Gold's Price Action Positive
Over the last three years, all gold's price advances have been beaten back by short selling, forward selling, and hordes of the yellow metal mysteriously surfacing to fill all buy orders. Still, goldphiles endured, buying on all dips and cheering each rally, hoping it would be the one to send the gold bears running for their caves. Now, investor patience is being rewarded.
Early in February, gold surged from the low $280s to just short of $305 on February 8. When the rally stalled, most analysts expected prices to slip back to the mid-$280s, if not below $280. That has not, however, been the case.
Although giving up some of its gains, gold has hung tough, not yet falling below $290. Strong physicals buying in Japan, and on some days other parts of the world, has come in as gold prices fell into the low $290s. (In January, Japan imported three times as much gold as in January 2000. Perhaps, the Japanese have come to grips with reality. They are having a financial meltdown.)
Have the low $290s become the new support level from which future advances will be launched? Only time will tell, but gold's recent price action has caught the attention of several analysts, commentators, and writers, resulting favorable reports on gold. Such reports will bring new investors. Existing gold bugs alone cannot move gold higher.
Richard Russell, editor of Dow Theory Letters, has long been a gold believer. However, Russell also believes in price action. Although advising subscribers to buy a little Homestake below $4 and Newmont below $14 back in November 2000, he has been cautious, not liking gold's price action. Yet, recently, on his Web site www.dowtheoryletters.com, Russell wrote:
Gold--I want to discuss the gold action. The 50-day MA of gold crossed bullishly above the 200-day MA back on Sept. 19 of last year. The 50-day MA has not been below the 200-day at any time since.
Gold began an explosive rise starting in January of this year. By February 6 April gold had recorded an intra-day extreme high of $307.50. From there April gold corrected down to an intra-day low of $290.50 on February 21.
Gold has been in a consolidation phase over the last three weeks. In the meantime, the 50-day MA for gold has been rising rapidly. As of today, the slower 200-day MA for gold stands at $280. The faster moving 50-day MA for gold stands at $287.
As long as April gold holds and consolidates above its 50-day MA I would consider the action as constructive. Of course, it would be much more bullish if April gold can hold above its February 21 intra-day low of $290.50.
And that's the technical picture for gold. All rumors, all discussion, all bullishness and bearishness sentiment is absorbed and discounted in the action of the gold price as outlined above. In this business you can talk the talk until you're blue in the face. What counts is the ACTION.
The Wall Street Journal Online on February 28 titled an article Gold Is Beginning to Sparkle Again As Investors Seek Stable Investments. Although the article was well balanced, as opposed to most WSJ articles, which have in recent years blasted gold and ridiculed gold inventors, it probably hit a chord with concerned investors. One paragraph from the article:
Gold is the ultimate in defensive investing. It can be worth putting a small portion of your portfolio in it, but it's unwise to put a lot of money into gold unless you subscribe to the following:
- You think stocks are overvalued.
- You believe corporations are going to default more often on bonds and other debt obligations.
- Deflationary pressures, or a weak economic recovery, will erode corporate earnings.
- The U.S. dollar will fall and banks will be weakened by their lending and derivatives exposure to parties like Enron.
Yes to all of the above.
Stocks are overvalued. Richard Russell says stocks are in a primary bear market.
Corporations will default more often on debt obligations, destroying investor confidence with every collapse. Loose monetary policies in the 1990s prompted businesses to pile on the debt, much of which will never be paid.
Earnings will erode, what earnings there are and the earnings that are real. This bear market will be remembered for the "earnings scandals." In fact, earnings do not have to "erode" to go down. They just have to be reported honestly.
The dollar will fall. Since January 2001, the Fed has created--out of thin air--more than a trillion dollars, and our trade deficit tops $400 billion annually. Under this circumstances, the dollar will fall. When is the only question.
And, yes, banks will be weakened by exposures to other Enrons. Right now, stock investors are trying to figure out if JP Morgan/Chase (a bank) is an Enron itself. A few analysts believe Fanny Mae and Freddy Mac, the nation's two largest mortgage lenders, have derivative problems.
So, the WSJ answered its own question. Yet, circumstances indicate that investors should be buying gold not in small amounts but in amounts that will produce meaningful results as paper assets are washed away, leaving gold standing as the "ultimate defensive investment." Recent buying in gold--and its price action--tells us that more investors have recognized gold's role in financial survival.
Bill Haynes
March 4, 2002
Bill has been a precious metals dealer since 1973. He can be emailed at bill@certifiedmint.com His primary Web site is www.certifiedmint.com
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