EXCERPTED FROM THE JANUARY 29 ISSUE OF FINANCIAL INSIGHTS
Before
you dismiss this prediction as either hype, poor judgment or the misguided
forecast of an aging, overzealous, and perennial believer that the importance
of gold’s discipline to mankind will outlive us all, please bear with
me for at least the next few paragraphs. First, I am not saying that this
event is imminent. Yes, I do believe that there is at least a 40% to 50%
probability that it will occur by year-end 2006, and an 80% to 90% chance
that it will appear before the year 2007 ends. However, even if I am wrong,
my hope is to present the reader with historical information and my insights,
that will help him understand my reasoning for this call. In this fashion,
you can decide for yourself whether I am either totally out to lunch, or on
the mark, as we both watch the market as it either proves or disproves my
thesis.
I remember
sitting in my stockbroker Rusty’s office in either late January or
early February, 1980. On one fateful afternoon I watched while gold, I
believe that it was for the spot month, ticked $875 on the New York Commodity
Exchange. At about the same time I observed in awe as silver posted its peak
price of $52.50. As we all know, those were the prices that marked the
highest Comex levels of the greatest Bull Markets in the history of both
metals.
From those
dizzying heights the yellow and white metals entered what were to become Bear
Markets that spanned two decades. Most of those who rode the great gold Bull
Market from its inception in1972, could not have dreamed that the party was
over, but it was! In fact, we would have never believed when gold rolled
over, that its fate was to eventually plumb successive new lows at $283
in1985 and, finally after offering periods of hope over the ensuing years,
$252.50 in 1999.
I believed as
long ago as the early 1970's, that our economy could not withstand the
monetary inflation that our nation was fostering. I felt by the mid-1970's,
and certainly by the end of that decade, that hyperinflation would ensue and
engender an economic accident of epic proportions. The end result, I assumed,
would bring our economy to its knees. Was I ever wrong! I was incapable of
comprehending the ingenuity, resourcefulness and brilliance of those who
guided our leaders, and who were the invisible hands behind our economic and
financial world.
Instead, our
great nation’s economy stumbled along for a time, overcame the 20% high
interest rates that appeared at the end of that era, but inevitably
regrouped. Gold and silver became tame as they entered prolonged Bear
Markets, and our leaders had a respite in their fight to keep the American
economy moving forward.
During the
following nearly two decades, gold traded in a range that was defined by
$252.50 and about $515 an ounce. Its final $252.50 low, struck in August,
1999, began the end of a frightening era when most of those who recognized
that gold represented “real money”, deeply questioned their
beliefs. We couldn’t understand gold’s continuing weakness, but
were thankful that our country had been pulled from the edge of the
precipice. Further, until later, we couldn’t fathom the full depth of
the driving forces that seemed to us to miraculously support our economy.
In retrospect,
and with the knowledge that only observation and experience can bestow, we
arrive at the year 2006, and somewhat understand. That is, that our country
was blessed with among mankind’s brightest minds. They devised methods
that allowed America
to continue to lead the world. Unfortunately, despite the fact that they were
able to forestall the appearance of the “Grim Reaper” they too
are only mortals, and are likely running out of new methods to maintain the
status quo.
The events that drove gold to $875 also
engendered a U.S.
inflation rate that topped 15% on an annualized basis. These unprecedented
outcomes stemmed from an extended period of abusive monetary creation when our
leaders acted to keep the good times rolling. They first extricated us from
the 1974-1975 recession. Later, they reversed the mid-1980 and 1982
recessions. Then, in the late1980's they sidestepped a Savings and Loan
disaster, and in 1998, a
potential financial calamity when Long Term Capital Management imploded. It
is likely that the recent, hastened but calm dissolution of Refco Inc. was
also their doing. Unfortunately, the effects of the continual flood of newly
created dollars needed to foster these events, are finally coming home to
roost!
The reason why I
anticipate that the next major target for gold is $875 is simple. Among other
reasons, it is due to two primary factors. The first is that there are no
major areas of resistance between the $500 to $515 range and that point. The
other is that conditions have coalesced that I believe will drive the eternal
metal to that level if not higher, before a major bearish assault can be
mustered.
When gold
collapsed from its1980, $875 Bull Market peak, the first area offering major
support was in the mid-$450 area. This occurred in the spring of 1980. From
there it sharply rallied and briefly touched the $725 zone. However, by fall
of the same year, it again plummeted and broke through its earlier low, as it
began to probe the depths of its Bear Market. Talk about volatility! It
finally struck a major, intermediate bottom in the low $290's. This was
posted in the summer of 1982. .
In early 1983,
the noble metal strongly rallied and marginally surpassed $500 before its
advance was rebuffed at about $515. The bear again took control and drove it
to a new, long-term $283 low in the first months of 1985.
From that
intermediate bottom it later strongly rose. Once again, in late1987, the $510
zone acted to repel any further bullish tendencies, and gold acquiesced and
began its terminal decline in search of its final Bear Market nadir. Thus,
the $500 to $515 range became a line in the sand that was not to again be
surpassed for nearly two decades.
I have detailed
much of the downward path that gold followed during its great, two-decade
Bear Market. I have shown until recently, how the $500-515 zone stonewalled
two major bullish advances.
This is not
surprising because round numbers are prime areas where investors choose to
take a stand. They either make up their minds to exit or enter major
positions at these numbers. And, $500 is one of the most important prices
where these psychologically supported decisions are executed.
Now that the
important $500 mark appears to have been decidedly left in its wake, I now
believe that technically, only $725 should offer any important resistance
between today’s prices and gold’s1980 bull top. Of course other
price levels should develop where the bears and profit-takers will enter the
market and temporarily impede its advance. However, now that $500 to $515 has
been resolutely overcome, I am confident that it is only a matter of time
before the eternal metal posts a new, all-time high.
THE REASONS WHY
GOLD
IS MOVING HIGHER
IN PRICE
There are a
number of factors that I believe will propel gold to at least its historical
high in this up-wave. Among them, the major gold producers have either ended
or reversed their hedging practices, or are in the process of so doing. This
was likely the primary reason that drove gold to its incredibly oversold and
undervalued $252.50 Bear Market low. Now, not only are they selling less gold
into the market, they may be actually purchasing it to offset their earlier
hedged sales. Further, annual gold production vs. consumption is in deficit,
and global production is on the decline. The world is now annually consuming
about 1,000 more tonnes of gold than its gold miners can produce. Further, it
has been projected that newly mined gold production will not begin to
increase until about 2010 at the earliest.
The decades-long
weak gold price acted to drastically reduce gold exploration. Importantly, it
requires between five and seven years, if conditions are just right, to bring
a major discovery into production. And, major world-wide gold exploration
only again began in earnest a few years ago.
Throughout the
centuries, the penultimate allure of gold to the average citizen was that it
protected him from the indiscretions of his rulers. Whenever a government
deviated from completely backing their money with something of value, the
contrived monetary unit lost purchasing power and ultimately became worthless
or nearly so, before it was replaced with a newly named piece of paper. This
was because governments have historically been poor preservers of the value
of their currencies! They have always found “good reasons” to
consistently overspend their budgets.
In every
instance they terminally damaged their monetary unit, and an inflationary
event was elicited! These acted to decimate the purchasing power of every
government issued fiat currency, and often the lives of their citizens in the
process. This is the history from which the old French saying arose that,
“even the poorest French peasant has hidden gold under his
mattress”. Too many times his leaders let him down. Too many times his
government issued paper currencies became worthless!
The next
fundamental reason underlying gold’s unfolding Bull Market, is that we
are in the process of experiencing an unprecedented increase in the U.S. money
supply. This began in early 1994. However, since Dr. Benjamin Bernanke was
nominated to replace Alan Greenspan it has literally exploded, and is now
rising off the chart. Further, the world has been informed that after March
23, the United States’
broadest measure of our monetary aggregates, M3, will no longer be reported.
It doesn’t
take much imagination to arrive at the obvious reason behind its elimination,
after a century of its weekly reporting. After all, Dr. Bernanke has already
given the world ample insight into how he will act when he assumes the role
of Federal Reserve Chairman. He is on record by stating his belief that
creating a sufficient amount of money can keep our economy afloat. In fact,
he even listed a number of new, creative methods that he could use to produce
the needed dollar credits if necessary.
Another primary
reason that gold has begun to soar, is that it recently struck new Bull
Market highs in all of the major world currencies. This attracted added
attention and purchases from around the globe, for technical and other
reasons. It is signaling to all those individuals who are astute and
open-minded enough to take notice, that a mass exodus from all of the major
currencies has begun! It is telling them that other thinking people finally
recognize that all nations are in the process of damaging the purchasing
power of their monetary units. This is where gold shines, and why panic
appears to have consumed those who are desperately trying to enter the gold
market to protect themselves!
I feel that Dr.
Bernenke’s assuming the helm at the Fed and gold breaking out in all of
the major currencies, are the two reasons underlying the recent change in character
in the gold market. They are responsible for its renewed, sharp, upward
ascent!
Despite the fact
that the average American has been convinced that there is nothing wrong with
unsustainable budget and trade deficits, and that the world will forever
accept dollar credits as fast as we can produce them, many of the
globe’s citizens are beginning to recognize that there are limits. The
smart money is finally beginning to protect itself by buying gold! This
includes among others, the Russians, the Chinese, the South Koreans and of
course those residing in India
who never doubted gold’s importance.
The final event
that will drive gold to attack its all-time $875 high is a resumption of the
dollar’s Bear Market. The U.S. dollar appears to be weakening. The
massive purchases of dollars that was fostered by a “one time”
reduction in taxes has ended. For those who are not aware, our government
gave international U.S.
enterprises the opportunity to repatriate profits that were earned abroad, in
return for a reduction in taxes to as little as 5%.
The catch was
that they had to bring their untaxed, global profits into the U.S. by
December 31, 2005. Further, since most of these profits were retained in the
currencies in which they were earned, they first had to be converted into
dollars. This entailed the sale of various hoards of foreign currencies and
the massive forced purchase of U.S. dollars, and acted to drive up its
international value. I have heard that the total dollar amount may have
approached or exceeded $500 billion! And, this primarily occurred in the
latter months of the recently ended year.
I believe that
this brilliantly conceived incentive was a major influence underlying the
dollar’s 2005 strength, but its effect has now waned. Without it, it
is questionable if the dollar’s uptrend is sustainable. If my analysis
is correct, gold’s ascent will accelerate when the dollar’s Bear
Market resumes its downward trek.
The noble metal
acted as a safe-haven whenever a nation’s sovereignty was at risk.
Further, gold is something that was forever coveted by man. This was because
it worked! Throughout history, it was the common man’s best preserver
of his wealth. It has been the sole item that has ALWAYS retained its value
through good times and especially during the bad ones. This time, it will not
be different! As difficult as it may be to believe, gold at $875 is a far easier call than
are most market plays. All that is needed to recognize this “truth”,
is to be open-minded and believe what you see transpiring around you, and not
what you hear and read via the media, and espoused by the parade of so-called
experts. I hope that this will help you better understand why gold is going
far higher, and the heretofore almighty dollar far lower.
By
: Dr. Richard
S. Appel
www.financialinsights.org
The
above was excerpted from the January 2006 issue of Financial Insights ©
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
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