It's Always Darkest Before The Dawn

By Dr. Richard S. Appel              December 15, 2005 www.financialinsights.org

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 have 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!

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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.

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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. © 2005 by Dr. Richard S. Appel. All rights are reserved. Parts of the above may be reproduced in context, for inclusion in other publications if the publisher's name and address are also included for credit.