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March 31, 2006
– Across the past several years gold’s price
has risen from its $252.50 nadir to a recent $572 high.
Yet, despite the fact that it has more than doubled in price,
few individuals or investors truly recognize that its Bull
Market even exists.
Since 1999, the eternal metal has plodded
ever higher. It experienced both excited sharp advances
and frightening declines. Violent upwaves were often followed
by price reversals that tested the mettle of the steadfast
gold-bugs. Some were thrown from the bull’s back,
but numerous others could not be shaken from the market.
For those who trusted their judgment and understood the
underlying fundamentals driving gold’s unrelenting
ascent, the recognition of the truth helped sustain their
determination and kept them invested.
It is common for secular Bull Markets to
be accompanied by not only skepticism but also by fear and
disbelief. Despite the fact that substantial profits accrued
to those who early understood that gold was destined to
be propelled far higher in price, the average person still
can not fathom gold’s destiny. While it seemed obvious
to a few, the reality remained elusive to the average man.
For good or for bad, it could not have been any other way.
For, historically, it is not until the final stages of any
Bull Market that the public enters and drives the market
price to dizzying heights that culminate in final tops.
I penned an article, “So
Few Believe” in November, 2003, that I hoped would
help investors recognize that gold was indeed in a primary
Bull Market. Just as today, I attempted to share my insights
with those who would follow my reasoning with an open mind.
I tried to educate the reader so that he would recognize
that gold’s fate was sealed.
Not much has changed since 2003, regarding
the public’s awareness of the yellow metal’s
secular Bull Market. They still remain unaware and are likely
to continue until the final bull stage.
The primary reason underpinning gold’s
Bull Market is fostered by the actions of our government.
Our nation has been moving along a path where our Fed and
government’s actions have undermined not only the
present but the future value of the dollar. This is due
to the ongoing policies which if anything have become more
damaging and progressive, thus predetermining gold’s
destiny. That is, to trend higher for the foreseeable future
as it responds to the flood of inflationary dollars that
our Federal Reserve and government continues to produce.
The purchasing power and exchange value of
currencies, that are only backed by faith in the integrity
of the issuing government, is primarily determined by supply
and demand. If the rulers of a country expand their supply
of money in excess of the increase in goods and services
offered on their markets, they cheapen the worth of the
already circulating currency. Similarly, if a country inflates
its monetary aggregates, their unit’s ability to purchase
other currencies diminishes.
In both cases this reduces the amount of
things that their money can purchase. In the nation itself
the cost of goods and services will be driven higher by
the increased number of monetary units available to bid
for them. On the currency exchanges, they will purchase
fewer units of the legal tender of other countries as the
sellers of the over-issued money overwhelm other currency
offerings.
This is where gold shines. It prevents governments
from an excessive creation of paper, or now electronic,
money. Under the discipline of gold a governing body cannot
create more of their monetary units than they have gold
to back them. This is the beauty of gold! It disciplines
governing officials and forces them to live within their
budgets. They cannot summarily issue money to pay for their
overspending without suffering the consequences.
Gold has been the only item that mankind
has always desired and repeatedly recognized as true money.
From the beginning of civilization it was the sole item
that has endured the test of time, and offered civilized
man a benchmark of value.
Originally, governments tied their money
to gold. They included precious metal in their coinage to
foster confidence. It was truly the sole substance that
was both coveted and universally accepted as something of
eternal value. From peasants to emperors, gold represented
lasting wealth. After all, it always required long hours
of arduous sweat and labor to recover a small quantity of
the lustrous metal from the bowels of the earth. Further,
it was something that could not be duplicated. These were
among the reasons why gold entered the world’s monetary
system.
However, I must wonder if the primary reason
for its desirability was that it kept their governments
honest. It prevented politicians from debasing their money
by issuing greater amounts of monetary units beyond the
quantity of gold that they possessed to back them.
Most Investors Have Difficulty Understanding
Gold or the Markets
In the U.S. the media compares gold with
copper and pork bellies. They discuss its value as they
would any commodity. We are frequently told that “gold
is too volatile” to be a sound investment. This, despite
the fact that it has lagged behind the price rises of most
metals. We are bombarded by negative gold statements. Further,
not only our officials but the press, espouse the belief
that neither our budget nor our balance of payments deficits
matter. Decades ago, similar domestic bureaucrats also told
us that budget deficits don’t matter. For those who
remember they said, “because we owe it to ourselves”.
However, the truth is that they do matter! If they aren’t
eliminated the dollar credits that must be created to fund
the overspending, will eventually destroy the dollar’s
purchasing power, our bonds, and potentially our economy.
This occurred in the late 1970's. Inflation rose well into
the double digits, interest rates hit 20%, American business
markedly slowed and, not surprisingly, gold touched $875
an ounce.
Yet, in part I must acknowledge that they
are correct, at least in the short term. As long as our
citizens allow the deficits to build, and the rest of the
world remain deceived and continue to accept our paper and
electronically created dollars for their products, it truly
doesn’t matter. Unfortunately, the time is moving
ever nearer when this will change.
In fact, we are beginning to hear the first
rumblings of a move away from the dollar. Numerous countries
are starting to shy away from the greenback. Japan, China,
Russia, and a number of other nations are making efforts
to reduce their dollar accumulations. China seems to be
at the forefront by seeking assets for which they can trade
their massive U.S. currency holdings. Additionally, Iran
is attempting to launch a euro based market for oil. If
this comes to pass, whether in Iran or another nation, the
world’s need for dollars will enter a waterfall decline.
For the dollar to remain relatively strong it will require
further American ingenuity. Our government will have to
create new reasons to convince the rest of the world to
continue holding dollars.
Most Americans are ill prepared to recognize
the importance of gold, or to even fathom the complexities
of the financial and economic world. Mathematics is one
of the primary building blocks that is necessary to understand
the intricacies of the financial universe.
In our youth most of us had our first introduction
to this discipline in the classroom. When I went to elementary
school I had one teacher. She taught us a number of different
subjects during the school day. She did it all.
Math is in and of itself a subject that can
be quite intimidating. In fact, many of us were taught by
teachers who themselves were uncomfortable with the topic.
I am certain that they did their best. But in the case of
those in my generation it is likely that numerous educators
inadvertently instilled their hesitation if not fear of
the subject into their students. Is it any wonder why numerous
highly intelligent individuals continue to shy away from
anything mathematic. If this is the case, how can they possibly
have a full command of what occurs in the financial realm.
Thus, they are forced to rely upon the media or alleged
experts who themselves may have their own agendas, present
misinformation, or know little more than do they.
Today, the gold market is experiencing yet
another correction within what I believe will prove to be
its greatest Bull Market. It has probed the $530-$535 level
from where it arose unscathed, and is now within striking
distance of its bull high. While its $534 low may prove
to be the point from which it will continue to trend higher,
I feel that further backing and filling and possible lower
levels should not be ruled out.
Gold’s 200 day moving average is $486.42 and its 50
day one is $554.97. At Friday’s $556.75 London second
fix, the yellow metal again tentatively moved above its
50 day average, while it continues to trade far above its
200 day line. This indicates that it remains in an overbought
condition. To my mind it would be healthy for its market
to work off this condition. If gold trades in its current
range or even probes yet a lower zone, it will build a strong
base from where it can initiate its next substantial advance.
They Likely Won't Beleive for Quite some
Time
Given the virtually universal refusal to
even consider that the eternal metal is in a Bull Market,
it seems to me that it may take quite a while before the
masses first begin to view gold differently. It may not
be until far later in it’s bullish ascent that the
average person begins acquiring the yellow metal. This will
likely result when the dollar is far lower on international
markets, inflation is patently obvious to everyone, and
the government’s statistics will become widely questioned.
Only then will gold be sought by the man in the street.
Until that time, the average American will neither understand
or believe.
Do not despair. For when they do we will likely
witness a massive price rise that will bring back memories
of late 1979 and early1980.That was when gold rose from
the $400 range to $875 in less than six months. You had
to be there to believe it! And, perhaps you will have another
similar opportunity before this gold bull takes his last
breath. It will only be then when they will believe, but
prices will be far higher. In fact, the final explosive
advance will be created by a late-coming panicked public,
just as it was in gold’s 1970's Bull Market. And,
I hope that we will both be sufficiently perceptive to sell
them our holdings when the world once again clamors for
the eternal metal.
******
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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.
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.
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