an independent analysis of gold mining shares and other investments

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Updated @ 7:00 p.m. EDT, Monday, April 7, 2003.

 

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SUMMARY:   As a freak April snowstorm rages outside, my current outlook has been raised to VERY STRONGLY BULLISH on both gold and gold mining shares.  Even as the price of gold itself has continued to move lower, HUI has made a series of higher lows:  112.61 on March 13, 114.06 on March 25, 114.22 on March 28, and 116.56 on April 7.  Investor sentiment toward gold and its shares is continuing to deteriorate, even as the share prices are grinding higher.  This is exactly the opposite of the behavior in early February when gold was peaking, and is the classic sign of an important intermediate-term bottom.  In addition, the 112.61 HUI nadir on March 13, 2003 almost exactly matches the floor of 112.66 on November 22, 2002, and therefore completes a very bullish double bottom.  As of this morning, when gold touched $319.30, its lowest point since December 2, 2002, Comex gold commercials were probably net long for the first time since December 2001, thus confirming a strong buy signal on both gold and its shares.  The intraday trading pattern since March 12 has seen gold shares repeatedly open at or near their lowest levels of the day, then gradually recover as the day progresses, which is quite bullish.  This indicates that institutions are accumulating repeatedly at key support levels.  Gold analysts who were very bullish at the recent top, and pounded the table all the way down, have recently become quiet, indicating that even they are afraid of appearing foolish as gold appears to be moving against them.  Almost no one but myself has pointed out that the HUI low of March 13 has held easily on repeated downside attempts.  All markets eventually follow the path of least resistance.  Since gold shares have tried over and over again to decline, and have bounced each time, eventually they will probe the opposite direction, which is toward higher prices.  Their attempted rally on March 31 is very typical of a market set for a major upside breakout.   The U.S. dollar has probably made its final serious upward surge of the year; as the greenback declines, gold will rise.  Meanwhile, the U.S. equity market has staged several sharp rallies, with the S&P 500 index touching but failing to surpass its key 200-day moving average on repeated attempts to move higher.  This is exactly the opposite situation from gold mining shares, with repeated early morning highs in U.S. equities fading to late morning selloffs.  Therefore, the U.S. equity market will also move in the direction of least resistance, which is straight down, and is poised to decline below its October 2002 lows for a total drop of 30%-40% over the next several months.  The Nasdaq composite index, which has struggled with the 1400 level for months, including today, will likely drop below 900 as early as the summer of 2003. 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 do you think of silver?  ANSWER:  The commercials for silver recently showed large speculators going net short, which is quite rare, and which has always proven to be an excellent buying opportunity.  Both silver and gold should rally in tandem over the next few years, with silver probably increasing more in percentage terms.  Unfortunately, there are no consistently profitable silver producers, so investors who wish to participate with the shares should stick to profitable gold mining companies instead.  My favorite gold fund for purchase is the no-load American Century Global Gold Fund (http://americancentury.com/  symbol BGEIX), which has a management fee of only 0.68% and an excellent indexing system in which their holdings are weighted by worldwide market capitalization.

March 17, 2003:  No Kaplan’s Corner today.

March 13, 2003:  QUESTION:   What do you see for the short-term and the long-term future of spot gold and HUI?  ANSWER:  HUI at 155 served as important resistance in the late spring of 2002 and again early this year.  Sooner or later, 155 is going to be convincingly broken to the upside, and will then become a key support level for a year or so.  As for gold itself, $422 served as important resistance in many calendar years going back to 1989, and will therefore probably again be a difficult number to break on its first attempt.  The media is likely to heavily cover gold’s first return to $400 since 1996, so this should provide sufficient momentum to get to $422, but probably not much higher.  After gold then retreats to the $357-$378 range, and HUI retests support slightly above 155, it will try at least twice more to break $422, and will eventually succeed, though the time frame is uncertain.  Gold moved slightly above $500 per ounce in late 1987, about the time that the Nasdaq was last below 300, so expect the next Nasdaq move below 300 to potentially push gold above $500 once again.  Gold might even move above $500 several months before that, in anticipation of the Nasdaq going below 300.  When gold reaches $422, HUI should be in the 180s.  When gold reaches $500, HUI is likely to be in the 240s.

March 11, 2003:  No Kaplan’s Corner today.

February 25, 2003:  QUESTION:  How will you know when gold and its shares have bottomed?  ANSWER:  Notice that during the bull market in gold shares since October 2000, when any important intermediate-term nadir occurs for gold and its shares, the spread between spot gold and the HUI is close to 210.  A week or two later, gold itself declines an additional few percent, but the gold shares make a higher low, with the spread between spot gold and the HUI around 200.  This is likely to happen over the next several weeks as the next key bottom is formed.  Also notice that when a true low point in gold shares is being completed, most share prices will collapse into the open and bottom early in the morning, then rebound significantly by the end of the trading day, even as gold itself closes near its intraday lows.  American and Canadian senior producers often bottom first, followed by juniors, and then finally South African shares which usually bottom last, so purchases should be made rotationally, to try to take advantage of the cheapest prices available for each of these categories.  Buying should be accelerated whenever it becomes increasingly obvious that previously touched lows are unlikely to be revisited, as failed attempts to set a deeper bottom often shortly precede a sharp move higher.  If gold shares consistently outperform gold bullion, and seniors hold up better than juniors in declines, then accelerate the buying.  If gold shares repeatedly bottom early in the day and rally in the late afternoon, also step up the magnitude of the buying.  Notice that exactly the opposite behavior is currently occurring, which is why continued deterioration in gold mining share prices is likely in the near future.  Also watch the commitments and Market Vane.  Commercials should be at least close to net neutral at the next bottom, if not outright net long, while Market Vane should show bullish sentiment toward gold below 50%.

January 6, 2003:  QUESTION:  How low are gold and gold mining shares likely to go, and when?  ANSWER:  Gold first peaked on June 4, 2002 and then again on September 24, 2002, which is a separation of 112 calendar days.  If today was the recent zenith for gold, that would be 104 calendar days since the previous high.  Switching to the lows, they occurred on August 1, 2002 ($298 spot) and October 24, 2002 ($309 spot).  If the price at which commercials are net neutral (and which really represents the true price of gold) is rising roughly three dollars per month, and we know that commercials were just about exactly net neutral on August 1, 2002, then in February or March 2003, it is likely that commercials will be net neutral near $320 spot.  Since commercials have not gone net long in some time, it is likely to happen following the peak of greatest bullishness, which probably just occurred.  Therefore, the gold price will probably bottom between $311 and $317 spot.  XAU will likely be near 63, GOX close to 52, and HUI around 116.  Not bad guesses:  XAU hit a low of 62.08, GOX bottomed at 50.79, and HUI touched 112.61.  One sign that both gold and its shares are close to a bottom will be when ABX and PDG either decline very slightly or actually rise over a period of several days (they have in fact been the strongest performers since the early morning bottom of March 13), while HUI and the juniors, as well as gold itself, are still dropping in price (though most juniors and South Africans have since bottomed and are beginning to turn higher).  As for the exact date, pick your favorite one in late February or early March.  Hopefully most readers picked March 13 or thereabouts.  Perhaps ABX will bottom in the middle of February, while gold mining shares in general will make their lows in late February, and the yellow metal itself will have a final nadir in early March 2003.  Close, but no cigar; add exactly one month to each of the dates in the previous sentence, however, and it’s right on the money, point for point.  My apologies to those poor souls who do very short-term options plays.

December 19, 2002:  QUESTION:  Isn’t gold in a long-term bull market?  Why are you bearish on gold if that is the case?  ANSWER:  The gold market now is very similar to the stock market in the summer of 1987.  In 1982, U.S. equities finally ended their bear market which had started in 1966.  By 1987, the stock market was clearly in an uptrend.  The U.S. economy continued to improve throughout 1987, both before and after the sharp stock market correction.  Similarly, the fundamentals for gold, such as negative real returns from time deposits, potentially higher inflation, and a weak equity market, will likely continue to improve.   In 1987 there were no day traders; very little 401K money was in the market; there was limited public participation in the rally.  Still, it became euphoric all the same.  It was in many ways analogous to the gold market today, having enjoyed an upward trend after a very long downward period.  Also similar to the gold market, the short-term condition became strongly overbought, with noticeable negative divergences, as the 30-year Treasury yield soared above 10% in the summer of 1987.  Finally, some block of savvy investors couldn’t resist the incredibly oversold government bond market and switched from equities into Treasuries, eventually triggering a sharp correction in equities.  Similarly, the current extreme short position by gold commercials, and the simultaneous clearing out of the remaining speculator short positions, should lead to a sharp correction in gold in the very near future, probably having started late last night, and likely continuing through the early months of 2003.

December 16, 2002:  QUESTION:  What would it take for you to turn bullish on gold and its shares?  ANSWER:  I am primarily looking for commercials to go at least slightly net long COMEX gold futures, as they did in December 2001.  As long as there remains a concentration of stale speculator long positions, there also remains the accompanying risk of a sharp drop in the price of gold as a cascade of sell stops are triggered, and these longs are flushed out.  Commercials are currently at an unusually extreme net short position, so caution is advised at the present time.  Once these stale longs are gone, there will be no technical impediment to a rally.  In addition, such a decline in the gold price will likely be accompanied by the essential skepticism toward any financial asset that often marks a good buying point.

November 11, 2002:  QUESTION:  Is there any significance to the spread between the XAU and the current spot gold price, or between the HUI and the current spot gold price?  What about the ratios between XAU/spot gold or HUI/spot gold?  ANSWER:  For many years, a widening of the spread between XAU and the spot gold price has led to a lower price for both gold and gold mining shares. Over the past three consecutive trading days, the gold price has risen while XAU has declined.  Usually, if this happens three times in a row, and often if it happens only twice, while both gold and gold mining shares had been previously rallying for some time, it generally indicates that a decline in the price of gold is about to occur.  Currently the spread between XAU and spot gold is about 254, which is above average for the current gold price, and probably means that a drop is imminent.  Conversely, when gold shares have been declining for some time and are about to reverse higher, this spread often contracts to about 240, as was observed on August 1.  I have not found the ratios to be as useful as a predictive tool.  The spread between HUI and the spot gold price is also not that useful.  However, the ratio between XAU and HUI does have some meaning, though not as much as the XAU/spot gold spread.  When the XAU/HUI ratio is noticeably below average, it means that seniors are underperforming, indicating overspeculation, and is usually bearish for gold and its shares; when it is significantly above average, it means that seniors are outperforming juniors, as often occurs at an intermediate-term bottom, and is therefore usually bullish.

RECENT CHANGES:

Monday, April 7, 2003:  The overall current outlook for gold and gold mining shares has improved from STRONGLY BULLISH (for the shares) and SIGNIFICANTLY BULLISH (for the metal itself) to VERY STRONGLY BULLISH for both gold and gold mining shares, reflecting the pattern of higher highs in HUI, the peaking U.S. equity market, and the peaking U.S. dollar, combined with general pessimism toward gold, as well as a likely net long position for Comex gold commercials.

Monday, April 7, 2003:  The traders’ commitments indicator for gold has improved from MODERATELY BEARISH to MODESTLY BEARISH.  The numbers as of this morning, after gold’s recent sharp drop (since last Tuesday when the commitments were last tabulated), may have seen Comex gold commercials actually go net long for the first time since December 2001, but this is only an educated guess that cannot yet be confirmed.

Thursday, March 13, 2003:  The overall current outlook for gold mining shares has improved from MODERATELY BULLISH to STRONGLY BULLISH, as the HUI appears to have completed a very bullish double bottom at 112.61 with its November 22, 2002 nadir of 112.66.  The overall current outlook for gold itself has improved from SLIGHTLY BULLISH to SIGNIFICANTLY BULLISH, as commercials appear to be have gone exactly net neutral Comex gold futures this morning, thus removing the threat of a serious triggering of stale speculator longs’ sell stops.

Thursday, March 13, 2003:  The price/volume statistics indicator has improved from SLIGHTLY BEARISH to MODERATELY BULLISH, as the HUI completed a potential strong double bottom at 112.61, gold itself is close to its 200-day moving average, and there was a recent surge in put buying on individual gold mining shares.

Tuesday, March 11, 2003:  The overall current outlook for gold mining shares has improved from MODERATELY BEARISH to MODERATELY BULLISH, reflecting their recent sharp price decline.  The overall current outlook for gold itself has improved from MODERATELY BEARISH to SLIGHTLY BULLISH, since the above-average spread between HUI and the spot gold price demonstrates that there is a real danger of a final sharp short-term drop in the price of the yellow metal before it is able to rally once again.

Tuesday, March 11, 2003:  The traders’ commitments indicator for gold has improved from SIGNIFICANTLY BEARISH to MODERATELY BEARISH, as commercials have reduced their huge short position by about half over the past five weeks.

Tuesday, March 11, 2003:  The price/volume statistics indicator has improved from MODESTLY BEARISH to SLIGHTLY BEARISH.  Since HUI broke below its 200-day moving average and collapsed, the risk of its continued decline has been proportionately abated.

Tuesday, February 25, 2003:  The overall current outlook for gold and its shares has improved from STRONGLY BEARISH to MODERATELY BEARISH, as gold and its shares have declined substantially, putting us closer to the eventual nadir.

Tuesday, February 25, 2003:  The traders’ commitments indicator for gold has improved from STRONGLY BEARISH to SIGNIFICANTLY BEARISH, as commercials have continued to reduce their net short position significantly from its recent 22-year peak of 127,047 net short.

Tuesday, February 25, 2003:  The price/volume statistics indicator has declined again from SLIGHTLY BEARISH to MODESTLY BEARISH, as the HUI is about to struggle with its 200-day moving average, and gold itself has a significant amount to drop before testing its own 200-day moving average.  The shares are consistently underperforming the metal, and the intraday trading behavior shows gold mining shares repeatedly moving higher in the morning and then lower later in the day.  Both of these patterns are bearish for gold and its shares.

Thursday, December 19, 2002:  The overall current outlook for gold and its shares has dropped from SIGNIFICANTLY BEARISH to STRONGLY BEARISH.  Gold mining shares, especially those of senior producers, continue to underperform the gold price, while investor sentiment has turned euphoric.  This is a profoundly bearish combination.

Thursday, December 19, 2002:  The price/volume statistics indicator has fallen from NEUTRAL to SLIGHTLY BEARISH, as the HUI, which failed to approach its June 4, 2002 peak, is negatively diverging from spot gold, which easily set a new 5-1/2-year high.

Monday, December 16, 2002:  The overall current outlook for gold and its shares has plummeted from MODESTLY BEARISH to SIGNIFICANTLY BEARISH.  Commercials are at an extreme net short position.  There is very little put buying on gold mining shares, and lots of call buying.  The media has turned bullish on gold.  Senior gold shares are far underperforming bullion, while juniors have been surging.

Monday, December 16, 2002:  The traders’ commitments indicator for gold has fallen from SIGNIFICANTLY BEARISH to STRONGLY BEARISH, as commercials have been aggressively adding to their net short position into all rallies.

Monday, November 11, 2002:  The overall current outlook for gold and its shares has risen from MODERATELY BEARISH to MODESTLY BEARISH.  There is not as much insider selling now as in September when the HUI was in the mid- to upper-130s, and seniors are beginning to outperform relative to juniors, both of which are positive developments.  On the negative side, the traders’ commitments for gold are still unencouraging, and the traders’ commitments for currencies which correlate closely with the gold price are at multi-year extremes, indicating the likelihood of a U.S. dollar rally which will likely depress the gold price.

Monday, November 11, 2002: The insider stock transaction activity for gold has improved from SIGNIFICANTLY BEARISH to MODERATELY BEARISH, as the intensity of insider selling has noticeably abated, as one would expect given the decline in gold share prices since the middle of September.  No important insider buying has yet emerged.

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 March 25, 2003, released at 3:30 p.m. on March 28, 2003, the commitments for COMEX gold futures showed commercial insiders long 69,948, short 119,919; large speculators long 40,659, short 16,292.  Small traders were long 41,992, short 16,388.  Commercials were thus net short 49,971 contracts.  This indicator has improved (from my previous update) to MODESTLY 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.

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. 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.  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.  In recent weeks, there has been evidence that U.S. inflation may be gradually but persistently rising, partly as a result of the falling U.S. dollar.  It is therefore likely that many investors in money market funds and other safe time deposits are actually experiencing a year-over-year loss in purchasing power, as the interest paid on their money is at a lower rate than the corresponding rise in inflation over the same time period.  This is fundamentally the most positive scenario for hard assets such as gold.

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.  On Tuesday, March 10, 2003, platinum touched an intraday peak of $707, its highest level since October 16, 1980!  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 85% to a nadir of $169.50 by April 7, 2003. 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 touched a low of $4.28 on Thursday, October 10, 2002, and then made a recent bottom at $4.34 on March 21, 2003.  Silver had touched a fairly recent high of $4.98 in the early morning on Wednesday, February 5, 2003.

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 exactly touched its 200-day moving average of 92.82 on July 26, 2002 and held above it.  At 10:06:36 a.m. EST on Monday, January 6, 2003, HUI touched an intraday high of 154.92, just seven cents below its level of June 4, 2002, and has therefore likely completed a bearish double top.  On Thursday, March 13, 2003, at 9:39:48 a.m. EST, HUI touched 112.61, just five cents below its November 22, 2002 nadir of 112.66, and thus potentially completing a very bullish double bottom in gold mining shares.  HUI is currently modestly below its 200-day moving average of 126.39.  As predicted, HUI collapsed after it failed to regain its 200-day moving average.  With this sharp decline now behind it, and a true double bottom in place, this indicator is MODERATELY BULLISH.

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.  On Thursday, August 1, 2002, spot gold made a short-term bottom at $298.00.  At 4:07:38 a.m. EST on Wednesday, February 5, 2003, spot gold peaked at $390.50 spot, its highest level since August 29, 1996.  At 6:15 a.m. EDT on Monday, April 7, 2003, spot gold touched a nadir of $319.30, its lowest level since December 2, 2002.  Spot gold is modestly below its 200-day moving average of $327.98.  This indicator is MODESTLY BULLISH.

Total gold mining equity option U.S. daily volume is modestly below normal levels while put-call ratios are modestly above normal levels.  Even bullish gold investors believe that gold mining shares will only move higher in the long run, rather than over the next few months, and have therefore mostly stopped buying calls on gold mining shares.  This is characteristic of a market which is set for a sharp upward move in the very near future.  This indicator is MODESTLY BULLISH.

Synthesizing these three signals as a group, the price/volume statistics indicator remains MODERATELY BULLISH.  The HUI has made a potential double bottom, gold and gold mining shares are both modestly below their respective 200-day moving averages, and gold call share buyers have gone on vacation.  All of these factors should have a positive technical effect on both gold and gold mining shares.

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.  With the Republicans in control of the Presidency, the Senate, and the House of Representatives, the Republicans will unquestionably be assigned full blame for the upcoming deep recession.  It will likely be a double-dip recession, but remember that the first dip is going to be a huge crater, and has not happened yet.  The Democrats will therefore almost surely sweep in 2004.  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.  President George W. Bush, through his virtually total incompetence, especially with regard to managing the U.S. economy, is gold’s best friend.  Goldbugs could not wish for a more ideal choice in the White House, no matter how much they may philosophically disagree with his policies.

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).  The Dow Jones Industrial Average will go below 2000 eventually.  If the Nikkei can go all the way back to its level of January 1983 (not a misprint), 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 (notice that a small dividend was recently announced, so the ball is rolling); 2) the dividend yield on the S&P 500 index will exceed 7%, and maybe even 8% or 9%; 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) the headline of Money magazine will be “Why You Shouldn’t Get Back Into The Market Just Yet”; 7)  I’ll be buying stocks and all my co-workers will be calling me crazy, instead of the other way around; 8) the huge Nasdaq screen will be removed from Times Square in Manhattan; 9) employees will be demanding traditional monthly retirement pension plans from their employers, rather than 401Ks; 10) late night talk-show hosts will spout dozens of favorite black-humor jokes about the horrible stock market, such as their 401Ks having turned into 40.1Ks, which will be repeated by the average person in the street; 11) (to be continued) . . . .

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 plummeted to an early morning nadir of 116.56, its lowest level since March 28, then gradually and systematically recovered to a late afternoon peak of 119.62 before closing down 0.85% at 119.51.  Since the key level of 120 was somewhat approached but not 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:

21% of my money is in stable value retirement funds consisting primarily of a blend of high-interest insured GICs.  An additional 3% is in money market funds paying virtually no interest.  I have 57.5% of my money in long gold share and gold mutual fund positions, all of which have been initiated over the past month.  Another 14% of my money is in short U.S. technology positions, with an emphasis on the semiconductor sector.  I have 4.5% of my assets in gold and silver coins and related collectibles in a safe deposit box, about half of which were recently purchased.  I maintain a small long position in SWC (call me a masochist).

(c) 1996-2003 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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