(July 21, 1997)
Dines Rule of Gold Countertrend (DIGROC): The price of gold tends to move generally opposite to the rest of the stock market and the US dollar. (See Mass Psychology book, page 327, Dinesism #1.)
We can remember when bytes were for computers, in the old days, but now it's ostensibly a boxing term. We had always thought mythological Hercules had a self-destructive bad temper, but in the Hannibal The Cannibal versus Holyfield prizebite, the moral turned out to have been, "An ear for an ear." Even though he wasn't driving a white Bronco, Mike Tyson proved that he was a real champion when he even surpassed Tonia Harding, adding a soupçon of Van Gogh. In the biggest farce since Leopold and Loeb, it was a lobe blow for boxing. Or were we mistakenly watching Jaws? It shows that it pays to watch pay-per-chew TV to get the updated version of Shakespeare's, "Romans, TV viewers, lend me your ears," although we'd rather have viewed the classic movie "From Ear to Eternity." The moral of Mike's Low State, you should forgive the use of the word "moral" so loosely, is: "If you can't beat 'em, bite 'em." Even Holyfield joked that he is now rich enough to change his nickname from "The Real Deal" to "The Real Meal."
According to The Dines Rule of Gold Countertrend (above), gold tends to move opposite to the rest of the market, so with the Dow enjoying a buying panic it is unsurprising that the golds are in the midst of a selling panic, this time triggered by the completely unexpected sale by the Australian central bank of 167-metric tons, or 60% of their gold holdings, an imprudent action that Australians will someday bitterly regret. Australia had only 20% of its monetary reserves in gold to begin with, so now the world's third-largest gold producer's paper currency is backed almost entirely by paper, the recipe for a future calamity. Gold sentiment is totally pessimistic, with widespread predictions of $250 an ounce, or much lower, the mirror image of some Analysts now predicting that the Dow will soar to at least 40,000. Fear and greed at antipodes.
With pessimism toward gold as intense as we've ever experienced it, gold stocks are behaving like a Kamikaze pilot who had just received a "Dear John" letter, typical of past gold Bottoms. However, Australia's sale came to only $1.8 billion, a paltry amount, so the selling appears to have been overdone on a Mass Psychological level. Calmly reviewing the facts, London gold is still within the trading range between 300 and 500, in which it has been oscillating since 1981, sixteen years ago, as shown in the chart (X, Y, below). Gold is deeply Oversold, has repeatedly bottomed near these levels, there are huge stocks have been dropping since Feb 96, so this is not a new decline, and the Dines Gold Stock Average is also testing its Nov 93 lows. The fact that silver has had a Downside Breakout suggests that this gold bearishness is not so much about central-bank selling as much as it is the public stampeding into financial instruments rather than hard assets, and that precious metals will probably not rise again until the stock market turns down. Meanwhile, there are some real bargains opening up in gold stocks, although it takes a lot of nerve to try to catch a falling safe, so we'd stand back for a moment, and await the inevitable cyclical upturn we'll try to flash an "all clear" signal to resume buying, hopefully within 10% of the lows. After all, gold is still the ultimate money, anywhere in the world, and is certainly not going out of style.
Even platinum and palladium declined, this on promises that the Russians might finally resume exports, for the first time this year. Nonetheless, Stillwater Mining (SWC), our favorite stock in this category, is Consolidating (above Line X, see chart), still within its longer-term Uptrend (not shown). In the last Dines Letter we warned that lower gold prices would lead to the beginning of the closedown of the world's gold-mining industry, and South Africa's East Rand Proprietary Mines has already announced having halted work at one mine. A shrinking gold supply will become increasingly bullish for gold prices.
Just as it seems there's no Top for the Dow-Jones Average, it seems that there's no Bottom for golds, which is why our Supervised List #1 is outperforming List #5. All portfolios should contain a combination of common stocks, enjoying the bull market, hedged by golds that will, sooner or later, have their cyclical day in the sun again. No doubt it is a frustrating time for goldbugs, but we have seen these nadirs before, and it's just when everyone has given up on golds that usually turns out to have been the prelude to exceptional capital gains. For the moment, the gold trend is down, obeying Dinesism #1, but the important difference is that, while there is no "ceiling" on how high stocks can go, there are lower limits on how low they can go. Gold stocks are getting down to really cheap levels, and the lower they go, the closer they get to real value at rock-bottom prices. We're holding most of our golds, continuously weeding out the weakest ones, until their Downtrends actually change, if only because of the near-total pessimism toward them. Were there to be a surprise drop by the Dow, golds might then spring to life. Ever since we flashed our Major buy signal on the precious metals on 9 Nov 92 our prediction has consistently been that gold shares would outperform gold bullion, a view to which we still hew. There's a huge short position that will be covered sooner or later, at some point jewelers will need to replenish their supplies for jewelry, and producers must eventually repurchase their forward sales.
Central bankers continue to have fun selling their chief monetary asset, their nations' heirlooms, their most valuable form of money, but they will probably be safely dead by the time a monetary crisis forces central banks into the open market to repurchase that gold perhaps aggravating a buying panic. Nor have central banks considered how pushing down the price of gold reduces the value of their remaining gold, a contraction that might have deflationary consequences, just as if they had printed smaller quantities of paper money. We will come back to this widely unnoticed point some day.
In the 1950s inflation was considered bad for gold miners, but now the Mass dogma is that there is no inflation, considered bad for gold. The superficial see gold bullion down and the Consumer Price Index rising only moderately, and rush to conclude that inflation does not exist. But US postage is going up, Congress is asking for a raise and, in your own experience, are prices really flat, or rising? Fellow Martians, don't think, look.
"It would take a Martian to be bullish at this point," said Andy Smith, analyst at Union Bank of Switzerland. "Expect an orgy of selling over the next few weeks," another bullion dealer added. REUTERS, 7 Jul 97
For some traders, the Fed's vote signaled that policy makers and the Chairman, Alan Greenspan, were content that the American economy was not growing too fast and that inflation was under control. That diminished demand for gold, an asset traditionally viewed as a hedge against a surge in inflation. "When the Fed doesn't raise rates, people interpret that to mean there is no specter of inflation looming ahead," said Leonard Kaplan, a chief bullion trader at the Monex Deposit Company in Newport Beach, Calif. "That deters people from investing in gold." Expectations that European central banks may sell gold reserves to reduce budget deficits to qualify for the European single currency, or EURO, also shadows the market. BLOOMBERG NEWS, 3 Jul 97
The end of the business cycle? The world may indeed be witnessing important changes in how business cycles work. It is not enough to assert, like The Economist, that since there have always been business cycles, there will always be business cycles. Understanding what causes business cycles and how those causes have changed suggests that business cycles will not be as important in the future as they were in the past. No one is precisely sure why business cycles occur. As the American economy enters its seventh year of sustained growth with minimal inflation and historically low unemployment, pundits commonly describe the most recent business cycle as "different," "peculiar," or "strange." In fact, it may not be an aberration, but the next step in a new trend. Peculiarities have prompted occasional speculation that the business cycle has somehow died, as well as declarations that nothing fundamental has changed. A more modest and defensible argument is that the current cycle reveals important changes in the operation of modern economies, and that these changes will tend to dampen business cycles and render them less prevalent, less severe, and less significant than in the past. Fundamental forces of the business cycle have not gone away. They will, however, be less important in a more flexible and adaptive economy that adjusts to shocks more easily and with less propensity for sparking a new cycle. Some states might find currency devaluation to be politically alluring in a low-inflation world. In the short run, devaluation strategies promise to save jobs by boosting export competitiveness and raising the price of imports. But since many states are similarly tempted, the stage is set for a competitive race to devalue. The G-7 states will certainly want to avoid a vicious circle of devaluation that would end with higher inflation but no gains in competitiveness. Within the European Union, incentives to avoid competitive devaluation are particularly compelling, since workers in Europe are in a relatively strong position to resist the cuts in real wages that devaluation would entail. Competitive devaluation within the EU would prove futile relatively quickly. Steven Weber, Associate Professor of Political Science at the University of California at Berkeley, FOREIGN AFFAIRS, Jul/Aug 97
Salomon Brothers analyst Leanne Baker upgraded three gold stocks, Barrick, Placer Dome and Getchell Gold. Ms Baker says the selling in Placer is overdone and notes that Getchell Gold is considered a prime acquisition candidate. Others include Stillwater Mining and Amax Gold, analysts say. WALL STREET JOURNAL, Heard on the Street, 9 Jul 97
If the International Energy Agency is right, world oil prices are headed for a fall. The agency's conclusion: despite buoyant petroleum demand in the US, "oil markets in the second half of 1997 are expected to soften appreciably from the tighter-than-anticipated second quarter of 1997." Many industry experts reckon that prices are indeed headed downward, though not by quite as much as the agency's data suggest. Bhushan Bahree, WALL STREET JOURNAL, 9 Jul 97