GOLD SUFFERS FROM AN INSTANT GRATIFICATION CULTURE

By Dr. Richard S. Appel              May 12, 2005 www.financialinsights.org

In our world of ever-present lotteries, an exploding gambling industry, the recently ended 20+ year equity Bull Market, and constantly rising home prices, Americans have become accustomed, nay addicted, to seeking action. We seem to be attracted, as surely as a moth is to light on a dark night, to fast, readily attained profits. We have become a nation of gamblers who are no longer satisfied with the overworked euphemism, "long-term investor". Yes, everyone seems to believe they are one. Yet, they become impatient with trendless price action or the earliest adversity. We are no longer willing to patiently wait for our profits to accrue. We must have them now, or we will find another game or market in which to play.

Momentum investing has gradually become a dominant element of the investing landscape. It is primarily practiced in the stock market. There, professional and amateur players alike chase after the next market sector that appears to be on the verge of roaring higher in price. Now, it has spread to the housing industry where investors not only purchase dwellings in which they intend to live, but a second, third or even more homes for investment purposes. Money flows into the hottest national markets and pushes their prices further and further into the stratosphere. This, as investors scramble so that they will not miss any virtually guaranteed profits.

This mentality is insidious. Not only does it consume those who are immersed in this endeavor, but it filters through the balance of the investment community. It is as though the quest for fast profits has spread beyond the compulsive gamblers, who are driven by their need to be players, but has also sparked into action the latent gambling instinct in us all.

Is it any wonder that gold's secular Bull Market cannot attract a following? Gold drearily began its Bull Market in the summer of 1999. From its $252 starting point it quickly rallied to about $320, before it again decayed in price. The slow, tedious decline lasted for a year and a half before the noble metal posted a double bottom at $255 in January, 2001. Thus, it began its new bull life with a whimper. Should we have expected the unfolding of its Bull Market to be much different?

After advancing from its $255 low, gold steadily plodded higher. Its rise was frequently punctuated by frightening price reversals. Each new temporary peak was followed by a harrowing brief decline that did not end until its price was10% to 17% lower. Still, every Bull Market high was succeeded within seven months by yet another. Again and again, these sharp set-backs took the breaths away from and panicked the members of the gold community. For the instant gratification crowd it was not a fun time!
The gold stocks were a different story. Here it was far worse! This was painfully true for even those with an authentic long-term perspective, and who possessed the will and courage to follow it. In hindsight, another reason appears obvious why today's typical investor shunned gold stocks. Most of those who invested in the gold sector neither recognized the existence of gold's Bull Market nor understood the reasons and causes for its existence.

The major gold mining companies as seen through the action of the HUI, began their Bull Market during the last quarter of 2000. This was near the thoroughly depressed 35 level. It boggles my mind that despite the fact that it has already struck a high approaching 260, few still believe that a major Bull Market even exists. While each of its three major bull advances drove prices breathtakingly higher, each following grinding, gut-wrenching decline tested the resolve of its investors, and drove the weak-hearted impatient crowd towards the exits.
The HUI's first important high occurred at about 80 in mid-2001. It took about nine months before that level was breached by a new major up-wave. Its next peak at 155 was posted in mid-2002, before a correction set in. In this case, it was not until about fourteen months later that 155 was surpassed. Now, we are entwined is the present installment of the Chinese Water Torture as it is applied to gold stocks. At the end of November, 2003, the HUI nudged 260. From that lofty point it repeatedly fell and grudgingly rose, and is yet to surpass that point. We have been forced to endure eighteen months since that peak, and we still find ourselves with the HUI over eighty points lower. Given the great pain, and the paper and real losses that have been endured by gold stock investors over this extended period, it is doubtful that any but the most resolute gold bugs remain invested in its stocks.

As poorly as investments in the gold producing companies have fared during the past year and a half, those who invested in the junior companies have suffered far worse. The exploration and development companies by their nature are very thinly traded. This exposes them to both wide upward and downward price swings. It is currently not unusual for many of these nascent companies to be trading below 50% of their Bull Market highs. In fact, a large number of these companies have fallen to levels at which they traded when gold sold below $300 an ounce. Investors in these shares truly rode an excited up escalator numerous times during their Bull Market, only to suffer despair each time their stocks spiraled lower.

I believe that few of today's legion of equity investors have a sufficient working knowledge of investing and markets to survive anything but a Bull Market! This prevents them from becoming truly committed to any investment. How can they remain invested in something if its price keeps falling, and the only reason that they purchased it was because some alleged expert or group of experts told them that it was a wise decision? Or worse yet, because they watched its rising price and wanted to jump on the bandwagon in their effort to become one of the momentum pros.

The investment media, that has a vested interest in attracting and keeping money in equities, constantly fills the airwaves with statements like, " we're only in a soft patch", and that common stocks will soon roar higher. Not only is this absent in the precious metals markets, but these same "talking heads" unanimously declare that gold is at best a sterile investment.

I believe that it is to the advantage of all those who believe in gold's Bull Market to recognize and accept the following: it will not be for a few years at minimum that the masses will realize that gold is even in a Bull Market. Yes, there will be trickles of newcomers attracted to each major price advance. Yet, until that time arrives, and the gold price is far higher, we will continue to benefit from the periodic, short-lived rallies in gold and silver. However, we will also be forced to persevere a number of similar sharp or extended price collapses.
For those who invest in the major and junior gold stocks, a different future should be expected. The brief Bull Market explosions in price will be followed by similar long extended corrective periods such as described above. This is when a long vacation should be contemplated using some of the money that was taken off of the table near each intermediate peak.

After all, the action of the gold complex Bull Market is not yet conducive to satisfying the expectations of our instant gratification society. Rest assured, they will ultimately enter gold and its related investments en masse. When they do, it will be time to prepare to sell them your holdings, but at a substantial premium to your cost basis.

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.

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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.