(December 22, 1997)
Every crowd has a silver lining. P T Barnum
Gold bullion is in a Downtrend, moving opposite the rest of the stock market. London Gold (see chart) has numerous times in the last 16 years probed these levels, later proving to have been a Bottom, and percentages favor this happening yet again. Canadian mutual funds, having made large gold profits early this year, are now indulging in tax-loss selling, with additional pounding coming from hedge funds, commodity funds, short sellers, central banks, and even Asian investors desperate to meet margin calls on their other assets because gold did its job of holding up while local currencies collapsed. When tax-motivated selling soon ends, the result should be a rally known as "the January effect," reinforced by the regular seasonal upturn in gold. According to Dinesism #9, the first few months are the strongest part of the year. Additionally, gold is deeply Oversold, depressed, nothing but bad news, end of the world, demonetization, demonization, etc. With a huge short position out against gold, the stage is set for a short-covering rally that should trigger a buying panic in 1998. Gold has "decoupled" from the rest of the precious-metals complex, as silver made a new high on 21 Nov 97.
* Dinesism #7, DIGROC: the price of gold tends to move generally opposite to the rest of the stock market. See Mass Psychology book, page 327. Dinesism #9, DIRGS: gold shares are seasonally strongest in the first few months of each new year. See Mass Psychology book, page 327.
Gold-mining shares are even more Oversold, as the chart of the XAU clearly demonstrates. How will we know when the actual Bottom has been achieved? Unlike calling Tops, which are unlimited, Bottoms must stop above zero if a company is to survive, so when they get down to extremely low levels, below a dollar-a-share for example, you know that you are near Bottom in price if not time. One of the things we are looking at is penetration of the Downtrendlines; every gold stock we follow is in a Downtrend. Just as soon as Downtrendlines are penetrated, at these below-value levels, should be an excellent time to buy or average down. We look for this every day, and it has not occurred as of today, but as soon as it does we will immediately flash an Interim Warning Bulletin "Buy" signal to its subscribers and follow it up in the subsequent issue of The Dines Letter (TDL). We have already sent 26 Interim Warning Bulletins this year. It is too late to sell the golds and too early to buy them.
As we try to puzzle out the way 1998 will evolve, we have no doubt whatsoever that the gold-mining industry will begin closing down at these low or lower prices, aggravating the fundamental undersupply. There is record buying from India, Turkey, and the Gulf States demand is up 33% so far this year and as the gold price drops purchasing tends to increase, especially during the gold-jewelry Holiday Season. The ramifications will be profound, including perhaps South Africa's Nelson Mandela appearing on television decrying the work force in his gold mines being laid off wholesale. With the price of gold dropping, monetary reserves held by central banks diminish in value, leading to a contraction in the total money supply, a deflationary factor we have seen mentioned by no other market observer in the world. We can already envision currencies as a primary consideration for investors in 1998, as we peer into the future's mists. THE DINES LETTER, 5 Dec 97
The nation's trade deficit jumped to an eight-month high of $11.1 billion in September, the Government said today, as financial turmoil in Asia helped widen the gap. The deficit with China and Japan widened significantly. United States exports, whose growth has sputtered since early spring, declined. Robert D Hershey Jr, NEW YORK TIMES, 21 Nov 97