SA Gold Shares
- Buy when there's Blood
Investment Indicators from Peter George
July 29, 2004
Scripture
"He has broken my teeth with gravel; he has trampled me in the dust.
I have been deprived of peace; I have forgotten what prosperity is…
but…men are not cast off from the Lord forever. Though he brings grief,
he will show compassion, so great is his unfailing love."
Lamentations chapter 3, verses 16,31&32
SUMMARY
Apocryphal stories are told of men who, over the centuries, have established fortunes buying when everyone else was selling. The Rothschild dynasty benefited greatly using a carrier pigeon to learn the results of the Battle of Waterloo, buying British Bonds when others were selling in anticipation of defeat at the hands of the French under Napoleon. Rothschild even encouraged the mood of panic, prior to stepping in.
It takes great courage to buy when there's blood in the street - when everyone else is riven with fear, dumping shares and contemplating flight. But the strategy is hardly scientific. How do we measure levels of fear? Nonetheless, when looking back, market bottoms generally occur when fear is greatest. That brings us to the present. There are strong grounds to believe that the South African gold share index has fallen to a level where the fear index has reached a significant high. If we are correct, it marks the end of a massive and painful two year correction; prelude to what is only the beginning of a substantial long term bull market.
The next leg could carry the JSE gold index from its recent dip to below 1500, back through its all-time high of 4,000 reached two years ago, spiralling up to a new peak in two years time of around 7,500. Now is the time to hold, not sell. Now is the time to add to positions. Now is the time to dump all industrial equities - both here and overseas - in anticipation of a major sell-off on Wall Street.
If you missed the first run in gold, now is the time to catch the second. Jump aboard before it's too late.
1. A LESSON FROM THE 1970 -1980 GOLD BULL MARKET
Attached to this report is a monthly chart of gold, stretching back to 1966. Note how it initially flat-lined at $35 an ounce - a price fixed by Roosevelt in the mid 1930's - right up until 1970. Ten years later, under the impact of a roaring bull market, it peaked at $850.
Nixon provided the impetus when he abandoned the gold standard. Although he only reneged on US gold convertibility in 1971, there would already have been rumblings of stress and strain in Fed and Treasury circles a year earlier. It was these which triggered the run which in due course made it possible for the US Fed to cast off every last vestige of monetary restraint, undermining the purchasing power of the dollar and driving investors to gold.
Note how the price of gold rose with scarcely a break, from $35 in 1970 to $200 in late 1974. Over the following two years it corrected all the way back to $100. As a trader, where would one have sold to limit losses? Assuming one had, where would one have bought back? In retrospect, the surest policy may have been to ride the correction and stay with the long term trend. Over ten years one would have enjoyed a superb run from $35 to $850.
2. APPLYING THE LESSON TODAY
South Africa is the world's largest gold producer. Although the dollar price of gold is important, it is the price the mines receive in rands, which ultimately carries the day. Although the dollar price has risen more than $100 since late 2001, from below $280 to its current level of $390, a rise of 40%, the benefit to South African producers pales into insignificance when compared to the fact that over the same period the rand has doubled in value against the dollar, shrinking from over R12 to either side of R6. The net effect has been a sharp downward correction in the rand gold price, from a peak of R3600 in December 2001, to a first bottom of R2375, in May 2003. This was followed by range trading for 12 months, before a double-bottom formed in July this year, right where we are today. The total down-move spanned two and a half years and amounted to a fall of 34%.
In line with declining rand revenues, the JSE gold index fell from 4,000 in May 2002, to an intra-day low of 1700 a year later, coinciding with a crack in the rand price to a low of R2375. With the rand price rallying up to R3000 by January 2004, the gold index bounced from 1700 to 2700. With the rand strengthening from R7,30 in January to its recent low of R5,85, although the rand gold price held its previous level of R2375, the shares made new lows. The index crashed from 2700 in January to a recent intra-day new low of 1460. The index is now 62% down from its peak of 4000 two years ago.
In his June 2004 Gold Report, well-known US chartist Richard Russell was reviewing the gold bull market of the 1970's - as we are doing here. He described how between 1974 and 1976 the metal experienced a huge 60,7% correction - but he decided to hold, finally selling his gold at $660, prior to the final run to $850 in 1980. It is interesting that the metal's correction THEN almost exactly matches the percentage correction in South African gold shares in the last two years. Russell held then, and to the chagrin of many clients we advised the same throughout the last two years. Today Russell goes even further:
"Back then there was no fear of a collapse in the US dollar. Gold was rising with inflation. Today it's different. The dollar, beset by huge deficits, is in real danger. Under these conditions, the question is whether investors should EVER sell their gold, or at least their gold bullion."
3. WHITHER THE RAND?
In the Business Times of July 25th, in an article entitled: "Mboweni rewarded with second term", the writer displayed a 12 year chart of the rand, stretching back to 1992. It showed the rand bouncing off a long term rising trend in the region of R5,80 to R5,90. This may well offer resistance to any further strength over the next six months, unless or until the gold price pushes up past $500.
Last week, in a Pollyanna-type address to the US Senate, Greenspan painted a picture of continued strong economic growth in the face of mild but rising inflation, sufficient to require further gradual increases in the Fed Funds interest rate. For the first time markets were sceptical. The Fed's Master Magician was no longer beoing taken at face value. International markets slipped below their 200 day moving averages, indicating worse to come. Granted the dollar rallied but as GATA expert James Turk commented:
"Nothing good has happened to suggest that the outlook for the dollar has improved. Consequently, last week's bounce in the dollar was probably nothing more than a bear market rally."
If we are wrong, and the dollar were to take the EURO back down from 121 to 118, dragging gold back from $390 to $378, the rand would almost certainly weaken from R6 to R6,50 or even R6,75. At that level the rand gold price would remain above R2450, and might push up to R2550 - comfortably above the double bottom at R2375. If this is the worst case scenario for SA gold stocks, it means the index has bottomed. If Turk is right, and the dollar bear resumes on the back of tanking world markets, then the gold price is about to run, but this time rand strength will lag the rise in dollar gold. Under these conditions, SA gold shares can recover sharply. Either way, rand gold prices look to have bottomed. We could soon see the launch of Leg 2 of a major long term bull market in gold. The coming up-leg could generate a 500% increase in the JSE gold share index, from 1500 to 7500 over the next 18 months. Last time Goldfields peaked at R160. This time it could reach R300 or more.
As foreign investor patience with the US spending binge draws to a close, Greenspan's fight to maintain the exchange value of the dollar is reaching desperate proportions. At the heart of it is gold. US financial authorities must keep the gold price under wraps. They have failed to contain oil prices. With Nymex Oil hovering on the brink of $42 a barrel, prices look set for a push to $50 by Christmas.
There has always been a close long term correlation between the prices of oil and gold. Their patent inability to hold down oil prices will soon translate into defeat in the battle to suppress the price of gold. When the thin line of manipulation finally snaps, a dollar collapse will begin in earnest.
4. DOW BELOW 10,000 - GOOD FOR GOLD
Grenspan is like a circus juggler trying to keep four balls in the air. Each represents an asset bubble of sorts. The first is the dollar. The second is the US stock market. The third is the US property market. The fourth is the US bond market. We recently circulated an article by Hoy entitled:
"The Coming Debacle in US Bonds"
The dollar is already in a long term bear market. The Dow has enjoyed a year long rally but inevitably the bear will resume and the index will revisit the previous low of 7200. This time it will break below and fall even more sharply. In due course housing prices will follow. Then the bond bubble will burst as well.
Bonds, the Dow and the Dollar all have strong INVERSE relationships with gold. In fact the Dow/Gold chart points to an eventual intersection around Dow 3000, and Gold 3,000.
All the above is grist to the mill for buyers of gold shares, supporting our view that the tide is about to turn.
PETER GEORGE
Tel. : (27) 21- 700- 4880
Cell : 082- 806 - 3147
A personal profile of Peter George
He turned 61 in August, 2003. Born in Natal, South Africa. Graduated with a BA (PPE) - Politics, Philosophy, and Economics - at Oxford University, England, followed by an MBA at the University of Cape Town. He was a Member of the Johannesburg Stock Exchange from 1969-1981, Chairman of Wit Nigel gold mine from 1983-1987, and a Member of the South African Bond Exchange from 1993-1997. He and his associates currently own an option to repurchase and reopen the Wit Nigel gold mine. Today he writes a regular commentary on world markets, currencies, and gold. This is available via e-mail or, by special arrangement, via surface mail. His own e-mail address is pgportfo@trinityholdings.co.za;
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