Gold Mining Outlook

by Steven Jon Kaplan

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Updated @ 5:45 p.m. EDT, Tuesday, June 11, 2002.

 

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SUMMARY:  Because of the recent sharp drop in gold and gold mining shares, my current outlook for gold and gold mining shares has improved to STRONGLY BEARISH.  After trading at ridiculous historic overvaluations, many junior gold shares declined by more than 30% just in the past week.  With $300 just 7% away, there are still no analysts besides myself bold enough to state definitively that the price is going below $300, so it is therefore almost certain to happen.  More and more analysts are saying that gold is in a bull market “as long as it remains above xxx price,” which is axiomatically the kiss of death, regardless of the numerical level stated in the claim.  Most likely commercials are covering their short positions into the decline; the traders’ commitments for the next few months will be critical in determining how long it will take for COMEX gold commercials to once again go net neutral, which will be the signal to turn bullish on gold and its shares.  There will be bounces in gold and gold shares on the way down at each oversold technical support level, as we saw this morning when many shares touched or closely approached their former resistance levels from April, as is appropriate for such a volatile asset class.  The recent appetite for the most speculative, money-losing names does not bode well for gold mining shares, as it smacks of bubble behavior.  It is true that gold has received support from a weak U.S. dollar.  However, there is an increasing likelihood that both the U.S. dollar and the U.S. equity market will stage a rally for several weeks, which would put downward pressure on gold and on gold mining shares.  It is even possible that the recent weakness in gold mining shares in particular is signaling a U.S. equity rally.  Last week’s Market Vane showed investors at 88% bullishness on gold, a level seen only once every few years, and a reading which is always coincident with an intermediate-term peak.  Physical gold buying has dropped over 20%, which will continue to pressure the price of the yellow metal.  India, which by far has the greatest physical demand of any country in the world, has suffered a double whammy:  the rupee is at an all-time low versus the U.S. dollar, while gold prices have risen in U.S. dollars (since last autumn), making the rupee price of gold about 20% higher than it was in November 2001.   Therefore, even if Indian buyers are paying the same number of rupees per year, they will be purchasing 20% fewer ounces.  The actual decline is probably greater because Indian buyers are intelligent and price sensitive.  Unlike American and Canadian investors, who seem to love to buy anything after it has already increased in price (see a chart of Hecla Mining), Indian buyers know to buy when prices are low, and sell when they are high.  Therefore, the actual decline in total ounces purchased from India is probably closer to 30%.  There is a myth that there has been more Indian buying due to the threat of an India-Pakistan conflict but historically Indians buy more during periods of perceived greater prosperity, not when there is increased tension or the threat of reduced prosperity.  There was a lot of talk about Japanese buying gold early in 2002 but since the Nikkei has been rebounding sharply from its historic low in early February, this trend has likely terminated; it was in any event only a tiny fraction of the Indian buying even at its peak.  Several countries have recently raised their short-term interest rates, including Canada and Australia; as short-term time deposits become more attractive, they draw money away from hard assets such as gold which pay no interest.  This is especially significant since media coverage of gold seems to have completely forgotten the important influence of worldwide interest rates.  Gold industry executives are continuing to sell shares in their own companies, while simultaneously issuing new shares to the public, as is usually roughly coincident with an intermediate-term peak in share prices.  Lots of brokerages, aware of the downtrend in the Nasdaq and fearful that investors would take their money out of their management entirely, have been encouraging their clients to switch into gold shares and gold funds as a survival tactic, to save their own butts, rather than because of any conviction as to their value as an investment.  Other investors have found that it is easier to make a single phone call to their mutual fund company to switch from the Nasdaq into gold mining shares rather than doing research into bank CD yields or the relative merits of TIPS or municipal bonds.  The mainstream business media has been heavily covering gold and gold mining shares in recent weeks, even more so than in the mid-1990s.  Now that these recent investors are getting burned, they will be less likely to participate in the next rally.  A 40% drop in gold mining share prices from their June 4, 2002 peak (HUI at 154.99) is a likely scenario over the next several months, and one should not seriously consider purchasing these shares until either gold goes below $270 spot or commercials go net long COMEX gold futures, whichever comes first.  One should be aware that short-term fluctuations in gold share prices often overwhelm the long-term trend, no matter how pronounced the long-term trend may be over an extended period of time.  For example, gold shares rallied very strongly from late 1972 through their peak in the early 1980s.  However, investors who bought gold shares in late 1974, after the first rally stage was essentially complete, were actually losing money in late 1978, four years later.  Similarly, in spite of the very strong rally in gold mining shares from late 1928 through 1937, investors who bought gold mining shares close to the first peak in 1930 were behind, not ahead, in late 1936, thus suffering more than six years of disappointment.  In practice, most latecomers were shaken out by the sharp downswings, and did not even participate in the profitable final blowoff.  Buy and hold can be a wonderful strategy, but only if one buys when prices are truly depressed, not when one buys to “not miss out” on a momentum trend play which is close to reversing or has already reversed.  When purchasing any securities, gold mining or otherwise, avoid buying on margin and never purchase call options, so that the magnitude of the eventual gain is the only important issue, rather than the vagaries of precise timing or interim volatility. Always stick with companies that have strong, growing earnings; avoid companies with losses. Occasionally a money-losing company will suddenly turn around and become profitable, but that is the rare exception.

I will attempt to give an unbiased outlook on the intermediate-term prospects for worldwide gold mining shares and other assets, based upon a collection of the most important fundamental and technical indicators. The objective will be to indicate critical turning points in the market. The indicators are listed in order of importance, most important first. Information in boldface has been recently updated.

Be sure to read (or attend) Eugene Ionesco's fabulous play RHINOCEROS.  If you do not understand it, or you understand it but sympathize with the beasts, you will have difficulty making money in the financial markets, as you will find it psychologically taxing to run in the opposite direction of the herd.  It should be observed that being a contrarian does not mean remaining fully invested in traditionally contrarian choices such as gold mining shares, but staying away from wherever the herd is most heavily charging blindly ahead.

KAPLAN’S CORNER:  QUESTION:  How will one know when to purchase gold mining shares?  ANSWER:  When gold is in a long-term bear market, as it was from 1980 through 2000, commercials were generally heavily net long gold at all bottoms, and modestly short gold at all intermediate-term peaks.  Now gold is in a long-term bull market, so commercials will be heavily net short gold at all peaks, and modestly long gold at all intermediate-term bottoms.  (By the way, gold being in a bull market means only that as long as the 1999/2000 low of $252 per ounce and the 2000 nadir of HUI at 35.31 are not broken to the downside, gold and its shares are in a bull market.  Thus, if a decade from now, gold is at $290 and the HUI at 90, that would still qualify as a long-term bull market, even if not the one that most goldbugs have been anticipating.  My long-term outlook is not really so bleak as this might seem to imply, but that is beyond the scope of this question.)  Therefore, one should watch carefully to see when commercials go net neutral COMEX gold, as that will set up the next buy signal.  For example, in early December 2001, commercials briefly went net long about 13 thousand gold contracts.  This level is likely to be approximately repeated in the next bottom for gold and its shares.  Therefore, here is the winning strategy:  when commercials go net neutral COMEX gold, start buying gold mining shares.  For each increase in their net long position [thanks to Jim Termini for pointing out a logic error here], proportionately increase your weighting as the square of the amount that they are net long.  Keep buying gold mining shares using the above formula until commercials are once again net short, then stop buying them (unless they go net long again) and hold on for the next ride higher.  When Market Vane again shows 80% bullishness toward gold, start gradually selling.

May 29, 2002:  QUESTION (from Mr. David Smith):   With increased interest in gold mining shares, and therefore increased awareness of environmental concerns related to mining exploration and development, are there companies involved in mining/processing cleanup whose shares are publicly traded?  ANSWER:  I am not familiar with that aspect of gold production.   However, if there are any readers who can respond to this question, all feedback would be most welcome.  The best answers will be given in the next update.  ANSWER:  No one had even a vague answer to this question.  Seems as though there’s an investment opportunity out there waiting for the right person.

May 1, 2002:  QUESTION:  Recently a number of gold producers have announced that they have either entirely eliminated or else substantially reduced their hedge book (the amount of gold they are selling forward).  How will this impact the price of gold?  ANSWER:  Over the long run, hedging has no effect on the price of gold, as it merely affects the timing of gold sales, rather than the total amount.  However, over the short run, if the total world amount of hedging has been reduced, it is logical that this would result in a price increase, as a hedge reduction is essentially equivalent to a purchase of the same quantity.  It is even possible that the majority of the recent rise in the gold price (above the pivot price of $276) was due to a reduction in the total worldwide hedge position.  Over the past decade or so, producers have generally increased their hedging when prices were high and reduced their hedge books when prices were low, thus damping volatility.  Some gold share investors have been more activist in recent years in demanding that many producers either eliminate or at least sharply reduce their hedging activities, so that gold share prices are more directly leveraged to the gold price.  If gold producers are now more afraid of negative public opinion if they resume their previous hedging activity, it is likely that hedging will remain at a low level in the near future.  Therefore, although the long-term movement of gold prices will not be affected, short- and intermediate-term volatility is likely to sharply increase, as producers are selling at market prices most of the time.  Higher volatility probably means that there will be greater percentage swings in gold mining share prices over the next several years as compared with the previous several years.

RECENT CHANGES:

Tuesday, June 11, 2002:  The overall current outlook for gold and gold mining shares has improved from VERY STRONGLY BEARISH to STRONGLY BEARISH, reflecting the recent sharp drop in the price of gold and gold share prices, especially those of money-losing junior gold miners which had fallen over 30%.

Tuesday, June 11, 2002:  The gauges of future inflation indicator has improved from MODESTLY BEARISH to NEUTRAL, as important leading indices of inflation have moved from 26-year lows just a few months ago to near neutral today.

Wednesday, May 29, 2002:  The overall current outlook for gold and gold mining shares has deteriorated to VERY STRONGLY BEARISH, reflecting incredible speculation in junior money-losing producers, as well as juniors’ share prices far outperforming the seniors, as is typical of a peak in any equity sector group.  Insider selling is also more pronounced, as is insider issuance of new shares and other new security offerings by gold producers.

Wednesday, May 29, 2002:  The traders’ commitments indicator for gold has fallen from STRONGLY BEARISH to VERY STRONGLY BEARISH, as commercials are now at or very close to their heaviest short position since February 1996.

Wednesday, May 1, 2002:  The insider stock transaction activity indicator for gold has dropped from MODESTLY BEARISH to SIGNIFICANTLY BEARISH, as the frequency of insider sales and registrations for intended sales by gold mining executives has risen sharply over the past few weeks.  Corporate announcements about new secondary share offerings have also suddenly risen over the past several trading days.

Monday, April 8, 2002:  The price/volume statistics indicator for gold has improved from MODERATELY BEARISH to MODESTLY BEARISH, as the high concentration of call buying on individual gold mining shares has somewhat abated in recent days.

Monday, March 25, 2002:  The outlook for gold mining shares has deteriorated to STRONGLY BEARISH, as an enormous concentration of call trading and sparse put trading in individual large-cap gold shares is indicating that a peak in gold share prices is imminent.

Monday, March 25, 2002:  The price/volume statistics indicator for gold has fallen from MODESTLY BEARISH to MODERATELY BEARISH, also reflecting the speculative fever in gold mining shares in recent trading days.

Monday, March 25, 2002:  The gauges of future inflation indicator has improved from SIGNIFICANTLY BEARISH to MODESTLY BEARISH, as both measures of future inflation’s growth rates have turned noticeably less negative.

Monday, February 11, 2002:  The overall outlook for gold, gold collectibles, and gold mining shares has worsened from SLIGHTLY BEARISH to SIGNIFICANTLY BEARISH, as gold’s price rise to above $300 spot has encouraged recent purchasers who are completely uncommitted to the yellow metal unless it is rising, and who will therefore bail out given even modest unfriendly price behavior.  Bearish traders’ commitments and overbought technicals support this view.  Also, the first true rally stage of any real bull market needs its corresponding retracement.

Monday, February 11, 2002:  The traders’ commitments indicator for gold has deteriorated from MODESTLY BEARISH to STRONGLY BEARISH, as commercials are currently net short about sixty thousand contracts.

Monday, February 11, 2002:  The price/volume statistics indicator for gold has deteriorated from SLIGHTLY BULLISH to MODESTLY BEARISH, as unusually heavy gold share call buying is probably marking a short-term peak for the yellow metal and its shares.

Monday, December 24, 2001:  The overall outlook for gold, gold collectibles, and gold mining shares has risen from MODERATELY BEARISH to SLIGHTLY BEARISH, as the pivot price for gold has risen from $271 to $276 spot, while gold commercials remain highly responsive to modest moves in either direction, and currency commercials are generally short those currencies which correlate significantly with the gold price.

Monday, December 24, 2001:  The traders’ commitments indicator for gold has improved from MODERATELY BEARISH to MODESTLY BEARISH.

Monday, October 29, 2001: The overall outlook for gold, gold collectibles, and gold mining shares has improved from SIGNIFICANTLY BEARISH to MODERATELY BEARISH, as the traders' commitments have noticeably improved, though still show commercials markedly net short.

Monday, October 29, 2001: The traders' commitments indicator for gold has improved from SIGNIFICANTLY BEARISH to MODERATELY BEARISH, as commercials are more aggressively covering their short positions on all dips in the gold price.

Tuesday, October 23, 2001: The overall outlook for gold, gold collectibles, and gold mining shares has improved from STRONGLY BEARISH/VERY STRONGLY BEARISH to SIGNIFICANTLY BEARISH, as the gold price has dropped substantially.

Tuesday, October 23, 2001: The traders' commitments indicator for gold has improved from VERY STRONGLY BEARISH to SIGNIFICANTLY BEARISH, as commercials grudgingly, but steadily, are covering their net short positions on all price declines.

TRADERS' COMMITMENTS (COT):

One of the most important factors affecting the market is the traders' commitments as reported every Friday by the COMEX. These commitments tell you what the commercials, or industry insiders, are doing vs. the non-commercial outsiders, also known as speculators. If the insiders, such as producers, jewelers, fabricators, and industrial users, are buying, while the speculators are selling short, this is BULLISH. If insiders are selling as fast as they can, while speculators are buying left and right, this is BEARISH. In any business, especially in commodities, people in the thick of things obviously know much more about the supply/demand situation than people who have no connection to the industry and are just trying to get rich quickly. The greater the disparity of the traders' commitments from their historic norms, the farther they must rise or fall to achieve equilibrium. The ideal buying opportunities, therefore, occur when commercials are net long far more than usual; the best selling opportunities are when commercials are net short much more than usual. (Thanks to "Jimmy C." for suggesting this enhancement.)

As of June 4, 2002, released at 3:30 p.m. on June 7, 2002, the commitments for COMEX gold futures showed commercial insiders long 40,497, short 125,717; large speculators long 73,044, short 31,101.  Small traders were long 53,972, short 10,695.  Commercials were thus net short 85,220 contracts, just below their greatest net short position since February 1996 (when gold briefly peaked at $422 spot), having reduced their short position from the previous week by 2,212 as the gold price rose $3.35.  Since commercials usually sell into rallies, this has mild bullish implications.  This indicator remains VERY STRONGLY BEARISH.  Readers interested in the official traders' commitments for all commodities and financial instruments should go to http://www.cftc.gov/ for many years of data. Click on "Current COT Reports" and then on "Commodity Exchange Incorporated".

GAUGES OF FUTURE INFLATION:

The Economic Cycle Research Institute (ECRI) monthly U.S. future inflation gauge (USFIG) for May, released June 7, 2002, was at 98.6, up from 98.2 for April (upwardly revised from 97.7).  Its smoothed annualized growth rate rose to –1.1% from –3.2% (upwardly revised from –4.1%).

The Foundation for International Business and Economic Research (FIBER) monthly U.S. leading inflation index, released June 7, 2002 for the month of May, was measured at 92.8, up from 91.9 (revised downward from 93.3) in April, and represents a 15-month high. Its smoothed annualized growth rate rose to +8.7% from –0.9% (revised downward from +2.4%), and represents its highest mark in 15 months.

This indicator has improved again to NEUTRAL.  The worst readings, some of which had been their lowest in 26 years, have likely already been reached.

WORLDWIDE INTEREST RATE POLICY:

Gold must always compete with time deposits as a short-term investment. Therefore, as interest rates rise, there is more to lose by being invested in the yellow metal rather than in an interest-bearing time deposit. As interest rates fall, there is less to be sacrificed by being invested in gold. On the flip side, lower short-term interest rates sometimes stimulate economic growth. Gold acts most strongly when inflation is outpacing the percentage gain in GDP, as is currently the case.  In addition, gold tends to perform best when the spread between the risk-free short-term interest rate and the inflation rate is either negative or very small, indicating that individuals who have selected safe time deposits for investment are finding themselves either falling behind or remaining just barely ahead of inflation.  It appears as though the Treasury yield curve is going to flatten, perhaps significantly, which would be profoundly negative for gold as short-term time deposits compete more fiercely with gold, which pays no interest, while rising long-dated Treasuries inspire money to exit the precious metals markets.  The gold media has completely ignored the fact that Canada recently raised short-term interest rates twice, and Australia once.  As short-term time deposits become increasingly attractive, they draw investor interest away from hard assets such as gold, which pay no interest.

INSIDER STOCK TRANSACTION ACTIVITY:

If an officer of a corporation is buying stock in his or her own company, it is a strongly bullish sign, since such a person would logically be the most familiar with the actual profits and losses, as well as pending projects and other relevant news. Similarly, if a corporate insider is selling, even if the stated reason is to pay for a child's college education, it is clearly a reason for turning bearish, since that person has rejected this investment in favor of another course of action. The higher ranking the corporate insider involved, the more emphatic the signal, since the more knowledgeable such a person would be with the entire outlook of the company.

On Thursday, February 14, 2002, James W. Stuckert, director of Royal Gold Inc. (RGLD), announced a PURCHASE on December 20, 2001 of 9,300 shares at a price of $5.40 per share, increasing his total holdings to 1,606,100 shares.  (I have no idea why his total holdings remain mysteriously constant after repeated purchases, you’ll have to call him to find out.)

On Thursday, February 28, 2002, James W. Stuckert, director of Royal Gold Inc. (RGLD), announced a PURCHASE on January 24, 2002 of 18,800 shares at a price of $5.35 per share, increasing (supposedly) his total holdings to his usual total of 1,606,100 shares.

On Thursday, April 11, 2002, Michael S. Hamson, director of Newmont Mining Corp. (NEM), announced a SALE on March 25, 2002 of 3,210 shares at an unspecified price, reducing his total holdings to 9,743 shares.

On Thursday, April 11, 2002, M. Craig Haase, director of Newmont Mining Corp. (NEM), announced a SALE on March 22-25, 2002 of 188,560 shares at a price of $26.37-$27.06 per share, reducing his total holdings to 35,324 shares.

On Monday, April 15, 2002, Mark A. Lettes, officer of a subsidiary of Apex Silver Mines Ltd. (SIL), announced a SALE on March 11, 2002 of 1,000 shares at a price of $12.48 per share, reducing his total holdings to 10,641 shares.

On Monday, April 15, 2002, Keith R. Hulley, officer and director of Apex Silver Mines Ltd. (SIL), announced a SALE on March 11, 2002 of 5,000 shares at a price of $12.32-$12.35 per share, reducing his total holdings to 19,312 shares.

On Thursday, April 18, 2002, Vicki J. Veltkamp, vice president of Hecla Mining Co. (HL), announced a SALE on March 22, 2002 of 5,000 shares at a price of $1.70 per share, reducing her total holdings to 16,307 shares.

On Thursday, April 18, 2002, Michael H. Callahan, vice president of Hecla Mining Co. (HL), announced a SALE on March 28, 2002 of 5,000 shares at a price of $1.92 per share, reducing his total holdings to 42,282 shares.

On Monday, April 22, 2002, Peter B. Babin, president of Royal Gold Inc. (RGLD), announced a SALE on March 1, 2002 of 15,000 shares at a price of $7.25-$7.30 per share, reducing his total holdings to 216,495 shares.

On Monday, May 13, 2002, Gabrielle K. McDonald, director of Freeport McMoran Copper and Gold Inc. Class A (FCX.A), announced a SALE on April 29, 2002 of 3,400 shares at a price of $18.34 per share, reducing her total holdings to 1,356 shares.

On Monday, May 13, 2002, Roy J. Stapleton, director of Freeport McMoran Copper and Gold Inc. Class B (FCX.B), announced a PURCHASE on April 30, 2002 of 2,000 shares at a price of $17.95 per share, increasing his total holdings to 2,000 shares.

On Monday, May 13, 2002, B. M. Rankin, Jr., director of Freeport McMoran Copper and Gold Inc. Class B (FCX.B), announced a SALE on April 23, 2002 of 50,000 shares at a price of $18.25 per share, reducing his total holdings to 587,890 shares.

On Monday, May 13, 2002, Ronald C. Cambre, director of Newmont Mining Corp. (NEM), announced a SALE on April 19-25, 2002 of 500,000 shares at a price of $29.00-$29.70 per share, reducing his total holdings to 66,813 shares.

On Tuesday, May 14, 2002, Mark A. Lettes, officer of a subsidiary of Apex Silver Mines Ltd. (SIL), announced a SALE on April 1, 2002 of 1,000 shares at a price of $13.46 per share, reducing his total holdings to 10,641 shares.

On Tuesday, May 14, 2002, Keith R. Hulley, officer of a subsidiary of Apex Silver Mines Ltd. (SIL), announced a SALE on April 1, 2002 of 5,000 shares at a price of $13.41 per share, reducing his total holdings to 19,312 shares.

On Thursday, May 30, 2002, Donald Baker, vice president of Royal Gold Inc. (RGLD), announced a SALE on April 9, 2002 of 5,000 shares at a price of $8.80 per share, reducing his total holdings to 11,090 shares.

On Thursday, May 30, 2002, Peter B. Babin, president of Royal Gold Inc. (RGLD), announced a SALE on April 17, 2002 of 15,000 shares at a price of $9.50-$9.56 per share, reducing his total holdings to 278,038 shares.

On Monday, June 10, 2002, John Norman Abell, director of Echo Bay Mines, Ltd. (ECO), announced a PURCHASE on May 17, 2002 of 5,000 shares at a price of $1.10 per share, increasing his total holdings to 15,000 shares.

On Monday, June 10, 2002, Arthur Darryl Drummond, director of Minera Andes Inc. (MNEAF), announced a SALE on May 24, 2002 of 40,000 shares at a price of $0.24 per share, reducing his total holdings to 0 shares.

On Monday, June 10, 2002, M. Craig Haase, director of Newmont Mining Corp. (NEM), announced a SALE on May 7, 2002 of 352,960 shares at a price of $29.91-$30.04 per share, reducing his total holdings to 889 shares.

Due to persistent recent insider sales by gold mining executives, as well as a sharp rise in registrations of intended sales during the months of April, May, and June, this indicator remains SIGNIFICANTLY BEARISH.

OTHER PRECIOUS METALS:

The behavior of silver, platinum, and palladium can serve as an early signal for gold, since these metals often rally or decline first. After trading in early December 1996 at a very small discount to gold, spot platinum reached a huge premium to spot gold as it hit a new 7-year high in August 1997, then declined almost all the way back to its 1985 low in December 1997 before rebounding above $400 per ounce in July 1998, then returning to a new post-December 1985 low of $330 per ounce in the early morning of October 30, 1998. Since then, platinum has continued to experience the agony and the ecstasy, soaring to $640 per ounce in January 2001, then sliding to $401 per ounce by October 2, 2001. If nothing else, this certainly debunks the myth that sentiment about any particular commodity is unlikely to change rapidly over a short period of time, a reason often cited by ignorant though admittedly highly paid gold analysts! Platinum is likely to continue to trade at a substantial premium to gold until we are deep into a recession, when it often then moves to a small discount to the yellow metal. Palladium had been rallying the most sharply and consistently since Tuesday, December 31, 1996, surging from $115 in late 1996 to $1150 (not a misprint), a new all-time high, by January 2001. Since then, palladium has proven that it can move rapidly in both directions by plunging more than 70% to $305 by October 23, 2001. As is typical, silver continues to be more volatile over the short run than gold. After touching a long-term double bottom of $3.50 per ounce spot in February 1991 and again in February 1993, silver made an attempted upside breakout in late 1997 and again in 1998 by soaring above $7.33 per ounce, before returning to its multi-year equilibrium price. Silver touched a nadir of $4.015 spot on Wednesday, November 21, 2001, its lowest level since September 29, 1993.  Silver recently made another euphoric peak at $5.15 on Tuesday, June 4, 2002, accompanied by incredibly bearish traders’ commitments.  Expect silver to decline, but not to break below its November 2001 bottom.

PRICE/VOLUME STATISTICS:

On Wednesday, November 15, 2000, and again on Thursday, November 16, 2000, HUI, the Amex Gold Bugs Index, touched a historic intraday low of 35.31. The multi-year downward trendline in HUI was broken during the rally of April-May 2001, and since then has successfully held successfully to the upside. On Tuesday, June 4, 2002, at 9:52:45 a.m. EDT, HUI touched an intraday peak of 154.99, its highest level since October 9, 1997. HUI is currently very significantly above its 200-day moving average of 83.88.  This measure remains MODESTLY BULLISH, as gold shares' attempt to hold above their 200-day moving average remains in progress.

In August 1998, gold broke below its 1985 lows and retested levels from 1979, the yellow metal's strongest rally year to date. At 3:24:20 a.m. EDT on Friday, August 28, 1998, spot gold touched $270.50 per troy ounce. Not coincidentally, the U.S. dollar made a multi-year top against most currencies on the previous day. At 1:51 p.m. EDT on Wednesday, August 25, 1999, gold traded at $252.00 per troy ounce spot, its lowest point since May 11, 1979, over twenty years earlier. At 7:45:00 a.m. EDT on Tuesday, October 5, 1999, spot gold touched $338.00 per troy ounce spot, its highest mark since October 1, 1997. As with gold shares, the downward trendline for spot gold dating back to the first week of February 1996 was broken during the early autumn 1999 upward spike and is still holding above it. Spot gold touched a nadir of $254.75 spot at 1:29:00 p.m. EDT on Monday, April 2, 2001, its lowest point since September 20, 1999. Spot gold rallied to a peak of $330.50 spot at 1:43:11 a.m. EDT on Tuesday, June 4, 2002, its highest level since October 5, 1999. Spot gold is very significantly above its 200-day moving average. This reading is SLIGHTLY BULLISH.

Total gold mining equity option U.S. daily volume is very significantly above normal levels while put-call ratios are moderately below normal levels (though they had been neutral as of noon). This is MODERATELY BEARISH.

Synthesizing these three signals as a group, the price/volume statistics indicator remains MODESTLY BEARISH.

SPECIAL POLITICAL CONSIDERATIONS:

Since the passage of his much-ballyhooed tax-cut package, President George W. Bush will now assume full responsibility for the deteriorating U.S. economy in the minds of most American voters. This is even more true now, as Enron and other scandals will inevitably bear the mark of perceived Republican cronyism, regardless of whether or not it is deserved.  Of course, the truth is that Clinton, Rubin, Greenspan, and Co. created the euphoric boom which was really responsible for the upcoming "Great Recession". Therefore, Bush is certain, like Herbert Hoover, to be a one-term President; the Democrats will surely regain the White House in 2004, just as they did in 1932, even if Mickey Mouse is their candidate. Stimulating the economy without regard to inflation will be the watchword of the decade, and quite likely the early years of the next decade as well.

WE’VE SEEN GOLDILOCKS AND THEN BABY BEAR, PRETTY SOON MAMA BEAR IS COMING:

There have been a few dozen major financial bubbles in world history.  Every single one of them has ended with a huge collapse in equities valuations.  This is not going to be the first exception.  By the time we’re done, the Nasdaq will be below 300 and QQQ will be below 6 (these are NOT misprints).  If the Nikkei can go all the way back to its level of December 1983, then there’s no reason the Nasdaq can’t go back to its level of October 1987, when it bottomed at 288.49 intraday.  Perhaps we will bottom in the summer of 2004, matching the pattern of the 1920s-1930s.  Before the bear market is over, ALL of the following “unthinkable events” will have to occur:  1)  Microsoft will pay at least a 5% annual dividend; 2) the dividend yield on the S&P 500 index will exceed 7%; 3) Microsoft and Intel will switch to the NYSE (notice that the symbols M and I remain unused; if you want to talk about a conspiracy, this is no coincidence); 4) tickers will disappear from virtually all public buildings; 5) several major and many smaller mutual fund companies will no longer exist; 6) (to be continued).  Look for the U.S. stock market to peak in late July or early August 2002, accompanied by the VIX volatility index making an important bottom between 16 and 19.

HUI "MAGIC MULTIPLE FIVE":

HUI is the Amex Gold Bugs Index, a weighted index of gold mining shares. In addition to being a useful leading indicator for the price of gold, there is a historical correlation between the behavior of HUI as it approaches or crosses any multiple of five, and the short-term future performance of the price of gold itself. The most bullish behavior is if HUI begins the day above a multiple of five, goes below a multiple of five during the day (particularly if the intraday low is the lowest level in several weeks or more), then closes the day with a gain. The most bearish behavior is the exact opposite. I prefer HUI to the more established and former favorite XAU due to the greater responsiveness and accuracy of representation of HUI. One unfortunate characteristic of HUI is that it always opens at the previous day's closing price, which is clearly inaccurate and distorting. Whoever is in charge of this index should remedy this defect.

HUI slumped to an early morning bottom of 114.95, then soared to a late afternoon peak of 130.89 before closing up 8.67% at 130.69.  Since the key levels of 120 and 115 were initially broken to the downside, but then these same key levels and also the key levels of 125 and 130 were regained to the upside, this is MODESTLY BULLISH.  The fact that many gold mining shares opened at or near their lows of the day is bullish in the short run, although their subsequent sharp rebound has removed a substantial portion of their potential upside.

On Tuesday, June 4, 2002, HUI touched an intraday peak of 154.99, its highest level since October 9, 1997.  On Wednesday, November 15, 2000, and again on Thursday, November 16, 2000, HUI hit an intraday bottom of 35.31 (holding just above 35, another multiple of five), marking its all-time low.

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MODEL PORTFOLIO:

Remaining diversified, including the following mutual funds, roughly in order:  IDU (an exchange-traded diversified utilities fund), PPH (an exchange-traded pharmaceutical fund), UTH (an exchange-traded large-cap utilities fund), VGSUX (U.S. utilities), FIUIX (U.S. telecom and utilities), VWEHX (U.S. higher-grade junk bonds), TRVLX (U.S. large-cap value), BBH (an exchange-traded biotech fund), SBF (an exchange-traded U.S. large-cap growth fund), VPACX (mostly Japanese equities), and the following individual equities:  T, AMD, SWC, QQQ, MSFT, ORCL, IDTI.  Recently sold 80% of my Treasuries and all of my zero-coupon Treasuries.  Actually covered a few (about 10% of total) short positions in gold mining shares this morning, with the intention of adding new short positions into any sharp short-term rallies, or if the XAU approaches 80.  I have 21% of my total assets in GICs, TIPS, and other non-Treasury cash equivalents.

(c) 1996-2002 Steven Jon Kaplan Your comments are always welcome.

AUTOBIOGRAPHICAL SKETCH: I was born and raised in Baltimore, Maryland, U.S.A., and was graduated from the Johns Hopkins University with a Bachelor of Engineering Science degree in May 1982. I have been studying the precious metals markets since the 1970s, and began this web site in August 1996. I maintain a fiercely independent stand toward the financial markets, and am not compensated by any person or organization with the exception of the advertising banners posted on this site. I am also a music composer, pianist, computer programmer, bridge player, and runner, and enjoy world travel.

In order to buy low and sell high, first you have to buy low!

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