elliott wave analysis
Buy and Hold is Dead! Long Live Buy and Hold! Long Live Gold!
SEATTLE - 20 February 2002 - by M.A. Nystrom
Every dog has its day, and gold's day is coming. Gold has been an undisputed dog, in one of the longest bear markets on record for any investment - 21 years and counting. Many would have you believe that gold as an investment is dead, that in the new world of investing, paper assets are king. Nothing could be further from the truth.
Gold has one advantage over paper assets: It is real. As Chris Powell of
so eloquently put it, "You can see it, hold it in your hand, put it in your closet or under your mattress, and come morning find it exactly where you left it. This is more than can be said for Enron, and the investment 'vehicles' in which it dealt."
Gold is a special kind of investment for a special kind of time. It does not bear interest, nor pay a divided. It is simply a hedge, -- specifically a hedge against falling currencies and paper assets in general. Gold has recently generated excitement by poking its head briefly above the psychologically significant $300 level for the first time in two years. The time is ripe for looking at a long term investment strategy embracing gold.
While gold has backed off from the $300 level (trading in the low 290s at the time of this writing), the technical view remains generally positive, with one big caveat - the possibility of manipulation in the market. This possibility must not be overlooked or ignored, and will be discussed in detail below. This point aside for now, the XAU & HUI appear to be forming long term rounding bottoms.
XAU - Philadelphia Gold & Silver Index (above)
HUI - Amex Gold Bugs Index (below)
From a shorter term view, they've broken sharply to new highs and are consolidating - a positive sign, though we may now be seeing a consolidation failure. It bears a close watch.
We believe that gold has a long term potential to trade well over $1,000 per ounce.
But don't go loading the boat just yet
, for there are still some important hurdles for gold. As the old adage goes, there are old traders and there are bold traders, but there are few old, bold traders. Gold bulls have been repeatedly disappointed with every significant rally since the yellow metal fell from its perch of $850 in 1980.
The fundamental picture also looks good for gold in the current chaotic macroeconomic environment. As widely reported, the Japanese have been snapping up physical, looking to protect their savings from what could become the biggest banking crisis in the history of the modern world. And the Japanese have a lot of savings to protect - over $105,000 per household. This represents a huge potential untapped demand.
The Russians are buying gold, with top Russian economist Tatyana Koryagina predicting a dollar collapse, and encouraging citizens to buy gold. Preparedness measures in Russia for the ultimate dollar collapse have moved from the realm of published warnings, to concrete actions, such as the Central Bank's decision to put the gold chervonets coin back into circulation. Imagine that! Gold once again circulating as legal tender somewhere in this modern world!
It is always easier to see a bubble from the outside than from within. The Japanese bubble, for example, was widely reported on in this country before it popped. With the decline of the Nasdaq from its 2000 peak, it is generally accepted that the bubble has been safely deflated in this country, and it is only a matter of time before the bull returns to the equity market. At least that's the domestic press's spin. Not so for the international community. From the outside, it is a deathwatch. It is clear that the U.S. is printing money like it's going out of style, which can only mean inflation in the long run, an environment in which gold will ultimately thrive.
Furthermore, gold producers are consolidating. This is excellent news in an industry as small as gold. The top 25 publicly traded gold producers have a market cap of only $48 billion. Compare this to GE, the worlds' biggest cap stock at $363 billion, or Microsoft with at $343 billion.(Data from InvesTech Research.)
The entire gold market is tiny by comparison. With most gold producers sporting such small capitalizations, not many institutional investors can easily tread here. Consolidation will increase the market caps and liquidity of a few large stocks, priming the pump for larger capitalizations for the entire sector.
Gold "Blue Chips"
, NEM on the Big Board, is closing in on two acquisitions which will create the world's largest gold producer. Newmont is also a strong opponent of hedging. By consolidating and lowering production costs, NEM believes it is building a natural hedge - providing stability at lower gold prices while gaining the greatest benefit in a rising market.
- another early favorite in the gold story stocks, is a large producer with no debt, showing profit, and no hedging strategy. Traded on the NYSE as GG, it was recently added to the Amex Gold Bugs index of unhedged producers.
While many gold investors prefer smaller, more obscure companies, we believe these two companies will be the leaders in the new gold bull market. They are large enough, well known enough, with the credibility of trading on the NYSE, that they will be safe enough for fund managers to purchase en masse. As these companies increase in market cap, they will act as a wick to increase visibility, liquidity and market caps for all companies in the sector. Think of them as the Amazon's and Yahoo's of this sector - the early "blue chips" in a nascent bubble. But judging from the current charts, both may be getting slightly ahead of themselves.
Proxy Ownership vs. Physical
If at all possible, we like the idea of purchasing and holding physical gold in preparation for the ultimate collapse of the dollar. We realize that this can be an unwieldy strategy , as premiums are higher, especially on small quantities, and there is the added complication of storing gold safely.
There is no way to know when the ultimate collapse of the U.S. Dollar will come. However, we do believe that this crisis will be telegraphed well in advance by the price of gold. As a result, we are anticipating nothing short of an all out bubble in the price of gold and gold shares leading up to this event. We draw this conclusion based on the limited supply of gold, the extreme number of short contracts in the futures market which must eventually be covered, and the current macro economic and megapolitical environment, which we only expect to deteriorate with time. Enron is only the tip of the iceberg in the funny accounting, and the full fallout has yet to be realized. The war adds an added level of instability, as no one knows when or where the next attack against America will come, though everyone seems certain that one will come. Meanwhile, our commander in chief, W, is out trying to pick fights with the rest of the world. Doubleplus un-good, as they would say in '1984.'
In this type of environment, gold stocks can move 30% or more for every 10% increase in the price of the metal, as we have witnessed recently. If our prediction of a 4 digit handle on the price of the metal is correct, this means a full-scale bubble in gold shares emerging. Remember what a bubble looks like? In the halcyon days of the internet bubble, worthless stocks with tenuous, remote linkings to the internet shot up 1-2-300% in one day! Sometimes in one hour! There is no doubt in my mind that we will see the same thing in the gold market one day.
is beginning to get an ear on Capitol Hill. All the talk and worry about lack of transparency in accounting methods of publicly traded companies is bound to turn on JPMChase, with its $29 trillion derivatives book. What's in that book? No one knows. Whatever it is, the market doesn't like it, and likes gold much better over the past 6 months.
GATA is releasing clear and credible evidence of a concerted, surreptitious government sponsored policy, executed by major bullion banks, to suppress the international price of gold. Such a policy benefits the U.S. dollar and keeps interest rates artificially low. How does America maintain its strong dollar policy? GATA claims it does so by manipulating the gold market. If this is true, once fully exposed, the price of gold should rise dramatically. GATA estimates that without the artificial lid, prices should currently be trading north of $600 today.
Herein lies the only fundamental threat we see to advancements in the price of gold. The national press, for whatever reason, has been loath to pick up on this story. It has been reported that of JPMChase's $29 trillion derivative book, $23 trillion is devoted to interest rate derivatives, and tens of billions to gold short sales.
One financial analyst, who asked not to be identified, explained the situation this way: "Gold is borrowed by Morgan Chase from the Bank of England at 1 percent interest and then Morgan Chase sells the gold on the open market, then reinvests the proceeds into interest-bearing vehicles at maybe 6 percent. At some point, though, Morgan Chase must return the borrowed gold to the Bank of England, and if the price of gold were significantly to increase during any point in this process, it would make it prohibitive and potentially ruinous to repay the gold."
(Quoted from Insight Magazine "All that glitters is not gold" by Kelly Patricia O'Meara, 2/25/02 issue)
Simply from a national security standpoint, this may well put a cap on the price of gold in the near term. JPM is simply too big to fail, and a spike in gold could push JPMChase over the edge, dragging the rest of the world financial system with it. The government, and the players in the gold cartel will do their damndest to see that this doesn't happen. If that means slamming the gold market one more time, allowing players to harmlessly unwind their contracts, so be it. If this is the case, our recent brush with $300 would be yet one more disappointment for the gold bugs in the long bear market.
Markets can be successfully manipulated for a period of time, but not forever. Whether the market is turned back at $300 due to manipulation or not, the future for this market is bright. One more significant hit to the price of gold would only mean another opportunity to accumulate more at lower prices.
A Starting Point
At this time, we maintain a cautious approach to the gold market. Familiarize yourself with the companies and stocks in the industry. We suggest beginning with the companies which make up the XAU & HUI.
AEM - Agnico Eagle Mines Ltd
ASA - ASA Ltd
BGO - Bema Gold Corp
CDE - Coeur D Alene Mines Corp
ECO - Echo Bay Mines Ltd
FCX - Freeport McMoran Copper Gold
FCX,C - Freeport McMoran Copper Gold
GG - Goldcorp Inc
GLG - Glamis Gold Ltd
HL - Hecla Mining Co
KGC - Kinross Gold Corp
NEM - Newmont Mining Corp
ABX - Barrick Gold Corp.
NEM - Newmont Mining Corporation
AU - Anglogold Ltd.
PDG - Placer Dome, Inc.
FCX - Freeport McMoran Copper Gold
HGMCY - Harmony Gold Mining Co. Ltd.
GG - Goldcorp, Inc.
MDG - Meridian Gold, Inc
AEM - Agnico Eagle Mines Ltd.
SIL - Apex Silver Mines Limited
Many of the stocks of the HUI trade at prices so low that they can be though of as non-expiring options. There is, of course, a universe of low priced mining shares. We will be exploring these in future issues of Chronicles. This is just a stating point. Find the ones that look good, and start accumulating on a dollar cost average basis. We may yet see lower prices before higher, and it looks like the gold market has recently gotten ahead of itself and is in need of a breather. Caution is in order.
Buy and Hold is Back!
We view this not so much as a trading strategy as an investment strategy, taking a page right out of the playbook of the late, great bull market: Buy & hold. Whatever the market does, buy a little more and accumulate slowly. The bear market has been on for 21 years, and it's not going to turn on a dime. But the stocks that are $1, $2, $3, $4 now will all be marginable securities before this is all over, which means leveraging opportunities as prices rise. Buy and hold is a great strategy for this market at this time, leaving only one question - when to get out, convert winnings to physical assets and run for the hills! For the world will be a different place when the price of gold is well north of $1,000. Proxy ownership may well be meaningless. For that matter, physical ownership of gold may also be outlawed again. As you know FDR outlawed the ownership of gold by private citizens in this country, "land of the free" in 1934.
(Click here for more details on the history of gold in this country.)
But we don't have to worry about that now. As Scarlet O'Hara famously said, "We'll worry about that tomorrow."
Tread cautiously, keep a keen eye trained on the price of gold, and stay tuned to Chronicles. Remember that when freedom is outlawed, only outlaws will be free.
M.A. Nystrom 20 February 2002
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Special thanks to Robert Prechter of
Elliot Wave International
, for the grand macro economic vision which inspires this website and this publication.
Special thanks to Robert Kiyosaki of
, for the grand micro economic vision which equally inspires this website and publication.
And finally, thanks to
, editor of
, for executing the vision.