an independent analysis of gold mining shares and other investments

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Updated @ 7:00 p.m. EDT, Monday, May 19, 2003.

 

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SUMMARY:   My current outlook for gold and gold mining shares has dropped to MODESTLY BEARISH.  The recent sharp collapse in the U.S. dollar reached its likely nadir today in response to U.S. secretary John Snow’s usual ill-considered comments at the weekend G-7 meeting.  Even in the absence of intelligent life in the current Republican administration, the greenback’s collapse has likely been overdone in the short run.  After falling to the point where one euro purchased 1.1728 dollars at 4:38:12 a.m. EDT, this morning, the dollar very quietly recovered to 1.1640 by the end of the trading day.  Additional attempts to decline cannot be ruled out, but the oversold condition is close to a technical extreme.  As the U.S. dollar rebounds, gold is likely to retrace perhaps $25-$33 of its recent gains, potentially reaching a June bottom of $333-$342.  Most gold analysts and even some who are not usually interested in the yellow metal have recently been making significantly more frequent positive comments about gold and have been investing in gold mining shares.  These sentiments are likely to prove accurate in the long run, but for now, investors should sell some of their gold mining shares in anticipation of being able to repurchase them more cheaply next month, probably close to their respective 200-day moving averages.  Gold’s traders’ commitments show very few total speculative short positions, indicating that there is sparse fuel left to enable the rally to continue much further.  Even a fabulous automobile cannot go far on an empty tank.  HUI, which had climbed 24.97% from its March 13 nadir of 112.61 to today’s intraday peak, is unlikely to decline below its April 29 nadir of 120.44, since its pattern of higher lows remains intact, as is characteristic of any long-term bull market.  Meanwhile, after QQQ had virtually the same intraday high on each trading day last week, the U.S. stock market finally gave up the ghost today.  It may bounce later this week, but will probably not exceed 29 for QQQ or surpass other important index benchmark intraday highs set last week.  Given that VXN hit a new low today of 30.37 and QQV hit a new low on Friday of 25.60, the Nasdaq could well drop 40% by this autumn to a level below 900. 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 see as the greatest extreme in the financial markets today?  ANSWER:  U.S. internet shares are ripe for selling short.  Many of them have increased exponentially since October 2002, without “requiring” improved earnings or anything other than that good old-fashioned 1990s speculative mania.  It’s déjà vu all over again.  Some say starve a cold and feed a fever; others say feed a cold and starve a fever.  I always say fade the fever!

April 7, 2003:  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.

RECENT CHANGES:

Monday, May 19, 2003:  The overall current outlook for gold and gold mining shares has deteriorated from VERY STRONGLY BULLISH to MODESTLY BEARISH.  The HUI has increased almost 25% from its March 13 low to today’s intraday high, leaving the sector overbought and temporarily overloved.  The traders’ commitments have also worsened noticeably, with a pronounced paucity of speculator short positions.

Monday, May 19, 2003:  The traders’ commitments indicator for gold has worsened from MODESTLY BEARISH to STRONGLY BEARISH.  Although the total number of speculator short positions is modest, the ratio of speculator longs to shorts is extreme, especially after the recent vertical ascent, indicating that there is virtually no fuel left for gold to continue its upward move.

Monday, May 19, 2003:  The price/volume statistics indicator has fallen from MODERATELY BULLISH to SLIGHTLY BULLISH, as gold shares appear primed to retest their 200-day moving averages.

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.

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 May 13, 2003, released at 3:30 p.m. on May 16, 2003, the commitments for COMEX gold futures showed commercial insiders long 57,917, short 131,631; large speculators long 58,093, short 15,673.  Small traders were long 46,438, short 15,144.  Commercials were thus net short 73,714 contracts.  This indicator has deteriorated (from my previous update) to STRONGLY BEARISH, given the fact that commercials have almost surely increased their short positions significantly since the last tabulation, because of the recent vertical ascent in the gold price.  This would leave few speculators on the short side to be forced to cover into any continued upward climb.  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.  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.  The U.S. Federal Reserve’s recent comments support the likelihood that U.S. time deposits will continue to produce negative real returns. 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!  Platinum touched a recent low of $590 on Wednesday, April 30, 2003.  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 87% to a nadir of $145.00 by April 17, 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 higher bottom at $4.34 on March 21, 2003.  In very recent days, silver may have peaked at $4.91 on Monday, May 12, 2003, which was seven cents below its previous high of $4.98 in the early morning on Wednesday, February 5, 2003.  Thus, silver has traced a chart of higher lows and lower highs.  One of these two patterns will have to be broken eventually, since they inherently conflict.

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 moderately above its 200-day moving average of 127.20.  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 MODESTLY BULLISH.  There remains always the danger of a retracement to the 200-day moving average.

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 11:50 p.m. EDT on Monday, April 7, 2003, spot gold touched a nadir of $319.10, its lowest level since December 2, 2002.  Spot gold is significantly above its 200-day moving average of $329.75.  This indicator is SLIGHTLY BULLISH.  Here, also, the danger of a potential drop to the 200-day moving average exists, though is less likely than for HUI, since gold already successfully retested its 200-day moving average on April 29, 2003.

Total gold mining equity option U.S. daily volume is substantially above normal levels while put-call ratios are moderately below normal levels.  Gold investors who had almost entirely stopped purchasing call options in March and April have been buying speculative calls in buckets over the past several trading days, especially today, which is often coincident with a short-term market peak.  This indicator is MODERATELY BEARISH.

Synthesizing these three signals as a group, the price/volume statistics indicator has fallen from MODERATELY BULLISH to SLIGHTLY BULLISH.  The HUI and gold have both made respective potential double bottoms, but gold mining shares are likely to fall to retest their 200-day moving averages, as indicated by the excitement in the gold share options markets.

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) vests will become popular men’s wear, as they usually are during recessions (I could not even find a vest in Macy’s last month); 12) there will be some kind of very strange public behavior which always accompanies a major market bottom, such as streaking in 1974 or pole-sitting in 1932; 13) (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 soared to a mid-afternoon peak of 140.73, its highest level since February 7, before closing up 4.12% at 140.62.  Since the key level of 140 was broken to the upside, this is SLIGHTLY BULLISH.

On Tuesday, June 4, 2002, HUI touched an intraday peak of 154.99, its highest level since October 9, 1997.  On Wednesday, November 15, 2000, and again on Thursday, November 16, 2000, HUI hit an intraday bottom of 35.31 (holding just above 35, another multiple of five), marking its all-time low.  On Friday, July 26, 2002, HUI made a short-term bottom at 92.82.

MODEL PORTFOLIO:

20% of my money is in stable value retirement funds consisting primarily of a blend of high-interest insured GICs.  An additional 20% is in money market funds paying virtually no interest.  I have 35% of my money in long gold share and gold mutual fund positions.  Another 20% of my money is in short U.S. technology positions, with an emphasis on the semiconductor sector and recently the internet group.  I have 5% of my assets in gold and silver coins and related collectibles in a safe deposit box, about half of which were purchased in March and April of this year.

(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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