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December 15,
2005 –I for one was taken by surprise with the ease that gold rose
and roared unimpeded through the $500-$510 an ounce level. This range should have
presented extremely strong resistance. Beyond the fact that an important
round number such as $500 nearly always gives pause to any major price rise,
$510 was an earlier formidable area that repelled the eternal metal’s
advances in January, 1983, and again in December, 1987. Yet, despite the
enormous upward rush that unfolded when this major zone was left behind, gold
quickly ran into a wall of selling and once again plunged in price.
From its Bull
Market inception at $252.50 in August, 1999, bullish investors gave been
forced to endure repeated brutal or extended, deteriorating price reversals.
This has prevented all but its most ardent believers from continually riding
the gold bull. As with most major, secular Bull Markets some of these price
declines while relatively brief, were terrifyingly steep. This was due in
part to the rapidity with which the earlier labored price rises often gave
way to seemingly waterfall price collapses.
Gold’s
first major Bull Market price break occurred after its $252.50 nadir spawned
a rapid rise to the mid-$320 range. The upward surge required barely a month
to unfold but then, just as suddenly as it appeared, the wind was knocked
from its sails. An eighteen month grinding decline ensued before a double
bottom was struck at $255, in early 2001.
During the great
gold Bull Market of the1970's, a price downturn such as we are now enduring
would have been quite nerve-wracking for me. However, today, in a way I am
fortunate. This is due to my experience which dates back to the mid-1960's,
when I first recognized gold’s eternal importance to civilized man.
Across the
following forty year period I was a staunch observer of gold’s daily
price action. I was there when the London Gold Pool lost control of the gold
price in1968. This group consisted of
the United States
and seven other major central banks. Their mandate was to maintain gold near
the $35 price on the world’s then major gold market, the London Gold
Exchange. During the time of the Gold Pool’s existence, inflation crept
higher in the economies of the various members, while the gold price was
prevented from expressing itself.
The Pool was
formed in1961. Then as now, they were successful in suppressing the upward
movement in gold until that fortuitous day in March, 1968. I watched when the
market ultimately overwhelmed their efforts, and when investors fell over
themselves and drove gold from $35 to $44.25 in the space of only two trading
days. I was also there when gold collapsed from $200 at the end of December,
1974, to its final $103 low eighteen months later. It took only three and a
half years after that nadir, for gold to touch its $875 an ounce Bull Market
peak.
I guess that
over the years I’ve become somewhat emotionally immune to sharp gold
price reversals. This is due to a few factors. First, I am convinced that
gold is in a secular Bull Market that is destined to eventually leave its1980
peak of $875 far behind. This belief is reinforced by the fashion in which
our government and Fed appear hell-bent upon preventing even a modest
recession from developing. In fact, I believe that this desire is a major
reason for Dr. Benjamin Bernanke’s rapid ascent from virtual obscurity,
to his likely seat as Federal Reserve Board Chairman. If he performs in the
fashion that he has stated, he will be responsible for creating an even
greater flood of inflationary purchasing media, than for which even Alan
Greenspan can be credited.
Despite the fact
that the general public and the majority of noted financial experts do not
understand the relationship, gold’s destiny is sealed. As an
unprecedented number of dollar credits are created to fund our unsustainable
Federal, and balance of payments and trade deficits, knowledgeable buyers
will increasingly acquire the yellow metal, and move it higher in price. They
will realize that the future loss of the dollar’s purchasing power will
affect gold as it has throughout history. It will drive people into the
metal, as a drowning person lunges for a life raft. Those who purchase gold
will do so in their desire to maintain the purchasing power of their wealth.
The swimmer, to save his life.
Another primary
reason why the current gold price reversal has not affected me as it would
have in the past, is that it seems “like deja vu all over again”.
I’ve lived through all of the similar declines during the gold bull of
the 1970's, as well as those that occurred during its 1985-1987, and
1993-1996 Bear Market rallies.
It may be
difficult to accept but corrections are important for the gold Bull Market!
It is normal for downdrafts during Bull Markets to be quite severe. In fact,
they often appear to be more intense than most Bear Market down-legs. These
secondary corrections act to frighten the weak holders out of the market. In
this fashion they cleanse the market. After the tentative investors have
jettisoned their positions, the market is then prepared to resume its skyward
price assault.
I began
anticipating this correction when gold ignored the resistance that should
have appeared between $500 and $510 an ounce, and rocketed higher in price.
Yet, I wondered from what price level it would occur. When gold did not
hesitate, and immediately broke through the $500-$510 area, I sensed that the
buyers and trapped short-sellers had panicked. With some trepidation, I was
uncertain if this zone would be left untested, by a downward leg, as gold
extended its upward climb. I was concerned because I felt that the upswing
was too sharp to be sustainable, and feared that the higher the yellow metal
went without a correction, the more severe would be its decline when it
arrived.
In the December issue of Financial
Insights with gold at $495.90, I wrote regarding the $500-$510
range, “Importantly, to my mind, any show of substantial near-term
strength from this level should be viewed as a change in the tone of the
market. It will indicate that far greater demand, if not panic, abounds for
the eternal metal”. I went on and said, “The road ahead will
similarly be fraught with periodic, sharp price declines as gold works its
way higher in price. If you anticipate their appearance as I do, your life
will be far less stressful”.
It is amazing how quickly the lust for the precious metal was replaced
by outright fear!
It is crucial
for all Bull Markets to periodically decline in price! These retracements
allow the temporary excesses that have built up to work themselves off. It
can be likened to pressure building up in a sealed pressure cooker. If the
increasing energy is not allowed to escape, the pot will ultimately explode.
Similarly, if a market moves in a parabolic fashion, traveling unchallenged
higher in price, when investors finally cease buying, a price collapse will ensue.
To my mind while it is terrifying, and fraught with temporary paper losses,
the current sharp decline will be remembered as nothing more than a normal
correction within gold’s multi-year Bull Market. Further, as hard as
it may be to believe while we are in the midst of this reversal, it is truly
healthy for the market.
I believe that
gold’s present plunging price is setting the stage for a major
extension of it’s Bull Market! When it ends, and gold resumes its
northward advance, it will be reviewed as having firmly established $500 as a
major support area. This will be critical to the market because it will
change the perceptions of it’s players. For stock investors it will
make them consider revaluing the worth of the ore reserves, and profit potential,
of their companies to that price. I am confident that it will spark a major
broad-based advance when this realization begins to permeate the market. For
gold investors it will foster greater confidence. They will view their
downside risk in a less frightening light. As with the stocks, it will become
the impetus for a major gold advance.
It will be
informative to observe the action of the major gold stocks as viewed through
the HUI or XAU during this gold set-back. It is likely that they will bottom before
the gold price! In fact, they may actually begin an uptrend while gold still
languishes or even continues to fall. This scenario has often transpired at
major turning points in the gold universe. If it again occurs it will confirm
that a gold bottom is in place.
In sum, I view
the present gold decline as simply a frightening episode in gold’s
secular Bull Market. I believe that the odds greatly favor gold exhausting
its decline at or near the $500 level. While it may temporarily break below
that point, it will likely be for only a brief period.
As an aside,
when I was placing the finishing touches on this piece I remembered that I
had earlier used a similar title. I published an essay on June 17, 2005, describing my
belief that the anguish that gold stock investors had endured was about to
end. The HUI was trading at about 200 at the time. It essentially traded sideways
for the next two months before heading skyward. I could just as well have
been describing the gold market in that missive. Gold was near the end of a
decline that took it from $456 to a low of about $413. The yellow metal moved
slightly higher. It then briefly declined to retest the $413 level but failed
to penetrate it, and the rest is history. Deja vu again!
By : Dr. Richard S. Appel
www.financialinsights.org
The above was excerpted from the December 2005 issue of Financial
Insights © November 27, 2005.
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
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