Victor Hugo
This market is looking better and better for gold shares. The US$ only manages a rally of a cent or two on the Euro in a week when most traders are calling it 7 cents stronger. The US$ also stays frozen like a mime. Have a look at the US$ Index - where traders expected a decent 5%+ relief rally from heavily sold momentum - but hardly moved last week. G8 intervention has certainly not had spectacular results.
Meanwhile the best of the gold shares have methodically been stepping higher and don't give latecomers much dip or pause entry opportunity. When gold shares stay firm with buying bias while the $Gold price tap- dances, it is often an indication that the $Gold price is about to run - usually the shares are the best early indicators.
Does one believe the signals when share price and volume behaviour give repeating buy signals such as now? Yes, yes, yes. Most of us stay sceptical and hesitate until golds gap higher. We look for more confirmation. Or we wait for the next dip. That doesn't come. Or if it does, we don't believe in it when in it. We end up doing nothing until we have to believe a run is underway and end up paying more not to miss the boat. That is the way it is with gold runs, especially in young bull markets.
History shows that in the first three or four years of a major gold bull market, most portfolio managers and private investors are suspicious or downright scared of gold shares and don't want to buy gold shares at all or only buy them to be seen to be prudent - not because they truly believe in solid investment potential.
Since the huge gold runs of the 1970's most traders who did not share in the 70's fun have never quite understood why anyone would want to buy gold. After all, there is the mighty US$ and there are so many wonderful trading stocks and well leveraged options and futures to choose from. For more than 20 years sneering investment professionals have asked who would want to buy "an archaic relic of history. "
Why? Because few actually understand the historical role of gold in the world economy and the emotions still tied to it in times of currency and asset valuation crisis. As is coming.
Few investors were around in the 1970's when Gold last ran big and fortunes were made by investors who used a buy-and-hold and add strategy. To give an idea of the scale of moves, the $Gold price ran from $195 in December 1974 to $850 in January 1980. By 1982 it was down to $296. Up for seven months to $510 in 1983. Down to $325 in 1993 and up to $414 three years later in 1996. Since 1996 there have been other gold runs - but they have been brief - e.g. two months in 1999 - from $252 to $327. So the push from March 2001 at $257.90 to February 2003's $384 is just not that convincing to those who have seen share prices not sustain highs.
The other factor that promotes skepticism is the huge swing in the share prices of top mining groups, typical of the early long term bull. In the case of Newmont, share prices fell 36% last year between June and July 2002 and since then have moved in a large range, now back near 2002's highs which were at $32.75. During the last 8 weeks and especially last week,
Newmont's price action has given solid range breakout evidence - and momentum swing counts are calling it from the current $32.29 to resistances at $38.90 and $47.00 - with long term counts suggesting scope to 1996's highs at about $60.00 and higher.
You have to buy some shares of this quality multinational producer in the current strong fundamentally and technically supportive environment for gold. While Wall Street and US Treasury Bonds are at unrealistically high levels and the US$ is at risk of continuing or accelerating its weaker trend
( since January 2002 ) - the gold bull can charge .
And I am hearing more and more of the economists who could not even mention the US$ to Eur$145 or to Eur$ 165 in the next two years. They are now conceding it is possible - something the technicians have known since momentum evidence increased from May 2002 from the 92 area onwards.
You want to buy some Newmont shares - especially if you get a chance to buy dips near support at $30.80 and $29.70 or lower. But try to pay not more than $32.80 where there could be some pauses or dips as recent momentum consolidates. Look out though - when flaxen haired Miss Piggy gets the Golden Glitter in her eyes, she runs pretty fast and pretty passionately - and you don't want to miss that ride!
Chances are though that there will be a big war in the next two weeks between those forces protecting the US$ ( who want Gold's credibility destroyed) and those who know that the US$ is already a casualty of a combination of US debt, slower global growth and deflation prospects as well as increasing disinvestment from US assets. Demand for the yellow metal has accelerated as mining companies and bullion banks close down their hedges and shorts and others begin to do the same.
Another important factor is the recent illustrative experience of Newmont and bank lenders to its Yandal mines. Newmont's offer of the mine or only 50c in the $ to the bank on margin calls is going to discourage a lot of the soft lending of gold that has happened in the last 7 or 8 years, which previously contributed to the depressed gold price.
All those central banks who have leased and lent and swapped gold must be starting to look very carefully at the ability of borrowers/lessees/counterparties to meet their physical obligations to redeliver if the Gold price edges higher. Higher lease/risk related interest rates would also add to price pressures as gold debtors decide to buy back to cover their obligations.
The abundant supply of the last 7+ years from central bankers (The Bank of England's face is getting redder by the day) is already drying up as the public begin to ask questions just where and who holds the gold not in the vaults. This is the story the Gold Anti Trust Action Committee have researched so well, despite the jeers and boo's they have endured. Already GATA and others estimate the shortfall of gold owed to central bankers relative to physical reserves claimable by central bankers - may be as high as five years of global mining production or 15 000 tons.
The $372 resistance has become the next big obstacle that traders are watching. Even the skeptics are beginning to admit they expect a Gold price near $410 - if $372 is penetrated. What they have not appreciated yet is that a gold price above $500 in a year or two is being corroborated by some pretty persuasive technical evidence.
Traders and economists pay lip service to the concept that gold prices accelerate when confidence deteriorates in paper currencies and in other paper claims. But they do not quite appreciate the power of the run to gold that can happen if confidence in the US$ and other paper assets collapses.
In actual fact there are no such things as paper assets. Paper is just a promise, not a physical asset. Gold is the only tangible, globally, readily exchangeable asset - that has its perception of value rooted for eons deep in the human psyche.
Gold also does not carry a corresponding liability. Unless of course you are a now concerned central banker who unbeknown to the public of his country - has lent, leased or swapped a significant portion of his country's gold reserves. Gold which is no longer in the vaults. See Daan Joubert's article in this regard at www.saGOLDS.com
The lender, lessee or counterparty has often on lent, leased, swapped to another counterparty and that counterparty has again done the same -and so on. When the gold price rises, those leasing costs go up. Or interest rates eventually go up, which they must do after the degree and extent of central bank stimulus efforts in the last few years. And monetary inflation has to accelerate down the line. Then watch the demands for delivery on those bars of physical gold add to the price squeeze. Maybe only two or three years from now - but remember markets are very good at anticipating market dynamics.
Pie in the sky? Maybe - but only pie in the sky if the world can get its act together. Some matters can't even be solved by the US. Matters such as which religion to believe in. Who should control oil and nuclear weapons. How to grow demand for goods and services while you don't have money nor confidence to invest. How to repair the Japanese banking system. How to stimulate Europe out of stagnancy. How to persuade the Middle East and Asia that the US is still able to fuel global growth. How to manage the dwindling oil and gas resources of the planet. How to avoid a Financial Great Reckoning as US debt and gross distortions in consumption fuel anger and fuel pressures to redistribute resources.
Difficult problems. But every great civilisation has faced their own great reckonings before Just read the book "The Great Reckoning" by James Dale Davidson. He was early when he wrote it - but many of the principles still apply.
Meanwhile lets enjoy the last of the recent rally on world markets - because the pain when pensioners find out what they do not have - and that they are unlikely to recover their pensions - could be the catalyst to the next dump on the US$ and on world markets. And could be the next rocket in the gold price to $445 - forget $400.
Of course - event risk also lurks as those angry have-nots accumulate WOMD capability.
I have increasingly loudly been saying a long term gold bull is underway, since the break of $267 in 1999 and the break of $284 in 2001, as the end of the 21 year bear cycle corroborated. I have written a lot about the reasons for it. The recent failure to retreat back below $316 and the action since then to $384 as well as subsequent action consistent with compression - which can enable the next leg above $400 within weeks - all pretty impressive.
Very important - is the mood of skepticism about sustainability of a gold run out there - just what a bull needs in order to fuel then consolidate a charge. Much as happened between 1986 and 1988. Technicals and cycles are supportive for a push soon, not to just "above $400 " as so many earnest commentators love to say - as if $400 is the magical test!
No, I prefer momentum swing tests and Fibonacci and Gann projections and other weird and wonderful names applied to cycle evidence. The theme that comes out, shows investment range for the $Gold price to go to $650 and beyond in the next few years. And that backs the fundamental supply and demand picture that is only now, slowly, very slowly, becoming understood.
Newmont (NYSE), one of the big producers - is popular with portfolio managers and investors who understand why they need some gold shares in their portfolios. Accumulate the heavyweight mining companies. Those will be the ones the come-lately portfolio managers will buy first as they scrabble to get aboard.
Heavyweight gold mining company share prices won't perform as fast and as big as the smaller marginal mines - but the share price action is a lot more liquid getting in and out. And it is the getting in and out that decides the profits.
GOLDSignals will follow only a handful or two of shares during this gold bull. Perhaps it will be the biggest and longest gold bull in the history of stock markets. We'll also discuss the $Gold price, related precious metal indicators, the US$, the Euro and the Rand ( the South African currency is often a useful indicator for the profits of its mines - SA mining companies still dominate the world's gold supply).
Technicals and fundamentals say you have to take a view pretty soon now and add some golds to your holdings and take profits from the rally on most other sectors - except bonds (interest rates will still fall more as governments get desperate).
The volatility of gold shares along the way will frighten quite a lot of rabbits out of a good trend - as the rabbits try to run tight stop loss strategies. The good news on that point is that very often there will be excellent dips for the tougher of the share buyers - to buy at reasonable levels on each major swing.
Enjoy the GOLDSignals run - it could accelerate very soon now - and our six month cycle profiles say there are still some months to come before the next blowoff.
Victor Hugo
www.HugoCapital.com
www.SAgolds.com
www.GoldSignals.com
June, 2003
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