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THE BEGINNING OF THE END

 

By Dr. Richard S. Appel             Printer Friendly Version

May 13, 2004

www.financialinsights.org

Many painful questions and feelings have gone through the minds and hearts of those who have invested in gold, silver and gold and silver stocks during their current price declines. In the space of but a few short weeks, long-time holders of these investments have watched in awe as their substantial paper profits quickly vanished. This was far worse for those who recently entered the precious metals arena. For they have sustained great, real losses. With the United States slated to generate massive budget deficits for as far as the eye can see, isn’t inflation virtually assured? Won’t the dollars created by the stroke of a key to fund these deficits also cause the dollar’s purchasing power to resume its sharp decline on international markets? Will not these guaranteed events fan the flames of domestic inflation?


Gold and silver have already touched lows that are about 14% and 35% respectively below its recent peaks. The HUI has similarly declined by as much as 35% from its high, while most of the junior exploration companies are trading at about 50% or less of their December to January high points. When will the blood-letting end? Or, as many of the precious metals non-believers are saying, have their Bull Markets really ended and, have we only experienced the early stages of what may yet become devastating losses? These are but a few of the questions that those who understand the significance of gold are pondering, both in private and aloud.


Corrections counter to the primary trend are part of all markets whether bull or bear. However, the magnitude of the recent declines in these investments, especially in the case of silver, have both shocked and frightened their followers to their very core. Yes, silver went nearly parabolic when it rose from under $5.00 to $8.50 in less than six months. Is it destined to continue its plunge and ultimately fall below its sub-$5.00 take-off point, as it did in 1997, when Warren Buffet announced that he had acquired millions of ounces of the white metal?


It is true that the shares of the major gold producers had gotten ahead of themselves given the rise in the gold price. Further, the vast majority of the junior explorers had traded at values that approached what they would be worth if they had already discovered their pots of gold. These are all conditions that existed since the end of 2003, and should have served as a warning. But few, including myself, actually listened. We all knew that gold was heading substantially higher, but our timing was dead wrong. Our greed got in the way! This created a condition where the markets had overextended themselves and were thus ripe for a more fierce and violent decline than should have been the case.


Are the bears correct that the precious metals complex has taken its last breath, and that gold will return to its Bull Market low of $252, or even go lower? Will the gold and silver stocks decline 50%, 100%, or more in that event? Or, if this is only a correction, is it still in its infancy and are we still fated to experience sharply lower prices across the precious metals sector? On all counts, I think not.


I have been involved in the gold and silver markets since the early 1960's. During this time I have experienced all of the ups and downs that accompanied their great Bull Markets in the 1970's, as well as their long Bear Markets that began in 1980, and finally ended nearly twenty years later. Through this entire period I enjoyed and profited from their rises, and suffered during each decline. And I’ll let you in on a secret. While the recent market declines have been quite severe to date, and will likely fall somewhat further, they have not been extraordinary to the world of gold.


You may have heard the adage that, “there’s no fever like gold fever”. This has typically caused gold, silver and their shares to become temporarily overvalued during most up-legs. And, in turn, this has led to more severe short-term corrections than typically accompany other markets. These have acted to reverse the periods of overvaluation and allowed a resumption of the advances from stronger bases and reasonable valuations. I am confident that this time, it is not different!


I believe that we are witnessing the beginning of the end of this down-leg in the precious metals and their shares. I can’t even refer to this as a major correction. I am certain that one lies somewhere ahead, but I believe that it will occur from far higher levels. During gold’s 1970's Bull Market the yellow metal sustained an incredible collapse from $200 to $103. This took about eighteen months to unfold. Yet, from its1976 nadir, gold reasserted its upward trend and fulfilled its $875 an ounce destiny.


I believe that gold is now probing for a low. Further, I would be surprised if it falls below the $350-$355 range, which should offer great support. If this correction is fated to be similar to its 2003 price reversal, a similar percentage decline in the noble metal would find it in this zone. The major gold stocks, as measured by the HUI, should experience similar important resistance to decline if it should fall to the 150 to 155 area. I would not be surprised if both of these areas are first tested, and possibly briefly penetrated, before the final lows are posted for this decline. The junior exploration companies on the other hand may have a different fate.


The majority of the junior companies have retreated about 50% or more from their recent highs. They are at a greater risk than their senior counterparts. If gold languishes at or below its current price level it is likely that these small stocks will drift lower into the summer months, as will their trading volumes. This is the typical price action for this market, during gold Bull Market secondary corrections.


I for one will be carefully observing how the juniors fare if gold builds a base for more than a short period after posting its final low. It is likely that the make-up of the gold investment community has changed. Today we have a far greater percentage of investing Americans. Further, they have become convinced that they are knowledgeable due to their earlier common stock Bull Market success. Additionally, many of these investors believe themselves to be traders. During earlier times, those who invested in gold, silver and their stocks firmly believed that gold represented real money. They invested in this sector as a safe haven, when they felt that our nation was damaging the integrity of the dollar. They primarily did this in order to preserve their wealth. For these reasons the make-up of the gold complex investor base, is far different than it was in the past.


A significant percentage of people view gold as a momentum play or as a short term trading vehicle. We already know that they have little commitment to gold and will run at the first sign of adversity. It will be instructive how the exploration stocks perform if gold forms an extended base before it resumes its upward movement. In this event, I would expect them to drift lower as they have in the past, due to a lack of interest. However, if these new players appear as bottom fishers, they may generate demand that heretofore did not exist, and may act to actually support the junior shares.


The exploration market is driven by excitement! This has typically resulted from either a major discovery or from a gold Bull Market. Barring an external event, such as an important metal discovery, an escalation of the War in Iraq, a major terrorist act, or from some other positive gold driving occurrence, it is likely that these companies will perform in a similar fashion as they earlier have. Further, they are approaching a period known as the “summer doldrums” when prices typically soften.


I do believe that the majority of the damage has already occurred to these nascent companies. The stocks that will likely suffer the worst from this point are those which remain overvalued. I am confident that when the dust clears, the majority of juniors will offer attractive prices relative to their perceived value, and the stage will be set for their next major upward advance..


All of these markets have sustained serious internal damage which should take at least a few months to repair. The bulls must first overcome their fear of further declines. They must then reassess their premises regarding gold’s future, and regain confidence that gold remains in a secular Bull Market. Then, they must observe the resumption of price advances across the gold and silver spectrum. This will embolden them to reenter the markets. In the gold stock sector, if history is a guide, the gold producing companies will first move higher. This will later be followed by the exploration companies. All of these conditions will likely have to first unfold before the gold Bull Market enters its next sustained advance which allows gold to test the $500 level. For those who are considering making bargain basement purchases, the time is approaching, but is not yet here.


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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.

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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

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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. © 2004 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..