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Sure, the Nasdaq now trades for roughly 28% of its March, 2000 peak. Other major averages have been beaten up as well, albeit less so. However, when one considers that earnings-even legitimate ones-have plunged and show no signs of going back up meaningfully any time soon, stocks based on this (and other) fundamentals are, in actuality, no cheaper than they were three years ago.

Nevertheless, traders with lots of cash burning a hole in their pockets but little sense are currently supporting stocks at levels that are questionable at best, given the absolutely awful economic news of late. Consider the following releases from this week alone:

Tuesday morning, the Institute for Supply Management said its index of manufacturing activity plunged in March to 46.2, from a February reading of 50.5. The reading was the weakest since November, 2001. The decline, twice what had been expected, revealed a slower economy threatening to lurch into another recessionary "dip."

Yesterday, the Commerce Department reported that factory orders dropped 1.5% in February-also, twice the decline that had been expected.

Today, two high profile announcements added to the growing mountain of evidence that the allegedly "growing" economy was experiencing even more sand in its gears. First, the ISM followed up Tuesday's bad news with word that its index of non-manufacturing, or service, activity had also plunged-quite unexpectedly, according to analysts-in March. The reading of 47.9, down from 53.9 in February, was the lowest since October, 2001.

Finally, the Labor Department reported that new claims for unemployment benefits spiked last week to their highest levels in over a year. New applications jumped by a seasonally adjusted 38,000 to 445,000 for the week ended March 29.

None of this seems to matter, though, to market participants on the edge of their seats over any news tidbit coming from Iraq. For a while a couple weeks back, it was actually looking as though some folks were starting to realize that-no matter what goes on in, now, the looming battle for Baghdad-the underlying U.S. economy is still in trouble. Now, though, traders are completely ignoring worsening economic news and what is certain to be yet another lousy corporate earnings season in their belief that an eventual end to the war in Iraq will cure all ills.

Some think that these traders have been receiving some help from the federal government's Working Group on Financial Markets, euphemistically known as the "Plunge Protection Team." In my humble opinion, the PPT is too often given credit (or blamed, as the case may be) for market moves that are caused more by governmental/economist propaganda or, quite simply, by the enduring ability of many investors to believe in fantasies.

However, the conspiracy buffs may have been on to something on Tuesday, when the stock market-which was on the brink of technically breaking the up trend started not quite a month ago-incredibly did an about-face moments following the release of the horrid ISM number. Those of us watching the moment-by-moment levels of the major indices came away with the distinct impression that someone initiated some pretty substantial buy orders on the index futures, and pulled the Dow (for one) back over the key 8000 level just as it looked like the bottom might give way.

And stocks have ground higher still since then in spite of the abysmal economic news, with the excuse being that a lousy economy is already "factored in" and that things can only get better once we see Saddam Hussein's body. Whether we see it in a state of decomposition or in front of some war crimes tribunal doesn't seem to matter; all will be well, and both capital spending and consumer demand will soar back to late 1990's levels, once we see it.

Of course, if anything bad happens to what in my view is really a best-case scenario already having been priced into an already over-priced stock market, share prices may soon again start to move back closer to some measure of reality.

In much the same way, the price of gold has recently drifted farther away from the reality of its still-strong underlying fundamentals and prospects for the future.

As we already know, gold ran to a brief, frothy peak of $390 per ounce two months ago, as technical and momentum-led traders interested in a quick buck ran it up too far, too fast. Now, however, we're more than $60 per ounce lower. We may be on the verge-barring a nasty turn of events in Iraq that brings some safe haven money back in-of breaking down significantly, as the $325 per ounce level I warned we'd reach in my mid-February commentary is already cracking.

Gold mining shares have also suffered considerable technical damage, which may not yet be completely over. The sector has now given back more than half of its total bull market gains experienced since late 2001, prompting some to suggest that-though far more potent than the many bear market rallies of the late 1990's-what was in reality a roughly eight month move from November, 2001 through June, 2002 was merely the latest gasp of an asset class/sector that has been dying a slow death for two decades.

This, of course, is nonsense. As I currently write in my most comprehensive research report/investment recommendations on the gold sector in a year*, virtually all of the bullish factors that have driven gold for the last year and a half are still quite in tact. However, the fact that some naysayers can try to claim now that gold's latest 15 minutes of fame are over is testimony to the enduring fact that markets can and do often trade more on perceptions-however wrong-than they do on reality.

The opposite of the case with the stock market this past week, investors have ignored good news where gold is concerned in driving its price lower. The U.S. dollar remains generally weak against other currencies. Reports suggest that retail buying by investors in the Middle East and Asia is at its strongest level in a while. Even jewelry fabricators-the most important equation in gold demand-have recently stepped up buying that had slowed down as gold shot up in January and February.

Though some have suggested that the mining industry itself could get afraid and thus short-circuit gold's future by taking on new hedges, there has been no evidence of that. On the contrary, we've seen past "notorious" hedgers such as Cambior and-this week-Placer Dome announce further reductions in their hedge books.

Last but not least, the largest producer in the world, Newmont-which has worn its anti-hedging policy on its sleeve-came in with earnings that were higher than the consensus estimate, and additionally made fools of some whispering that they would be otherwise.

Yet, just as the stock market has grown even more "out of whack" as the economy and earnings pictures continue to deteriorate so, too, has the gold price moved away from its underlying fundamentals. As far as I'm concerned-and just as the stock market is really no "cheaper" now that it's three years past its nominal peak-gold is equally attractive now as it was when the bull market started at a price of around $260 per ounce. Further, gold shares-which did indeed move too far ahead of gold in mid-2002, prompting me to reduce my recommended exposure to gold shares by two-thirds at the time-are nearly as attractive as they were back then as well.

One mistake that gold bugs have made in recent weeks is in not understanding that gold prices are equally as capable of defying reality as is the stock market, if that's the direction most investors wish to go. The reasons could be as asinine as you could imagine-and pretty much are. Yet for the moment, it doesn't matter; as long as the majority of investors are buying the hokum that a victory in Iraq will take us back to the good old days of the 1990's, they'll act on that. (Incredibly, they also seem willing to buy the nonsense that the most inflationary and reckless monetary policy of all time will turn out OK, simply because it's managed by a man-Alan Greenspan-whom Wall Street has canonized.)

Accordingly-though such levels ultimately won't be sustained-we could see the stock market averages move somewhat higher still before reality sets back in. Likewise, I now doubt whether current levels for gold will hold, especially if we see in the near term the most favorable near-term outcome possible to the conflict in Iraq. Gold bugs should therefore brace themselves for further declines which, in a "worst case" scenario (for the yellow metal, anyhow) could see a drop back to the $300-310 level.

Such a move would increase the bearishness now permeating gold once again outside of the traditional, permanently bullish gold bug circles. It would probably be fed by some extreme short-selling/put activity that will prove just as fleeting as was the speculation that took gold to $390 per ounce. All of it would undoubtedly translate into another glorious chance to "load up," and reap gains similar to those experienced during the several months through last June.

All of this is NOT to say that you should leave the gold sector completely and wait for lower prices. As I have been saying since the beginning of this bull market, there is now a bigger risk in being out of gold and gold shares than in being in them. When I slashed my recommended exposure to gold stocks last June, I nevertheless urged my subscribers to maintain a "core" position of 8-10% of their portfolio in the sector, as back then-and certainly now-we never know what might happen to cause gold to skyrocket faster than we could move back in. I continue to feel that way, even as I fear that we'll see further near-term declines.

The good thing is that a long-term bull market-such as that I'm still convinced we're in where gold is concerned-will eventually forgive some short-term trading mistakes. So, for those of you who stayed in too long, and/or with too big a part of your portfolio, take heart. This secular bull market in gold is still young, and-barring a drastic change in fortune for gold that I presently can't envision-will eventually bail you out, and then some.

And for those of you who had the wisdom to sit out most or all of the decline in gold (and especially in gold shares since mid-2002), congratulations. And, get ready to take outsized positions again!

Chris Temple, Editor The National Investor

April 4, 2003

* Chris Temple's latest research report on the gold sector-which includes profiles on his three currently-recommended gold equities as well as on those he expects to imminently add to his list-is available as part of his "Bear Market Survival Package." It can be ordered at his web site, www.nationalinvestor.com.