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
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
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
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
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.
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
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.
© 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..