The Next Major Stop for Gold, $875

By Dr. Richard S. Appel              February 3, 2006 www.financialinsights.org

Before you dismiss this prediction as either hype, poor judgment or the misguided forecast of an aging, overzealous, and perennial believer that the importance of gold’s discipline to mankind will outlive us all, please bear with me for at least the next few paragraphs. First, I am not saying that this event is imminent. Yes, I do believe that there is at least a 40% to 50% probability that it will occur by year-end 2006, and an 80% to 90% chance that it will appear before the year 2007 ends. However, even if I am wrong, my hope is to present the reader with historical information and my insights, that will help him understand my reasoning for this call. In this fashion, you can decide for yourself whether I am either totally out to lunch, or on the mark, as we both watch the market as it either proves or disproves my thesis.

I remember sitting in my stockbroker Rusty’s office in either late January or early February, 1980. On one fateful afternoon I watched while gold, I believe that it was for the spot month, ticked $875 on the New York Commodity Exchange. At about the same time I observed in awe as silver posted its peak price of $52.50. As we all know, those were the prices that marked the highest Comex levels of the greatest Bull Markets in the history of both metals.

From those dizzying heights the yellow and white metals entered what were to become Bear Markets that spanned two decades. Most of those who rode the great gold Bull Market from its inception in1972, could not have dreamed that the party was over, but it was! In fact, we would have never believed when gold rolled over, that its fate was to eventually plumb successive new lows at $283 in1985 and, finally after offering periods of hope over the ensuing years, $252.50 in 1999.

I believed as long ago as the early 1970's, that our economy could not withstand the monetary inflation that our nation was fostering. I felt by the mid-1970's, and certainly by the end of that decade, that hyperinflation would ensue and engender an economic accident of epic proportions. The end result, I assumed, would bring our economy to its knees. Was I ever wrong! I was incapable of comprehending the ingenuity, resourcefulness and brilliance of those who guided our leaders, and who were the invisible hands behind our economic and financial world.

Instead, our great nation’s economy stumbled along for a time, overcame the 20% high interest rates that appeared at the end of that era, but inevitably regrouped. Gold and silver became tame as they entered prolonged Bear Markets, and our leaders had a respite in their fight to keep the American economy moving forward.

During the following nearly two decades, gold traded in a range that was defined by $252.50 and about $515 an ounce. Its final $252.50 low, struck in August, 1999, began the end of a frightening era when most of those who recognized that gold represented “real money”, deeply questioned their beliefs. We couldn’t understand gold’s continuing weakness, but were thankful that our country had been pulled from the edge of the precipice. Further, until later, we couldn’t fathom the full depth of the driving forces that seemed to us to miraculously support our economy.

In retrospect, and with the knowledge that only observation and experience can bestow, we arrive at the year 2006, and somewhat understand. That is, that our country was blessed with among mankind’s brightest minds. They devised methods that allowed America to continue to lead the world. Unfortunately, despite the fact that they were able to forestall the appearance of the “Grim Reaper” they too are only mortals, and are likely running out of new methods to maintain the status quo.

The events that drove gold to $875 also engendered a U.S. inflation rate that topped 15% on an annualized basis. These unprecedented outcomes stemmed from an extended period of abusive monetary creation when our leaders acted to keep the good times rolling. They first extricated us from the 1974-1975 recession. Later, they reversed the mid-1980 and 1982 recessions. Then, in the late1980's they sidestepped a Savings and Loan disaster, and in 1998, a potential financial calamity when Long Term Capital Management imploded. It is likely that the recent, hastened but calm dissolution of Refco Inc. was also their doing. Unfortunately, the effects of the continual flood of newly created dollars needed to foster these events, are finally coming home to roost!

The reason why I anticipate that the next major target for gold is $875 is simple. Among other reasons, it is due to two primary factors. The first is that there are no major areas of resistance between the $500 to $515 range and that point. The other is that conditions have coalesced that I believe will drive the eternal metal to that level if not higher, before a major bearish assault can be mustered.

When gold collapsed from its1980, $875 Bull Market peak, the first area offering major support was in the mid-$450 area. This occurred in the spring of 1980. From there it sharply rallied and briefly touched the $725 zone. However, by fall of the same year, it again plummeted and broke through its earlier low, as it began to probe the depths of its Bear Market. Talk about volatility! It finally struck a major, intermediate bottom in the low $290's. This was posted in the summer of 1982. .

In early 1983, the noble metal strongly rallied and marginally surpassed $500 before its advance was rebuffed at about $515. The bear again took control and drove it to a new, long-term $283 low in the first months of 1985.

From that intermediate bottom it later strongly rose. Once again, in late1987, the $510 zone acted to repel any further bullish tendencies, and gold acquiesced and began its terminal decline in search of its final Bear Market nadir. Thus, the $500 to $515 range became a line in the sand that was not to again be surpassed for nearly two decades.

I have detailed much of the downward path that gold followed during its great, two-decade Bear Market. I have shown until recently, how the $500-515 zone stonewalled two major bullish advances.

This is not surprising because round numbers are prime areas where investors choose to take a stand. They either make up their minds to exit or enter major positions at these numbers. And, $500 is one of the most important prices where these psychologically supported decisions are executed.

Now that the important $500 mark appears to have been decidedly left in its wake, I now believe that technically, only $725 should offer any important resistance between today’s prices and gold’s1980 bull top. Of course other price levels should develop where the bears and profit-takers will enter the market and temporarily impede its advance. However, now that $500 to $515 has been resolutely overcome, I am confident that it is only a matter of time before the eternal metal posts a new, all-time high.

THE REASONS WHY GOLD IS MOVING HIGHER IN PRICE

There are a number of factors that I believe will propel gold to at least its historical high in this up-wave. Among them, the major gold producers have either ended or reversed their hedging practices, or are in the process of so doing. This was likely the primary reason that drove gold to its incredibly oversold and undervalued $252.50 Bear Market low. Now, not only are they selling less gold into the market, they may be actually purchasing it to offset their earlier hedged sales. Further, annual gold production vs. consumption is in deficit, and global production is on the decline. The world is now annually consuming about 1,000 more tonnes of gold than its gold miners can produce. Further, it has been projected that newly mined gold production will not begin to increase until about 2010 at the earliest.

The decades-long weak gold price acted to drastically reduce gold exploration. Importantly, it requires between five and seven years, if conditions are just right, to bring a major discovery into production. And, major world-wide gold exploration only again began in earnest a few years ago.

Throughout the centuries, the penultimate allure of gold to the average citizen was that it protected him from the indiscretions of his rulers. Whenever a government deviated from completely backing their money with something of value, the contrived monetary unit lost purchasing power and ultimately became worthless or nearly so, before it was replaced with a newly named piece of paper. This was because governments have historically been poor preservers of the value of their currencies! They have always found “good reasons” to consistently overspend their budgets.

In every instance they terminally damaged their monetary unit, and an inflationary event was elicited! These acted to decimate the purchasing power of every government issued fiat currency, and often the lives of their citizens in the process. This is the history from which the old French saying arose that, “even the poorest French peasant has hidden gold under his mattress”. Too many times his leaders let him down. Too many times his government issued paper currencies became worthless!

The next fundamental reason underlying gold’s unfolding Bull Market, is that we are in the process of experiencing an unprecedented increase in the U.S. money supply. This began in early 1994. However, since Dr. Benjamin Bernanke was nominated to replace Alan Greenspan it has literally exploded, and is now rising off the chart. Further, the world has been informed that after March 23, the United States’ broadest measure of our monetary aggregates, M3, will no longer be reported.

It doesn’t take much imagination to arrive at the obvious reason behind its elimination, after a century of its weekly reporting. After all, Dr. Bernanke has already given the world ample insight into how he will act when he assumes the role of Federal Reserve Chairman. He is on record by stating his belief that creating a sufficient amount of money can keep our economy afloat. In fact, he even listed a number of new, creative methods that he could use to produce the needed dollar credits if necessary.

Another primary reason that gold has begun to soar, is that it recently struck new Bull Market highs in all of the major world currencies. This attracted added attention and purchases from around the globe, for technical and other reasons. It is signaling to all those individuals who are astute and open-minded enough to take notice, that a mass exodus from all of the major currencies has begun! It is telling them that other thinking people finally recognize that all nations are in the process of damaging the purchasing power of their monetary units. This is where gold shines, and why panic appears to have consumed those who are desperately trying to enter the gold market to protect themselves!

I feel that Dr. Bernenke’s assuming the helm at the Fed and gold breaking out in all of the major currencies, are the two reasons underlying the recent change in character in the gold market. They are responsible for its renewed, sharp, upward ascent!

Despite the fact that the average American has been convinced that there is nothing wrong with unsustainable budget and trade deficits, and that the world will forever accept dollar credits as fast as we can produce them, many of the globe’s citizens are beginning to recognize that there are limits. The smart money is finally beginning to protect itself by buying gold! This includes among others, the Russians, the Chinese, the South Koreans and of course those residing in India who never doubted gold’s importance.

The final event that will drive gold to attack its all-time $875 high is a resumption of the dollar’s Bear Market. The U.S. dollar appears to be weakening. The massive purchases of dollars that was fostered by a “one time” reduction in taxes has ended. For those who are not aware, our government gave international U.S. enterprises the opportunity to repatriate profits that were earned abroad, in return for a reduction in taxes to as little as 5%.

The catch was that they had to bring their untaxed, global profits into the U.S. by December 31, 2005. Further, since most of these profits were retained in the currencies in which they were earned, they first had to be converted into dollars. This entailed the sale of various hoards of foreign currencies and the massive forced purchase of U.S. dollars, and acted to drive up its international value. I have heard that the total dollar amount may have approached or exceeded $500 billion! And, this primarily occurred in the latter months of the recently ended year.

I believe that this brilliantly conceived incentive was a major influence underlying the dollar’s 2005 strength, but its effect has now waned. Without it, it is questionable if the dollar’s uptrend is sustainable. If my analysis is correct, gold’s ascent will accelerate when the dollar’s Bear Market resumes its downward trek.

The noble metal acted as a safe-haven whenever a nation’s sovereignty was at risk. Further, gold is something that was forever coveted by man. This was because it worked! Throughout history, it was the common man’s best preserver of his wealth. It has been the sole item that has ALWAYS retained its value through good times and especially during the bad ones. This time, it will not be different! As difficult as it may be to believe, gold at $875 is a far easier call than are most market plays. All that is needed to recognize this “truth”, is to be open-minded and believe what you see transpiring around you, and not what you hear and read via the media, and espoused by the parade of so-called experts. I hope that this will help you better understand why gold is going far higher, and the heretofore almighty dollar far lower.

******

The above was excerpted from the February 2006 issue of Financial Insights © January 29, 2006.

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 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. © 2006 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.