True Contrarian

by Steven Jon Kaplan

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Updated @ 5:45 p.m. EDT, Thursday, September 19, 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.

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SUMMARY:   My current outlook for gold and gold mining shares has dropped to MODERATELY BEARISH.  The XAU has risen by about 20% since my last update.  Since that time, insider selling has accelerated by top executives at most gold mining companies.  The traders’ commitments, which had seen commercials net neutral for a brief time, recently showed commercials more than 60 thousand contracts net short, and gold has risen $5 per ounce since then, possibly indicating that they may be as many as 70 thousand contracts net short at this time (we won’t know until the report released on Friday, September 27, which is eight days away).  Small speculators were more than 5:1 net long as of the last report.   A lopsided ratio of call trading to put trading on gold mining shares has resumed in earnest, as investors fleeing the general stock market have once again flocked to gold as an alternative even as the U.S. dollar has been generally rising since July 19.   As in the spring, speculative gold shares have been far outperforming the senior producers, which is often a sign of a short-term peak.  The only reason that I am not more bearish is that many investors who started buying gold shares for the first time in the spring of 2002 were burned by the 40% collapse in HUI from early June to late July.  Therefore, they chose not to participate in the recent move higher, and as a result, gold share valuations are not nearly as dangerously euphoric now as they were in late May or early June.   I continue to be worried by the nearly unanimous bullish consensus of the brokerage community toward gold mining shares; there will have to be more visible skepticism before the next rally can resume in earnest.  There is a common seasonal pattern in which gold shares bottom in the autumn before rising significantly through the subsequent spring and/or summer, so perhaps that will occur from 2002-2003.   Physical purchases of gold by the primary world consumers, including India, has seen a pronounced decline over the past several months, partly from the weak Indian rupee, and partly because many of these consumers are psychologically not willing, or at least not yet willing, to pay 10%-20% more than they have been paying over the past few years.  Barrick Gold recently publicly announced a decrease in its hedged position which was widely reported by the financial media; such announcements historically often coincide with short-term peaks in gold share prices.  As many producers have eliminated or reduced their hedges, the total worldwide hedge book has declined by 60%-65% over the past two years, thus reducing the potential gain in the gold price to be achieved in the future from further hedge reductions, which are essentially equivalent to gold purchases.  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 just over 40.1%.  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:  Since you don’t like gold mining shares at this time, what would you recommend for purchase?  ANSWER:  Tobacco shares, although unpopular to some, represent solid value at current levels.  The dividends are high and the P/E ratios are low.  Technically, they appear to be tracing classic bottoming patterns.  Just as importantly, if we head into worldwide recession, as I am certain that we will, there will likely be no decrease in tobacco consumption.  Some investors remain concerned about litigation issues, but actually the current arrangement between the tobacco companies and the U.S. government has caused the 50 U.S. states which are receiving regular tobacco payments to rely on these payments, and therefore to essentially be silent partners of the tobacco manufacturers.  Confirmed smokers can evade the very high local taxes by purchasing cartons over the internet or from Indian reservations; I received such an advertisement today in e-mail, in spite of the fact that I don’t smoke.  The ban on many forms of advertising is also beneficial; it saves money.  There are not many businesses in which your competitors are not permitted to advertise, and in which new competitors have very significant bars to entry.  Besides tobacco stocks, utility shares still represent reasonable value for similar reasons:  high dividends, low P/E ratios, and little to lose from a prolonged recession.  Deregulation or not, it is difficult for a new utility company to start in someone’s garage.  These are not as undervalued as tobacco shares, but are a reasonable second-place choice.

August 6, 2002:  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:

Thursday, September 19, 2002:  The overall current outlook for gold and its shares has fallen from MODESTLY BULLISH to MODERATELY BEARISH.  The pessimism toward gold that was rampant in late July has been replaced by an optimism nearly as pronounced as what was experienced in the spring.  Juniors are far outperforming seniors, put buying has all but vanished, and commercials are once again more than 60 thousand contracts net short in COMEX gold futures.  I would be more bearish, except that gold share valuations are not as overextended as they were in late May or early June, so they have less to decline in percentage terms.

Thursday, September 19, 2002:  The traders’ commitments indicator for gold has plummeted from NEUTRAL to SIGNIFICANTLY BEARISH, as commercials have shown a strong eagerness to heavily re-establish short positions at any price above $315 spot, whereas small speculators are again more than 5:1 net long as they were in late May and early June.

Thursday, September 19, 2002:  The insider stock transaction activity for gold has deteriorated from MODERATELY BEARISH to SIGNIFICANTLY BEARISH, as insider selling by gold mining executives has picked up after a brief interval of insider buying in late July that quickly dried up after share prices rebounded.

Thursday, September 19, 2002:  The price/volume statistics indicator for gold has worsened from MODESTLY BULLISH to NEUTRAL, as the 200-day moving averages are too far away to be useful as short-term support, while put trading on individual gold mining shares has plummeted, indicating very little fear of a short-term drop in the gold price.

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 September 10, 2002, released at 3:30 p.m. on September 13, 2002, the commitments for COMEX gold futures showed commercial insiders long 49,522, short 110,002; large speculators long 45,693, short 25,872.  Small traders were long 50,606, short 9,947.  Commercials were thus net short 60,480 contracts, having increased their short position from the previous week by 19,813 as the gold price rose $4.50.  This indicator has fallen to SIGNIFICANTLY 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" for the latest gold commitments.

GAUGES OF FUTURE INFLATION:

The Economic Cycle Research Institute (ECRI) monthly U.S. future inflation gauge (USFIG) for August, released September 5, 2002, was at 109.0, up from 107.0 for July (upwardly revised from 106.4), and marking its highest level since March 2001.  Its smoothed annualized growth rate rose to +18.8% from +15.7% (upwardly revised from +14.6%).

The Foundation for International Business and Economic Research (FIBER) monthly U.S. leading inflation index, released September 6, 2002 for the month of August, was measured at 93.7, down from 95.3 (revised downward from 96.2) in July.  Its smoothed annualized growth rate dropped to +8.7% from +13.4% (revised downward from +15.3%).

This indicator remains SIGNIFICANTLY BULLISH, though it is displaying a minor negative divergence.

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.  Canada did not raise short-term rates on September 4, even with its improving growth outlook, partly over the fear that such a move could accelerate a recession in its economically weaker neighbor immediately to the south.   Should this policy continue, it will confirm that the world’s major industrialized nations are more concerned about preventing recession than fighting inflation.  This will therefore lead to increased inflation worldwide as it becomes acceptable politically to accept growing inflation, which will be ever more commonly perceived as a lesser evil when compared with the pain of high unemployment and other ills caused by a worldwide economic slowdown.  In the long run, this will be positive for gold and its shares.  Whenever 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 Wednesday, August 14, 2002 (amended from 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 2,106 (originally 1,000) shares at a price of $12.85-$13.46 per share, reducing his total holdings to 9,535 (originally 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.

On Friday, August 9, 2002, Warrack G. Willson, vice president of Silverado Gold Mines Ltd. (SLGLF), announced a PURCHASE on May 17, 2002 of 1,200,000 shares at a price of $0.13 per share, increasing his total holdings to 1,200,000 shares.

On Tuesday, August 13, 2002, Robert W. Bruce III, director of Freeport McMoran Copper and Gold Inc. Class B (FCX.B), announced a SALE on July 24-31, 2002 of 1,372,100 shares at a price of $13.17-$15.64 per share, reducing his total holdings to 62,517 shares.

On Tuesday, August 13, 2002, Mary A. Erickson, shareholder of Golden Eagle International Inc. (MYNG), announced a SALE on July 5-17, 2002 of 250,000 shares at a price of $0.12-$0.13 per share, reducing her total holdings to 14,050,000 shares.

On Tuesday, August 13, 2002, Roger D. Palmer, officer of Golden Star Resources Ltd. (GSS), announced a PURCHASE on July 25, 2002 of 8,000 shares at a price of $1.15 per share, increasing his total holdings to 8,000 shares.

On Tuesday, August 13, 2002, Allan J. Marter, CFO of Golden Star Resources Ltd. (GSS), announced a PURCHASE on July 25, 2002 of 11,000 shares at a price of $1.15 per share, increasing his total holdings to 31,500 shares.

On Tuesday, August 13, 2002, Richard Q. Gray, COO of Golden Star Resources Ltd. (GSS), announced a PURCHASE on July 25, 2002 of 20,000 shares at a price of $1.15 per share, increasing his total holdings to 35,000 shares.

On Tuesday, August 13, 2002, Peter Claningbull, vice president of Golden Star Resources Ltd. (GSS), announced a PURCHASE on July 25, 2002 of 4,700 shares at a price of $1.15 per share, increasing his total holdings to 3,700 shares (maybe he was short 1,000?).

On Tuesday, August 13, 2002, Peter Bradford, CEO of Golden Star Resources Ltd. (GSS), announced a PURCHASE on July 25, 2002 of 280,000 shares at a price of $1.15 per share, increasing his total holdings to 280,000 shares.  (P.S.:  They all should have waited one more day, as the price of GSS bottomed on July 26 at $0.73 per share.)

On Tuesday, August 13, 2002, Robert M. Taylor, vice president of Stillwater Mining Co. (SWC), announced a SALE on July 3, 2002 of 939 shares at a price of $13.83 per share, reducing his total holdings to 7,446 shares.

On Tuesday, August 13, 2002, John R. Stark, vice president of Stillwater Mining Co. (SWC), announced a SALE on July 3, 2002 of 869 shares at a price of $13.83 per share, reducing his total holdings to 6,840 shares.

On Tuesday, August 13, 2002, James A. Sabala, CFO of Stillwater Mining Co. (SWC), announced a SALE on July 3, 2002 of 1,370 shares at a price of $13.83 per share, reducing his total holdings to 13,265 shares.

On Tuesday, August 13, 2002, Ronald W. Clayton, shareholder of Stillwater Mining Co. (SWC), announced a SALE on July 3, 2002 of 939 shares at a price of $13.83 per share, reducing his total holdings to 7,446 shares.

On Tuesday, August 13, 2002, Terrell I. Ackerman, vice president of Stillwater Mining Co. (SWC), announced a SALE on July 3, 2002 of 665 shares at a price of $13.83 per share, reducing his total holdings to 4,471 shares.

On Tuesday, August 13, 2002, A. Murray Sinclair, director of Vista Gold Corp. (VGZ), announced a SALE on May 27, 2002 of 100,000 shares, reducing his total holdings to zero shares.

On Wednesday, August 14, 2002, Keith R. Hulley, officer of a subsidiary of Apex Silver Mines Ltd. (SIL), announced a SALE on July 1, 2002 of 5,000 shares at a price of $14.50 per share, reducing his total holdings to 19,312 shares.

On Wednesday, August 14, 2002, Paul Soros (you may have heard of him), director of Apex Silver Mines Ltd. (SIL), announced a SALE on July 11-15, 2002 of 12,500 shares at a price of $16.00-$16.08 per share, reducing his total holdings to 728,007 shares.

On Thursday, August 15, 2002, Robert G. Dinning, CFO of Apolo Gold Inc. (APLL), announced a SALE on June 28, 2002 of 50,000 shares at a price of $0.17 per share, reducing his total holdings to 523,333 shares.

On Monday, September 2, 2002, S. Oden Howell, Jr., director of Royal Gold Inc. (RGLD), announced a SALE on August 29, 2002 of 18,000 shares at a price of $13.90 per share, reducing his total holdings to 533,680 shares.

On Monday, September 2, 2002, Merritt E. Marcus, director of Royal Gold Inc. (RGLD), announced a SALE on August 28-29, 2002 of 29,000 shares at a price of $13.70-$13.80 per share, reducing his total holdings to 280,588 shares.

On Monday, September 9, 2002, Mark A. Lettes, CFO of Apex Silver Mines Ltd. (SIL), announced a SALE on July 1, 2002 of 1,000 shares at a price of $14.50 per share, reducing his total holdings to 9,535 shares.

On Monday, September 9, 2002, Mark A. Lettes, CFO of Apex Silver Mines Ltd. (SIL), announced a SALE on August 1, 2002 of 1,000 shares at a price of $12.80 per share, reducing his total holdings to 9,535 shares.

On Monday, September 9, 2002, Mark A. Lettes, CFO of Apex Silver Mines Ltd. (SIL), announced a SALE on September 3, 2002 of 1,000 shares at a price of $15.10 per share, reducing his total holdings to 9,535 shares.

On Monday, September 9, 2002, Keith R. Hulley, officer and director of Apex Silver Mines Ltd. (SIL), announced a SALE on August 1, 2002 of 5,000 shares at a price of $12.80 per share, reducing his total holdings to 19,312 shares.

On Monday, September 9, 2002, Keith R. Hulley, officer and director of Apex Silver Mines Ltd. (SIL), announced a SALE on September 3, 2002 of 5,000 shares at a price of $14.85-$15.00 per share, reducing his total holdings to 19,312 shares.

On Tuesday, September 10, 2002, Thomas F. Fudge, Jr., vice president of Hecla Mining Co. (HL), announced a SALE on September 5, 2002 of 30,542 shares at a price of $4.10 per share, reducing his total holdings to 2,234 shares.

On Friday, September 13, 2002, Ronald W. Clayton, shareholder of Stillwater Mining Co. (SWC), announced a SALE on August 9, 2002 of 1,665 shares at a price of $8.21 per share, reducing his total holdings to 15 shares.

On Wednesday, September 18, 2002, Allan J. Marter, CFO of Golden Star Resources Ltd. (GSS), announced a PURCHASE on September 12, 2002 of 5,000 shares at a price of $1.36 per share, increasing his total holdings to 36,500 shares.

On Thursday, September 19, 2002, Vicki J. Veltkamp, vice president of Hecla Mining Co. (HL), announced a SALE on September 17, 2002 of 20,000 shares at a price of $4.17 per share, reducing her total holdings to 16,307 shares.

The earliest signs of insider buying in gold mining shares had emerged shortly after July 25.  However, since then, insider selling has resumed in earnest.  Therefore, this indicator has dropped from MODERATELY BEARISH to 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, and then nearly matched that peak at $5.14 on Monday, July 15, 2002, thus completing a bearish double top.  Silver recently touched a low of $4.38 on Friday, August 23, 2002.

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 significantly above its 200-day moving average of 104.77.  HUI 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.  On Thursday, August 1, 2002, spot gold made a short-term bottom at $298.00.  Spot gold is significantly above its 200-day moving average.  On August 1, 2002, spot gold 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 moderately above normal levels while put-call ratios are moderately below normal levels. This is MODERATELY BEARISH.  For example, exactly zero puts traded today on Anglogold (AU).

Synthesizing these three signals as a group, the price/volume statistics indicator has fallen to NEUTRAL, as the 200-day moving averages are too far away to help much with nearby support, while put trading in individual gold mining shares has fallen significantly, indicating insufficient fear of a short-term decline.

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.  Not a bad guess:  the stock market peaked on August 22, accompanied by a VIX of 30.44.

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 surged to an early morning peak of 134.54, then retreated to a mid-morning bottom of 131.76 before rallying again to close up 2.13% at 134.13.  Since the key level of 135 could not be broken to the upside, this is SLIGHTLY BEARISH.

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.  On Friday, July 26, 2002, HUI made a short-term bottom at 92.82.

MODEL PORTFOLIO:

Concentrating increasingly on high-dividend equities, with a rising portion moving to GICs and similar no-risk equivalents.  Holding the following positions:  IDU (an exchange-traded diversified utilities fund), RYJUX (a bet on higher 30-year U.S. Treasury rates), 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), SBF (an exchange-traded U.S. large-cap growth fund), VPACX (mostly Japanese equities), and the following individual equities:  CG, SWC, MO, X.  Have switched from being modestly net long gold/silver mining shares to being slightly net short gold mining shares.  I have 35% 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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