IS GOLD FATED FOR AN OCTOBER SELL-OFF?
The gold market appears to have past its low
and has been consolidating in the $400 area. This has been
accompanied by similar price action in the shares of the stocks
that either mine or explore for it. From experience, as long-term
followers of the yellow metal recognize, we have entered what
has been historically the annual best few months for gold.
Thus, if history is a guide the odds highly favor an advance
from current levels. So why am I concerned?
A major confluence of events has occurred that is extremely
bullish for the gold universe. Some of these have been in
place for a time but others have recently emerged. According
to the World Gold Council's statistics, for over two decades
mine production has seriously lagged that needed to satisfy
gold's increasing demand, and the gap is widening. This has
strained the available above ground scrap, investor dis-hoarding,
and central bank sales that have heretofore made up for the
shortfall. In fact, this year's anticipated gold mine production
of 2,500-2,600 tonnes will be outstripped by over 3,300 tonnes
of demand. Importantly, for the next few years at minimum
this deficit is destined to worsen. This is due to the fact
that gold production will decline faster than new mine output
is expected to come on stream.
Further, if those at GATA (Gold Antitrust Action Committee;
gata.org) are even reasonably close to being accurate in their
assessment, the major central banks have little remaining
gold with which they can, or will, willingly part; they are
basically scraping the bottom of the proverbial barrel. Additionally,
the major gold producers have become buyers of the metal in
order to reduced or eliminated their earlier hedges. This
in their haste to prevent additional losses generated by the
rising gold market.
Addressing this issue, producer hedging poured an additional
tens of millions of ounces of gold onto the market for over
a decade and a half. Had this not occurred gold would not
have fallen to the depths of its $252 nadir in August, 1999,
and the noble metal would be trading at far higher than today's
price. However, I remain confident that the reversal of this
process will instead act to drive gold higher in price, as
the major gold miners are forced to reduce their net supply
to the market as they offset their hedges.
Recently, Argentina announced that they purchased 42 tonnes
of gold during the first six months of this year. This may
be a prelude to similar actions by other nations. Also, several
months prior to the requisite time for their announcement,
the 15 nations involved in the 1999 Washington Agreement stated
that they would renew their accord. They agreed to restrict
their combined annual sales to 500 tonnes over the next five
years and would limit their gold leasing. Recent rumors have
it that this number may not be reached.
Still another event that is beneficial for the gold price
involves Switzerland. If you will recall, after the announcement
of the 1999 Washington accord, that country began dis-hoarding
1200 tonnes from its long held and earlier coveted gold reserve.
The Swiss carried out their plan at a rate of about 25 tonnes
per month. They are now approaching their stated goal and
will soon cease these sales. As with the actions of Switzerland,
the above events will all exert a positive impact upon an
already tight gold market.
Only last week, Russia's president Vladimir Putin appears
to have given his citizenry a major reason to rush into gold.
He recently abolished elections for governors, and eliminated
local elections for individual members of parliament. This
is tantamount to announcing his dictatorship and will threaten
the great strides that his nation has achieved in their apparent
fleeting quest for individual freedom. I believe that this
event will frighten numerous Russians and will drive them
into gold for what they will view as their financial survival.
In addition to the above items that will positively influence
the gold market are the ballooning domestic money supply,
the ongoing massive U.S. Federal deficits, as well as our
unsustainable balance of payments deficits. The latter is
highlighted by the horrendous second quarter $166.2 billion
current account deficit. This is fast approaching 6% of GDP
which history has proved to be unsustainable. Whenever a country
neared that point its currency suffered a significant depreciation
against those of other nations. It is likely that the U.S.
will be capable of driving our deficit/GDP equation to a record
high level. This is due to the dollar's world reserve currency
status. However, at some point the first nation state will
refuse to accept our dollar, and other countries will follow
suit. It is only a matter of time.
The combination of the burgeoning money supply with the record
fiscal and current account deficits will act to reduce the
dollar's purchasing power as well as its desirability. This
will ultimately translate into its worth declining domestically
as well as on the world's currency exchanges. To my mind,
the effect of an exploding money supply occurring simultaneously
with both budget and current account deficits, adds up to
the underpinnings capable of alone supporting a major secular
gold Bull Market.
If I am correct, the gold Bull Market is destined to take
the breath away from not only today's skeptics but also from
most true gold believers. So why worry about the future, and
especially the month of October, if everything now appears
to be aligned on the side of a rising gold market?
All long-term and even recent first-time gold investors have
already endured various "tests of fire". The longer
that one has invested in gold the greater the number that
had to be survived. We all suffer from deep and some from
possibly irreversible scars. All of this is due to the repeated
setbacks that periodically occurred within the 1970's Bull
Market, through the Bear Market rallies from1980 through1999,
as well as from those secondary price declines that we have
sustained during the present Bull Market.
I want to stress this point so that you do not forget that
all gold up-trends will be punctuated by declines, and some
of these will be quite harrowing! This is the reason that
patience and a long-term perspective must be stringently adhered
to in order to profit, nay survive, while gold works its way
to its peak over the next number of years.
Fast approaching October is the month that the International
Monetary Fund has its annual meeting. If their upcoming affair
is similar to a number that transpired during the1970's, we
may have to live through yet another temporary set-back in
the yellow metal's rise, despite its golden future.
THE 1970's REVISITED AND
A POSSIBLE GLIMPSE INTO OUR FUTURE
The 1970's witnessed gold rise from $35 in 1971, to its $875
peak in early 1980. These overall exciting and profitable
times were also accompanied by some frightening price declines
that produced devastating paper and real losses. They accrued
primarily to those investors who did not essentially buy and
hold their gold investments through the Bull Market! It is
true that there were a number of adept traders who greatly
profited. A few even far outperformed those that maintained
their gold and gold share positions throughout gold's great
advance. However, the vast majority of traders who attempted
to time the market were severely damaged when gold often reversed
course. They were either left in the lurch when gold rose,
or they sold out near an important bottom after gold had collapsed
It would not surprise me if there was a major correction
within the next year or two. This could take gold down 30%,
40%, or even 50% from its highs. Something similar to this
occurred when gold touched $200 an ounce in December, 1974.
It later posted a $103 low a year and a half later. I believe
that it is prudent to sell a small portion of your holdings
into all strong advances with the knowledge that a correction
will eventually occur. In this fashion you will have some
capital available with which to acquire the great bargains
that will appear at the inevitable bottom. If I am correct
and a substantial correction is fated to occur before gold's
Bull Market finally crests, you will be happy that you did.
Even if you ride out all of the set-backs, take heart! Remember,
after striking $103, gold then resumed its Bull Market and
peaked at $875. If an investor had held through that entire
nearly 50% decline, he still could have quadrupled his money
at gold's final top.
My concern about an October gold reaction revolves around
at least three difficult periods that gold bugs encountered
during the1970's gold Bull Market. These resulted from statements
emanating from the annual Fall IMF meetings. In each instance,
coinciding with the conclusion of these gatherings, were announcements
that were extremely gold negative. They each generated short-lived
but sharp sell-offs across the various gold markets. Given
recent events, I have begun to wonder if we are again destined
to endure another similar time.
Among the reasons that cause me to view the upcoming IMF
meeting with a wary eye, is the early announcement of the
continuance of the Washington Agreement. The March statement
by the members of the accord was a full six months before
it was due to expire. Given the fact that the premature extension
dispelled a major concern overhanging the gold market, it
acted to strengthen its price.
The timing of this announcement was quite startling to me
after having observed the actions of the various central banks
through their decades long battle against gold. I do not recall
another event sponsored by them that was as positive for gold,
save for the September, 1999 Washington Agreement. Further,
there is increasing talk and speculation that the members
to the accord may actually sell less than their stated 500
annual tonnes over its 5 year term. These two issues have
lent great comfort to the minds of many gold investors and
may act to lessen their concerns, causing them to be emboldened
in their actions. Who knows, any comments emanating from the
meeting that alter the market's current perception of the
amount of gold that will reach the market, may damage it.
Finally, President Bush's intense desire for reelection needs
little discussion. He is barely leading John Kerry in the
polls, and must desperately maintain the status quo for a
few more weeks to remain in the Oval Office. To this end,
I believe that he will do whatever is in his power to maintain
a stable stock market, a level economy, and prevent a rising
If common stocks move sharply lower it will not only harm
American investors but may generate fear, in the minds of
our voting public, of an impending economic decline. Or, a
strongly advancing gold price prior to the November elections
may upset the markets. If either of these events transpire,
voters may perceive that President Bush has lost control of
the economy, and may change their vote to Mr. Kerry.
While it is far from certain that the IMF meeting will end
with gold damaging comments, I believe that it is prudent
to maintain some cash on the sidelines. If my concern proves
correct you will have the ability to benefit and not entirely
suffer, both emotionally and from paper losses, from such
an occurrence. In any event, this issue should be kept
in mind during the balance of gold's Bull Market. It has worked
in the past for the central bankers and will likely be utilized
in the future.
When earlier IMF comments occurred that affected the gold
price, the yellow metal was typically advancing in price.
While gold is trending higher, as of today it does not appear
to be a threat to the desires of the central banks or to the
aspirations of President Bush. For this reason, we may be
spared from a near-term attack. However, if gold soon strongly
rises, negative comments will forestall its unfolding and
may help solidify President Bush's hold on the presidency.
Whatever transpires, I am confident that gold remains in a
confirmed secular Bull Market. For this reason its long-term
trend will remain up regardless of any temporary setback.
The above was excerpted from the October 2004 issue of Financial
Insights © September 19, 2004.
I publish Financial Insights. It is a monthly newsletter
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various junior resource stocks that I believe offer great
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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
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