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INTERMEDIATE-TERM FINANCIAL OUTLOOK: Gold and especially gold mining shares roughly tracked the Nasdaq for most of 2003, and this pattern is likely to continue for 2004. The Nasdaq made an important bottom on March 12, 2003; gold shares bottomed on March 13, 2003 (as measured by HUI). Both also made intermediate-term bottoms in late July/early August. The recent record ratio of insider selling to insider buying has been prevalent in the gold mining industry just as in technology and many other market sectors, and combined with recent eager public participation from the same investors who shunned gold when it was below $300 per ounce, is suggestive of an intermediate-term peak. Probably more importantly, HUI recently was unable to surpass its December 2, 2003 zenith even with gold $25 per ounce higher and silver $1 per ounce higher. As a general rule, when gold and silver are making new highs, but gold and silver mining shares are not able to set new highs, this negative divergence leads to a downturn of several weeks to several months for both the yellow metal and its shares. Given gold's historic tendency to bottom in the late winter or early spring, and then make a second (double) bottom in the summer, a pattern which has persisted in recent years (including 2003), look for gold to bottom around $372 in the spring followed by a lower low near $356 in the summer, while gold mining shares make a positive divergence by bottoming with HUI near 163 in March or April and then a higher low around 168-172 in June or July. This would imply that gold shares return very close to their intermediate-term bottom from late July 2003. Given that 155 was resistance on HUI for an extended period of time, it is likely for that level, now broken, to become the new solid support base. In early 2003, I predicted the bottom in HUI within less than two percent, but then far underestimated the late-year rally in gold mining shares, so those who did best followed my buying recommendation and then ignored me thereafter, just as my wife usually does. As a general rule, it is easier for me to pick bull-market bottoms and bear-market tops in gold shares rather than the other way around. Find someone who can do the opposite and you'll have a complete guide to success.
In many ways, there is an important analogy of January 2004 to August 1987. In August 1987, gold mining shares began a correction from all-time peaks which would cause them to decline 40% by November. The Nasdaq also dropped around 40% over the same period of time. Both then had a modest bounce thereafter. The major difference between these two groups was that gold shares continued generally downward for another 13 years, whereas the Nasdaq had suffered only a brief correction in a bull market which would last another 13 years. Now we are probably at the opposite juncture. The Nasdaq's upcoming correction will probably be followed by a downturn which could last for perhaps a decade, while the likely correction in gold shares over the next several months will be merely a typical pullback in the context of a long-term strong bull market which could continue for another decade or more.
As gold shares drop, the Nasdaq will decline more or less in tandem. It should be kept in mind that an investor in Paris or Rome or Dubai or Johannesburg or Toronto has been generally unimpressed with the rallies in U.S. equities and in gold. Gold has actually been flat in terms of most world currencies since the summer of 2001, while the U.S. financial markets, although certainly higher in U.S. dollar terms, are little changed in terms of most world currencies. Therefore, as the U.S. dollar stages a typical seasonal rebound, made more likely by a nearly unanimous consensus that the greenback is hopeless, the U.S. financial markets will continue to remain flat in terms of other currencies, which means that they will decline in nominal U.S. dollar terms. U.S. Treasuries will likely be one of the greatest beneficiaries of a rising dollar and money exiting equities; the near consensus bearishness toward bonds is likely to be fooled, at least in the short run.
LONG-TERM FINANCIAL OUTLOOK: Gold will continue to make a pattern of higher lows as its strong bull market from April 2001 to the present continues throughout the next 10 or 15 years. The most recent major low was at $319.25 in April 2003, so the next low will likely be between $340 and $370 an ounce later this year. Gold has surpassed $400 per ounce in many years in the past dating back to 1979, but has gone above $440 per ounce in only a few years, so that barrier is probably about to reassert itself once again. Inevitably, however, gold will go above $500 per ounce, and then above $600, and a decade from now will probably move about $1000 per ounce, though gold will probably not ever exceed in inflation-adjusted terms its all-time peak from January 21, 1980. Meanwhile, gold mining shares will make a similar pattern of higher lows, although given their current P/E ratios, gold itself most likely offers a superior alternative to gold mining shares, given that gold has only about one third the potential percentage downturn of the shares, with roughly the same upside percentage potential. Since gold's rally has been almost entirely due to the U.S. dollar's decline, gold's price has been basically flat in terms of most other major world currencies. This is likely to change in the future, with gold rising perhaps twice as much as the U.S. dollar declines, and gold generally rising in terms of most world currencies. The reason is that the world's major industrialized nations are not just going to sit back and let the U.S. devalue its currency uninhibitedly. Given any threat of recession, the European central bank and Japan's central bank and Canada's central bank and Australia's central bank are going to depreciate their currencies aggressively, and given that their short-term rates are generally far above those of the U.S., they can depreciate more aggressively and more impressively than the U.S. can, given that the U.S. has basically exhausted nearly all of its interest-rate cutting potential already. This process of competitive devaluation will help gold to rise even without cooperation from a falling U.S. dollar. For that reason, gold producers in South Africa, which have been suffering from the price of gold actually declining in South African rand terms while wages have been rising at about 10% per year, will see far improved profits relative to most other producers. Therefore, those who are currently invested in gold producers primarily outside of South Africa should consider progressively selling at this time, and then reinvesting in South African producers as these shares bottom later in 2004, as well as in physical gold itself and gold coins and collectibles, which as a rule are still selling at historically low premiums to their melt (intrinsic) values.
U.S. equities in general will continue to decline until the dividend yield on the S&P 500 is between 7.5% and 9.5%. Great bull excesses are usually followed by equally severe recessions.
REMINISCENCE OF THE WEEK: In the summer of 1971, my parents decided to drive my sister, my brother, and myself to Provincetown, Massachusetts, at the end of Cape Cod. They had heard that the town was a historic Portuguese fishing village and felt it would be an educational experience for us to experience the well-worn, hardworking atmosphere. Well, the fishermen were still there, and it was a quaint, blue-collar town, but only from about 4 a.m. until 9 a.m. After that, the hippies that gave Provincetown the recent moniker "Haight Ashbury East" began to dominate, so by the time we passed through the increasingly crowded streets on a Sunday afternoon, we were being offered love beads and peace necklaces left and right, accompanied by distinctly non-Nixonian utterances, as long-haired twentysomethings and teenagers of both sexes approached our car from all directions. It was certainly an educational experience, no doubt about that. No longer were hippies those strange folks I only saw on TV; they were real people. When I got home I made my own tie-dyed psychedelic shirt and learned to play "Age of Aquarius" on the piano. I wasn't allowed to let my hair grow too long, though.
(c) 1996-2004 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 have been writing music and short stories since the mid-1960s. I maintain a fiercely independent stand toward the financial markets and toward everything else in life, and am not compensated for my writings by any person or organization with the exception of the advertising banners posted on this site. I am also a pianist, computer programmer, bridge player, and runner, and enjoy world travel. I appreciate all those who have quoted the various sayings on my web site over the years, which have wound up in some pretty interesting collections. Those who do not like my opinions can feel free to stuff it up their respective butts.
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