an independent analysis of gold mining shares and other investments
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SUMMARY: My current
outlook for gold, gold coins, and gold collectibles has
improved to MODESTLY BULLISH. My
current outlook for gold mining shares remains MODESTLY BEARISH. In recent weeks, junior gold mining
shares have increased in price significantly more than has been justified by
the gold price itself, or by the performance of senior producers. This appears to be due entirely to P/E
expansion, and thus is vulnerable to contraction whenever the stock market as a
whole is declining sharply. Those
who are interested in the yellow metal should concentrate on buying coins,
bars, and collectibles, and avoid the junior gold producers at this time. In the recent modest decline of the HUI
from its recent peak of 170.65 on
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 about the recent sharp
rise in long-term
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.
Thursday, July 31, 2003: The overall current outlook for gold, gold coins, and gold collectibles has improved from MODESTLY BEARISH to MODESTLY BULLISH, as gold may have recently made another higher low at $340.50 on July 16, 2003. The outlook for gold mining shares remains MODESTLY BEARISH, as the juniors are overvalued relative to the seniors, and have not declined as much in the recent pullback. A sharp pullback in the Nasdaq and S&P 500 would also potentially drag down gold mining shares, even if gold itself rises, since sharp overall P/E contractions don’t usually spare individual sector groups.
Thursday, July 31, 2003: The traders’ commitments indicator for gold has improved from STRONGLY BEARISH to SIGNIFICANTLY BEARISH, as commercials continue their usual pattern of covering short positions into price dips, while the price at which commercials are exactly net neutral has continued to rise by approximately 1% per month for the past three years.
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.
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, 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, 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 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.
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.
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.)
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 low of $590 on
Total gold mining equity option
Synthesizing these three signals as a group, the price/volume statistics indicator is SLIGHTLY BULLISH. The HUI and gold have both made respective potentially bullish double bottoms, but gold mining shares (especially those of the junior producers) are significantly above their 200-day moving averages, and are therefore vulnerable to a correction at any time.
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
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 dipped to a late morning low of 161.94, then rallied to an early afternoon high of 164.56 before closing up 1.20% at 164.04. Since the key level of 165 was somewhat approached but not broken to the upside, this is SLIGHTLY BEARISH.
21% of my money is in stable value retirement funds consisting primarily of a blend of high-interest insured GICs. An additional 7% is in money market funds paying virtually no interest, most of which is derived from having recently closed my long position in RRPIX. I have reduced my long gold share and gold mutual fund positions from 35% to 9% to take advantage of the recent price spike in gold mining shares, and to capitalize on the superior opportunity in short U.S. technology positions, which have increased from 20% to 57% of my total portfolio, with an emphasis on internet and semiconductor shares, and a small short position in biotech shares. I have 6% 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.
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