Also, the major central banks have collectively greatly reduced their sales and will annually sell no more than 400 tonnes of gold. This is not to mention the fact that world gold production is in decline and is expected to continue on a lowered path for at least the next three to five years. Wasn't the supply/demand equation now firmly in gold's favor? These and other reasons, I thought in disbelief, should be acting to force gold and gold shares higher. Wasn't anyone listening or thinking? Or, was I all wet!

    I continued, and reflected on the fact that the major gold companies and the Canadian exploration sector began their present correction in early June, 2002. This is an enormous length of time for a secondary correction so early in a gold Bull Market. Further, the gold share weakness has already bestowed sharply lower prices upon the shares of even the finest major and junior companies. Didn't their prices already reflect a gold price in the low $300 range, not the $346 level of today? Surely, I opined, the extended weakness has already driven virtually all but the most ardent gold believers from the market.

    Gold, on the other hand I thought after rocketing to nearly $390, plummeted to a low of $319 only several weeks ago. It has since recovered, but it has laboriously plodded higher with neither fanfare nor excitement of any kind; only the fear of a return to new lows. I remembered the various reasons, that knowledgeable individuals speculated, were behind the recent despondent gold and gold stock action. The desire and actions of our government to suppress its price, the widespread disbelief in their Bull Markets and the short sales that it generated, the current common stock strength that drew funds out of gold equities, and others. All of these thoughts and more went through my mind! What was the reason I queried, that gold and gold stocks were so downtrodden and dejected?

    Then it came to me! It didn't matter!!! I realized that all Bull Markets unfold in their own time frame and in their own fashion. Markets aren't made to please me or to benefit and enrich you! They are simply produced by the confluence of events and conditions that affect the item in question. I tried to step back from the disheartening day-to-day actions of the various gold segments. When I did this I was able to look past the trees and see the forest. I then realized that what appeared to be great weakness was simply the Bull Market's arduous climb of the proverbial "wall of worry". I remembered that gold's 200 day moving average moved above its 400 day moving average several months ago. I then looked at a chart beginning at the origin of gold's Bull Market. The original major uptrend remained intact. Further, both gold and the HUI had recently broken above their 200 day moving averages. Even the TSX Venture Composite, a proxy for Canadian exploration companies, appeared to have formed a massive head and shoulders accumulation pattern. It struck me that as bad as all of these markets appeared to act, they remained in Bull Markets. Then I understood! Despite what appeared to be dismal price action across the gold spectrum, it was simply the normal unfolding of a secular gold Bull Market.

    What was transpiring in the gold universe was only the Bull Market's way of stealthily moving higher while taking as few investors as possible with it. Each chilling plunge, every relentless decline only acted to remove more and more weak holders from riding the Bull Market to its conclusion. Even die-hard "gold bugs" either reduced their positions or refrained from additional purchases. The Bull Market was doing its thing!

    I realized that later, when gold and the gold equities explode in price, these early investor casualties to the bull would be back. They would remember how they owned gold and gold shares at lower prices. Or, that they hadn't purchased enough due to their fears! They would reflect on their small profits or even losses that they had sustained from their earlier errant decisions and actions. They would berate themselves for having known that gold was destined for much higher levels, and for having allowed themselves to be tricked out of the market. BUT, I realized, they would return to drive prices sharply higher!

    Primary movements in gold and gold shares have always been explosive! I remember the great gold Bull Market in the 1970's. Investors that tried to either pick a bottom or to wait for a slightly better purchase execution, often were left behind when gold sharply moved out from a base or from an area of consolidation.

    Today is no different! When gold and gold equities again resume their Bull Market advances the backing and filling that we have been experiencing, will be replaced by steep price rises. There will be no advance warning! Investors who waited will be forced to frantically increase their bids in their effort to make purchases. Sharp price increases in all segments of the gold complex will be generated by those who knew better. They will be fostered by those who allowed themselves to be out of position when the Bull Market reasserted itself. At that time there will be a mad scramble to acquire both gold and the gold mining equities, but at sharply higher levels than those today offered. Further, today's reluctant buyers will be accompanied by the momentum players and funds, and the additional capital that will emanate from the emboldened die hard investors who held on through the trying correction that dominates today's gold marketplace.

    Most investors attempt to find THE REASON why this stock or that commodity or this market did this or that TODAY. These are the demands of amateurs! In the scheme of things daily market machinations are unimportant. For this discussion, the only true issue that matters is that gold and gold shares are in a secular Bull Market! This means that any and all efforts to constrain their advance will ultimately be met with failure. Just as all Bear Markets move to conclusion so do all Bull Markets! In fact, the restraining forces will create distortions that when ultimately corrected will lead to even higher prices.

    To me, it doesn't matter whether the gold complex explodes higher today or in August ( I would prefer, however, if it were today!). What matters is that when it finally occurs I will not be left behind, sorry that it did not carry my investments skyward with it. I hope that you are with me when that time arises.

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