Long but interestingBy Dr. Richard S. Appel
November, 2004
Much has occurred during the past few months that drew me to the conclusion that gold and gold equities are approaching a period when they will shortly resume their secular Bull Market advances. I have recognized and discussed during this time my belief that the gold price would be under pressure until after the upcoming presidential election. Further, it has been my contention that no effort would be spared to maintain orderly stock, bond and gold markets, in order to help the incumbent remain in office.
During the past few years I noted some of the strange gold price actions that occurred, the comparisons to which I had not witnessed across my nearly forty years of studying the gold and gold equities markets. Importantly, some of these unusual occurrences became quite commonplace in the last two months. After considering their consequences I am compelled to believe that sharply higher gold and gold share prices are likely awaiting us just around the corner.
It is my conviction that our leaders desire to control an orderly gold price rise as its secular Bull Market unfolds. They are not so much concerned if gold moves higher, but how its advances play out. They realize that gold will advance as a result of their actions, but they desire to prevent the public from recognizing that fact for as long as possible.
For new readers, the reason that politicians shun gold is because it acts as a barometer, whose price action announces how a government is handling their country's fiscal and monetary affairs. When a nation is acting prudently, their monetary unit is stable on world markets, as are their domestic prices. Under such conditions, the gold price tends to find a level from which it does not greatly deviate.
When most countries maintained a gold standard, the last vestige of which ended in 1971, the noble metal acted to limit a government's propensity towards excessive monetary creation. Our leaders could only issue dollars if they had sufficient gold with which to redeem them. This forced those in power to live within their means. They could not spend more than they acquired through taxation. However, when a nation state acts irresponsibly and overspends their tax receipts creating fiscal deficits, it drives its balance of payments into negative territory, and both their currency's worth on world markets and its local purchasing power falls. During such times gold senses that the currency is destined to decline, and will rise in anticipation of that event. This is the real reason that gold, despite all of the negative rhetoric that abounds, has been plodding higher in price. Do not forget it has already risen 65% since it posted its 2001 bottom, with neither the awareness nor participation of the general public.
Since the birth of civilization gold has been coveted by man. It was one of the first forms of money and once recognized for its eternal value, has been used by virtually all civilizations as their primary form of money. If we were able to go back in time for sixty or more years, you would find that it was the prime, universal item used as money. The reason that it achieved this lofty state, and maintained it for several millennia, was due to the fact that its use forced politicians to be honest regarding their issuance of paper money substitutes. Each time a country deviated from exclusively using gold and issued paper currency in its stead, their leaders began to debase their money at an escalating pace. In all cases, this did not end until the banknotes finally became worthless or nearly so. The only question was how long it took. This is the reason behind the old French adage that, "even the poorest French peasant hides gold under his mattress". It was the result of the repeated currency changes that France's citizens were forced to endure. These were due to their government's destruction of each new currency that they issued, to replace the earlier ones that they had inflated to near worthlessness.
I digressed, again. A number of unusual events have repeatedly occurred in the gold market for at least the past few years. These go against all of my experience following the gold market, as well as the laws of probability. First, gold has rarely traded higher than $6 on any given day. Each time that it begins a session sharply higher or trades to this level above its previous closing price, a substantial amount of selling has appeared. Bill Murphy (Gold Antitrust Action Committee, GATA.org) was the first person to note these incredible recurring incidents. I sensed that something was wrong for quite some time prior to his observation, but it was his bringing my attention to it that first stopped me in my tracks.
He rightly pointed out that this action has helped prevent drawing undue attention to gold after it began its tortuous, rising, bullish path in 2001. Second, often when the great metal was either leaving a base or when it suddenly shot higher, it would meet a wall of selling. The last several days are a good example. Gold, after trading just over $6 above the prior day's close last Friday, was not only stopped dead in its tracks, but it moved sideways on Monday, only to be whacked on the following day when it gapped down $6, before posting a $7 loss. In the old days, when gold exhibited an explosive breakout or a sharp run-up, the momentum typically followed through for at least several days before a setback occurred. Now, almost like clockwork whenever gold trades strongly higher selling mounts, and the wind is immediately taken out of its sails.
Still another repetitive telltale trading pattern has been in force. This time it involves the action of the HUI, the Amex Gold Bugs Index. In the past the HUI and its precursor the XAU, the Philadelphia Gold & Silver Index, often reversed direction prior to the yellow metal at major turning points, during extended gold advances or declines. Gold and the major producers normally move in tandem. However, the past two or more years have seen the HUI reverse course on any given day while gold was moving strongly higher. With few exceptions, the following day gold was hit for a substantial and often a prolonged string of losing sessions. Some observers have commented that this action might be the result of information leaking of a forthcoming attack on gold. Whatever the reason, it has often signaled an impending downdraft in gold's price.
I am bringing these extraordinary events to your attention because the regularity of these strange and recurring anomalies have greatly increased during the past few months. I believe that the reason for this condition is the fact that buyers of the yellow metal have become more aggressive, and thus the need to overwhelm these gold positive forces has similarly risen. This, in order to prevent a near-term, sharply higher price.
I realize that many readers are quite skeptical of my above claims and statements. I am not asking you to believe me! However, I suggest for your own sake, that you keep an open mind and try to more closely follow the daily price movements of gold and the HUI. It will be easy enough to draw your own conclusions. But again, you must be open-minded and try to believe what you see and ignore all of the negative gold rhetoric that fills the airways. If I am correct, you will have sufficient time as gold's great secular Bull Market unfolds, to confirm or refute my observations. This will allow you to determine for yourself if either the cited abnormal events are a coincidence, or if official actions or statements occur at times when gold is soaring, and are used to control its further advance.
In any event, I believe that anyone interested in the gold complex should closely focus on the trading relationship between gold and the HUI. Further, you should use caution whenever a deviation from the norm such as I have described presents itself.
If you invest in gold I believe that it is imperative for you to attempt to get a "feel" for the gold market. You should at least follow the daily closing prices of gold and the HUI and compare them with earlier ones. I believe that this is best done in real terms, not in percentages. For example, if gold posts consecutive closes of $420, $416, $418, $416.50, $417 and $415.50 you can sense that it is trending downward, albeit it slightly. However, if you work in percentage terms you have no reference point from which to judge its underlying direction. All that you know is that it was down 1%, up 0.5%, down 0.4%, up 0.2% etc. You will lose all sense of its trend. If you use this method in following all of your markets I believe that you will develop a better grasp of their primary trends.
An advance in gold is the determining factor that will influence the price movements of both the major producers and the junior exploration companies. I believe that we are on the cusp of a substantial increase in gold's price which will drive it to test the $500 level. I do not know if the precious metal can muster sufficient buying power to propel it to a new high prior to the election. However, once the need to strenuously restrain its advance no longer exists, I feel that it will break free of its shackles and surprise most onlookers with a burst of strength.
I suspect that November will be attended with a new Bull Market high. However, precise timing was never my forte, and we may have longer to wait. Yet, given what appears to be a far greater magnitude of effort necessary to constrain its price, it is likely that it will literally evaporate when the last presidential vote is cast.
My only potential caveat is that a number of gold enthusiasts are predicting a similar scenario. This gives me some pause because I prefer gold breakouts that are anticipated by as few investors as possible. However, I doubt if all of we pundits combined have as much influence as the worldwide audience that gold appears to be finally attracting.
The gold producing companies, as viewed through the action of the HUI, struck their lows in May. I believe that they will join and make new highs along with gold. They have completed their bases and await a breakout to new high levels before they will really roar. The HUI is trading at 227.47 and its Bull Market peak is $258.60. Additionally, it's 50 day moving average just rose above its 200-day average. They are 208.38 and 207.23 respectively. Thus the HUI's moving average study has turned bullish, which is a major plus.
The junior sector is becoming quite interesting to me at present. After sustaining substantial losses during the springtime they bottomed around July. From their lows, most companies moved higher and many of them developed defined upward trends. It appears to me that most of the better companies have cleaned up their markets; they have absorbed all of the cheap stock sold by the weak holders. This being said, I believe that they too are poised to move sharply higher along with gold. I will discuss my ideas on this topic more fully in the Resource Market section.