Gold Mining Outlook

by Steven Jon Kaplan

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Updated @ 7:45 p.m. EDT, Tuesday, August 6, 2002.

 

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I will be at the New York Institutional Gold Conference on September 23-24, 2002 at the New York City Marriott Marquis, especially early in the morning and late in the evening both days.  Registration is free; go to http://www.iiconf.com/ for details.  I will be glad to discuss the outlook for gold and its shares with friend and foe alike.

I will also be playing piano to accompany the singer Glen Charlow at Don’t Tell Mama, 343 West 46 Street, Manhattan, on Tuesday, August 6, 2002 at 9 p.m.(yes, tonight!); Tuesday, August 13, 2002 at 9 p.m., and on Saturday, August 17 at 6 p.m.  You can show up, or make reservations in advance at (212) 757-0788.  It is a tribute to the late Lucille Ball, of “I Love Lucy” fame.

SUMMARY:   My current outlook for gold and gold mining shares has improved substantially to MODESTLY BULLISH.  Spot gold recently made an important initial bottom at $298 spot on August 1, 2002.  While this may not be the final bottom, as speculators in a panic may still have a final cascade of sell stops which push gold down to around $286, it appears that gold mining shares are beginning to hold up much better than they had during the months of June and July.  Today, for instance, even as the U.S. dollar fell sharply and gold was lower, gold mining shares resisted attempts to push lower.  It is certainly that case that after an initial bottom such as the one seen on July 26 in which gold mining shares are dumped indiscriminately along with other stocks, there may be a bounce due solely to these shares behaving like other equities.  If senior gold shares in particular continue to hold up well under adverse circumstances, this would bolster the argument that these shares are prepared to make either a double bottom or a head-and-shoulders bottom.  Often the second bottom is characterized by a final three-consecutive-day slide in the price of the yellow metal, so look for this to occur over the next several weeks.  As U.S. equities generally rally, the U.S. dollar is likely to continue its current counter-rally, which will put pressure on gold and gold mining shares.  The heavy call trading on gold mining shares has sharply subsided, as day traders have gone elsewhere to play, while goldbugs have become chastened by the recent 40% slide in their holdings.  I continue to be worried by the preponderance of brokerage upgrades of gold mining shares over the past two weeks, but perhaps brokers will be right once in a great while just to make them effectively useless as a contrary indicator.  Commercials covered more than half of their heavy short position from July 23 to July 30, and in fact were likely almost exactly net neutral when gold bottomed at $298 spot.  Therefore, the pivot price for gold over the past 12 months has risen from $276 spot to $298 spot.  The intraday patterns of gold mining shares have improved noticeably over the past two weeks.  In India, the world’s greatest consumer of gold, recent rains following a drought during the critical monsoon season may lead to greater perceived prosperity and thus potentially improved gold buying, particularly on price dips.   It does appear that gold industry executives have stopped their heavy selling of shares in their own companies, indicating that the marked overvaluations of the late spring are no longer a serious concern.  This is a positive development, although there has been no insider buying to speak of.  At a true bottom, insider buying is usually evident.  As of the intraday low in HUI of 92.82 on Friday, July 26, 2002, the decline from June 4 (HUI at 154.99) to July 26 was in fact just over 40.1%, and of course HUI may not have yet reached its ultimate nadir.  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.

KAPLAN’S CORNER:  QUESTION:  What sector groups would you most and least recommend for current purchase and/or short sales?  ANSWER:  My favorite group to be long currently is utilities shares, which are traditionally known as the haven of widows and orphans.  With widows apparently dumping these shares in July (young orphans are not known for panic selling), they declined in price as much as the Nasdaq, even with their lower P/E ratios and dividends that averaged above seven percent at their recent lows.  As the U.S. economy slows and long-term capital gains become increasingly difficult to obtain, high dividends are gradually becoming the average investors’ favorite performance yardstick.  There is also a strong positive correlation between tight government regulation and stock price performance (see Philip Morris).  It is even possible that Congressional legislation will change the currently unfair treatment of dividends and tax them at the same rate as capital gains, which will cause these shares to soar [thanks to Scott Griff for this intriguing premise].  There is also likely to be a sharp rebound for other oversold equity groups, including especially telecom and pharmaceuticals and even those Nasdaq shares which have reasonable valuations.  As investors have piled into Treasuries and municipal bonds in recent weeks, these are likely to be the worst performing groups over the next several weeks, as long-term interest rates must always maintain a certain premium above the inflation rate, and these securities have become strongly overbought.  Over the long run, REITs and U.S. coastal real estate in general are likely to show declines which mirror the drop in the S&P 500.  Paradoxically, as the stock market has been going down, the average person who previously put money into both stocks and real estate has recently been putting money only into real estate, figuring that stocks can go both up and down (though before 2000 they figured stocks could only rise in price) but thinking that real estate can only go up (do people ever learn?).  The average investor, having lost money in the stock market, but having gained in the value of their house, perceives his or her overall financial situation as more or less breaking even.  It is quite likely that as the value of residential real estate collapses, as it inevitably does in a true bear market (see 1929-1934 or 1973-1978), ordinary Americans will perceive themselves as much poorer all around, having lost money in both the stock market for their anticipated retirement and in the value of their houses, and will sharply curtail their spending.  Falling real estate prices will therefore probably be the primary cause of the more severe stage of the U.S. recession that is closely approaching.  Caveat emptor.

July 31, 2002:  QUESTION:  I have recently raised cash with the intention of using the money to gradually purchase gold mining shares after they collapse.  What gold funds would you recommend?  ANSWER:  There are many gold funds which have received positive press over the past few months, given their strong rates of return (until recently, of course).  However, most gold funds charge enormous management fees, some as high as 6%.  Having studied the portfolios of these funds, there is no justification for their managers taking such a huge percentage of their investors’ hard-earned money; they do not opportunistically trade, have no idea how to sell short, or do anything at all that would justify this kind of legalized thievery.  My choice for best buy is the American Century Global Gold Fund, symbol BGEIX.  The management fee is only 0.68%.  There is a 1% redemption fee, but that applies only if the shares are held for less than 60 calendar days.  Investments and redemptions can be made at any time, in amounts as low as $50, without charge.  The fund’s holdings are roughly proportional to worldwide market capitalization.  They remain about 97.6% invested at all times.  William Martin has been continuously managing the fund since May 1, 1992; the fund itself has been around since August 17, 1988.  Telephone number:  (800) 345-2021.  I have not received any remuneration from this fund or any other consideration whatsoever for this recommendation; I am giving it only as a service to my readers.

July 9, 2002:  QUESTION:  What is the primary reason that the gold price is going to decline?  ANSWER:  Physical buying is one key to the gold price.  Now that the price in U.S. dollars is about 10% above its level of a year ago, jewelers and others who are well aware of gold’s volatility have reduced their buying, knowing that they will probably get another chance below $300 to accumulate inventory.  Indian buyers, the world’s most significant consumers, have had to deal with a falling rupee on top of the rising gold price, and are also quite price sensitive, so their physical buying has dropped substantially.  Seasonal factors often cause a dropoff in the summer months even when prices are low, so that at currently inflated levels, this decline is likely to be exaggerated.  On the investment front, it should be noted that small speculators have barely begun to reduce their net long positions.  From a timewise point of view, most of those noncommercials who are currently long COMEX gold futures have been holding these positions since May or even April, thus making them technically “stale.”  Stale speculator positions, long or short, are usually those which end up losing the most money, as the best noncommercial traders are early and nimble.  Since speculators by definition have no physical gold to deliver, they must use sell stops to protect against windfall losses.  It is a virtual certainty that tens of thousands of contracts have associated sell stops just below $300 in the August, October, and December months, so that once the price breaks below $300, these sell stops will trigger a new wave of speculative unloading of these stale long positions.  Given the reduced liquidity seen in the summertime, this speculative unloading could dominate the market in the short run.  Such selling will itself eventually cause disappointment among those who thought they had discovered the holy grail of investing, thus potentially triggering additional selling out of sheer disgust and/or additional stop loss points being hit.

June 11, 2002:  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 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, August 6, 2002:  The overall current outlook for gold and gold mining shares has improved substantially from SIGNIFICANTLY BEARISH to MODESTLY BULLISH, as commercials covered more than half of their net short position, and gold mining shares are not far from completing a bottoming pattern.

Tuesday, August 6, 2002:  The traders’ commitments indicator for gold has improved from STRONGLY BEARISH to NEUTRAL, as commercials heavily covered from July 23 to July 30, and were likely very close to net neutral when gold bottomed at $298 spot on August 1.

Tuesday, August 6, 2002:  The price/volume statistics indicator for gold has improved from MODESTLY BEARISH to MODESTLY BULLISH, as both HUI and the gold price itself tested and held above their respective 200-day moving averages on July 26, while the heavy concentration of call trading in gold mining shares seen in the spring has now led to only tentative gold trading, with put trading remaining roughly constant throughout.

Tuesday, August 6, 2002:  The gauges of future inflation indicator has improved again from MODESTLY BULLISH to SIGNIFICANTLY BULLISH, as both indices are showing double-digit growth rates.

Wednesday, July 31, 2002:  The overall current outlook for gold and gold mining shares has improved again from STRONGLY BEARISH to SIGNIFICANTLY BEARISH.  Given the recent substantial drop in price, there is less of a decline remaining.

Wednesday, July 31, 2002:  The insider stock transaction activity for gold has improved from STRONGLY BEARISH to MODERATELY BEARISH, as the recent sharp drop in gold mining share prices has discouraged further selling of these shares by top executives.

Tuesday, July 9, 2002:   The insider stock transaction activity for gold has deteriorated from SIGNIFICANTLY BEARISH to STRONGLY BEARISH, as the rate of recent insider selling by gold industry executives has exceeded the peak of February 1996, and is now approaching (but has not quite reached) its level from the summer of 1987.

Tuesday, July 9, 2002:  The traders’ commitments indicator for gold has improved from VERY STRONGLY BEARISH to STRONGLY BEARISH, as commercials are slowly covering their short positions when the gold price declines.

Tuesday, July 9, 2002:  The gauges of future inflation indicator has improved from NEUTRAL to MODESTLY BULLISH, as important leading indices of inflation are now showing positive rates of growth.

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 July 30, 2002, released at 3:30 p.m. on August 2, 2002, the commitments for COMEX gold futures showed commercial insiders long 63,814, short 96,047; large speculators long 27,460, short 27,075.  Small traders were long 39,299, short 7,451.  Commercials were thus net short 32,233 contracts, having decreased their short position from the previous week by 34,720 as the gold price fell $8.60.  This indicator has improved to NEUTRAL.  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" for the latest gold commitments.

GAUGES OF FUTURE INFLATION:

The Economic Cycle Research Institute (ECRI) monthly U.S. future inflation gauge (USFIG) for July, released August 2, 2002, was at 106.4, up from 103.4 for June (upwardly revised from 101.7).  Its smoothed annualized growth rate rose to +14.6% from +8.5% (upwardly revised from +5.5%).

The Foundation for International Business and Economic Research (FIBER) monthly U.S. leading inflation index, released August 2, 2002 for the month of July, was measured at 96.2, up from 95.1 (revised upward from 94.9) in June. Its smoothed annualized growth rate rose to +15.3% from +13.8% (revised upward from +13.3%).

This indicator has improved again to SIGNIFICANTLY BULLISH, showing double-digit growth rates for both indices.

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.  Canada recently raised short-term interest rates three times, Australia twice, and New Zealand four times.  However, due to the noticeably slowing U.S. economy, it will be difficult politically for the U.S. Federal Reserve to raise interest rates even if real price inflation rears its head.  Most likely the Fed will perceive a moderate increase in inflation as preferable to a prolonged recession, although the U.S. is likely to suffer from both in any event.  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, 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 Friday, June 7, 2002, Robert Bruce, director of Freeport McMoran Copper and Gold Inc. Class A (FCX.A), announced a SALE on May 6, 2002 of 462,200 shares at a price of $17.7501 per share, reducing his total holdings to 1,428,000 shares.

On Monday, June 10, 2002, James R. Moffett, CEO of Freeport McMoran Copper and Gold Inc. Class B (FCX.B), announced a SALE on May 2, 2002 of 200,000 shares at a price of $17.50 per share, reducing his total holdings to 618,618 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.

On Friday, June 14, 2002, Mark A. Lettes, officer of a subsidiary of Apex Silver Mines Ltd. (SIL), announced a SALE on May 1-29, 2002 of 33,000 shares at a price of $12.13-$17.16 per share, reducing his total holdings to 10,641 shares.

On Friday, June 14, 2002, Keith R. Hulley, officer of a subsidiary of Apex Silver Mines Ltd. (SIL), announced a SALE on May 1-22, 2002 of 55,000 shares at a price of $12.13-$17.25 per share, reducing his total holdings to 19,312 shares.

On Friday, June 14, 2002, Lewis E. Walde, officer and treasurer of Hecla Mining Co. (HL), announced a SALE on May 22, 2002 of 6,000 shares at a price of $4.61 per share, reducing his total holdings to 21,579 shares.

On Friday, June 14, 2002, Vicki J. Veltkamp, vice president of Hecla Mining Co. (HL), announced a SALE on May 20, 2002 of 5,000 shares at a price of $3.48 per share, reducing her total holdings to 15,410 shares.

On Friday, June 14, 2002, Thomas F. Fudge, Jr., vice president of Hecla Mining Co. (HL), announced a SALE on May 22, 2002 of 10,000 shares at a price of $4.24 per share, reducing his total holdings to 32,776 shares.

On Friday, June 14, 2002, Michael H. Callahan, vice president of Hecla Mining Co. (HL), announced a SALE on May 7, 2002 of 10,000 shares at a price of $3.42 per share, reducing his total holdings to 42,282 shares.

On Friday, June 14, 2002, Arthur Brown, CEO of Hecla Mining Co. (HL), announced a SALE on May 22, 2002 of 25,000 shares at a price of $4.62 per share, reducing his total holdings to 281,029 shares.

On Monday, June 17, 2002, Karen Gross, vice president of Royal Gold Inc. (RGLD), announced a SALE on May 22-23, 2002 of 15,000 shares at a price of $15.50-$15.72 per share, reducing her total holdings to 60,650 shares.

On Wednesday, July 10, 2002, Mark A. Lettes, officer of a subsidiary of Apex Silver Mines Ltd. (SIL), announced a SALE on June 3-4, 2002 of 2,000 shares at a price of $16.95-$18.02 per share, reducing his total holdings to 10,641 shares.

On Wednesday, July 10, 2002, Keith R. Hulley, officer of a subsidiary of Apex Silver Mines Ltd. (SIL), announced a SALE on June 3-4, 2002 of 15,000 shares at a price of $16.95-$18.00 per share, reducing his total holdings to 19,312 shares.

On Monday, July 15, 2002, Hank Lesinski, shareholder of Vista Gold Corp. (VGZ), announced a PURCHASE on June 24, 2002 of 400 shares at a price of $3.95 per share, increasing his total holdings to 400 shares.

On Monday, July 15, 2002, Warren Bates, officer of Vista Gold Corp. (VGZ), announced a SALE on June 6-7, 2002 of 75,000 shares, reducing his total holdings to zero shares.

On Monday, July 15, 2002, John F. Engele, vice president of Vista Gold Corp. (VGZ), announced a SALE on June 5, 2002 of 100,000 shares, reducing his total holdings to 75,000 shares.

Due to a subsiding of the recent heavy insider selling of gold mining shares, this indicator has improved from STRONGLY BEARISH to MODERATELY 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, and then nearly matched that peak at $5.14 on Monday, July 15, 2002, thus completing a bearish double top.

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 modestly above its 200-day moving average of 95.04.  HUI recently exactly touched its 200-day moving average on July 26 and held above it, thus improving this measure to MODERATELY BULLISH.

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 modestly above its 200-day moving average, and like HUI, tested and held above its 200-day moving average.  This reading has therefore improved to MODESTLY BULLISH.

Total gold mining equity option U.S. daily volume is modestly above normal levels while put-call ratios are slightly above normal levels. This is SLIGHTLY BULLISH.

Synthesizing these three signals as a group, the price/volume statistics indicator has improved to MODESTLY BULLISH.

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 August or early September 2002, accompanied by the VIX volatility index making an important bottom perhaps near 26.

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 fell to a late morning bottom of 107.54, then rallied to a late afternoon peak of 112.96 before closing up 3.51% at 112.87.  Since the key level of 110 was initially broken to the upside, this is SLIGHTLY BULLISH.

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), RYJUX (a bet on higher 30-year U.S. Treasury rates), 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, SWC, AMD, QQQ, MO, MSFT, ORCL, CDIC.  Have switched from being moderately net short gold/silver mining shares to being modestly net long gold mining shares.  I have 25% 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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