The Power
of Uncertainty and Fear
Dr Richard
S. Appel
April 30, 2004
Gold, silver,
gold and silver equities as well as numerous commodities suffered
severe losses during the past several days. Gold and silver after
posting highs a few short weeks ago of $432 and nearly $8.50
respectively, struck their recent lows of $390 and $5.99. Both
the major gold and silver producers and their junior exploration
counterparts followed the metals lead, and quickly sought lower
prices. Similarly, additional commodities including platinum,
palladium and copper gave back what felt like much of their recent
spectacular gains. It is amazing how the substantial paper profits,
which were created by the tortuous movements these markets traversed
to their recent highs, could so quickly turn into significant
losses for latecomers. Yet, even for those early entrants who
still possessed massive profits, the precipitous falls sent shudders
through their startled, trembling bodies and left them with a
feeling of despair. How could this be, muttered a legion of suffering
investors and traders, if these commodities and stocks are truly
in Bull Markets?
You had better get used to it! As difficult as the past several
days have been for those who are bullish on these markets corrections
must be anticipated, for they go hand in hand with all great
Bull Markets. If you remember, as recently as during the February
through early April, 2003 period, and after having earlier surged
to $388, gold collapsed and touched $319. This 18% loss took
two months to unfold, and suffer we did. You may have already
forgotten that painful time because it was shortly followed by
significant profits generated by a subsequent $100 + rise in
the yellow metal's price and simultaneous, soaring share prices.
Earlier, during the great gold and commodities Bull Markets of
the 1970's, there were numerous brief and a few extended price
collapses that tested the mettle of those participants who were
aligned with the gold bull. The most chilling set-back began
from the peak at $200 on January 1, 1975, the day that gold again
became legal for Americans to own. It terminated a year and a
half later in the summer of 1976, when gold bottomed at $103.
It was a grueling, nerve-wrenching period, but it was followed
by gold's march to its ultimate $875 peak in February, 1980.
Each time that the bears temporarily gained the upper hand, and
prices sharply fell, it similarly sent chills and tremors through
the hearts of the "gold bug" investors of that era.
However, in the end, massive profits accrued to those who stayed
the course and rode the Bull Markets to or near their conclusions.
Why are we suffering these massive price declines across the
precious and base metals spectrum? There are a number of underlying
reasons for these price breaks. Most are common threads present
in all of these markets, and others are more specific to individual
ones.
As the title of this missive indicates, uncertainty generated
by the lack of a wholehearted belief in the existence of these
Bull Markets, and the fear engendered by this condition, has
enormous power and influence. Uncertainty and fear, by those
who profess undying confidence in the Bull Markets, have allowed
this bear raid to produce cascading price declines across the
precious and base metal markets.
Many investors and traders, including hedge funds and similar
entities of all sizes, jumped onto the rising precious metal
and commodity bandwagons in their quest for short-term profits.
They observed the rising momentum that these markets generated
and wanted to join the party. They couldn't care less if they
were buying pork bellies, corn or cotton! For this reason they
were not committed to the markets and exited at the first sign
of adversity. Further, many then added short positions which
magnified the price markdowns.
To the detriment of all long position holders, the preponderance
of those who purport to be believers in the precious metals Bull
Market truly still do not yet believe. They repeatedly heard
and read in the popular media that the economy is improving,
that the Federal Reserve and our politicians have everything
under control, and that gold would never again act as a monetary
metal. These omnipresent statements caused them to question themselves,
their reasoning and their belief. Further, many of these individuals
and groups had leveraged their positions. They were either on
margin or held futures or options contracts. This placed them
in an enormously stressful position and forced them to be precise
in both their judgment and their timing. Also, the sharp declines
generated wide-spread margin calls which forced sales by weak
and strong holders alike. A combination of these situations in
turn created a snow-ball effect which further depressed these
markets as the earlier longs ran for cover.
Precious and base metals were the hardest hit because they had
risen the most and their prices had become greatly overextended.
Silver for example traded at a virtually unprecedented 50% above
its 200 day moving average. For many base metals such as copper,
nickel and aluminum, their major advances were caused by our
nascent recovery and by enormous Chinese demand. These conditions
had placed great stress upon the available supply of these and
other commodities and metals. The demand was so intense that
it generated staggering base metal price rises of as much as
100% in less than a year.
In the end, it was a combination of the earlier panic to acquire
needed, immediate supply, as well as the influence of hedge funds
and others who wanted to profit from these price rises, that
drove their prices to unsustainable lofty levels, and set the
stage for the declines that we have been forced to endure.
One facet common to all markets is that they act as vehicles
for and become controlled by the expression of human emotions.
During a Bull Market or any important upward price movement,
the rising prices generate much excitement in the psyche of its
followers. As the prices continue to trend higher most investors
and speculators gradually lose control of their rational judgment.
They begin to project far higher price targets than they had
originally anticipated, and their greed begins to take over.
Simultaneously, they observe other players aggressively competing
with one another. This reinforces their bullish beliefs and instills
excessive and unwarranted confidence that the market is heading
still higher. Unfortunately, at some point the market is bid
to overvalued levels which cannot be supported. When this occurs
the last buyer is satisfied, and prices fall. Typically, the
more overvalued and overextended a market becomes, the greater
will be its ultimate decline. This is the reason why Bull Markets
rise to levels which often overshoot all reasonable, value-related,
upside projections.
All significant market corrections act to dispel the euphoria
that accompanied the earlier rising prices. In an instant, investor
greed becomes transformed into abject fear. Fear that even still
lower prices are in the offing. This leaves them questioning
the validity of their beliefs in the Bull Market's existence.
These are but a few of the issues that market players in the
precious and base metal arenas have been forced to once again
struggle with, due to the recent wide-spread price collapses.
Gold and silver were trending far above their 200 day moving
averages when the current correction set in. Gold had traded
about 15% above this average and silver about 50%. Last week,
gold once again returned to its 200 day moving average and silver
to within 4% of its 200 day average. Throughout the 30+ year
period that I have followed the yellow metal, the 200 day moving
average has always offered great support during declines in a
Bull Market, and exceptional resistance to advances during Bear
Markets. Silver on the other hand, rocketed to an area of excess
that beckoned the short sellers! It had risen so sharply and
so far above its moving average that the stage was set for a
bear raid. And attack they did!
The major gold and silver producers broke below important areas
of support. The XAU violated 93 and the HUI 208. This attracted
technical short selling. The market technicians then entered
the fray believing that lower prices were at hand. This helped
further depress the XAU and HUI to their recent lows of 87 and
192 respectively.
Prior to this event, the junior exploration companies had absorbed
a considerable amount of newly free-trading stock without a significant
negative impact to most of their share prices. The shares were
issued during the latter part of 2003, in conjunction with the
unprecedented amount of company financings that had occurred.
The sale of these shares were allowed by the expiration of the
mandatory four month hold periods. However, with the price collapses
of gold and silver the downward pressure on junior companies,
combined with the evaporation of across the board bids, caused
the majority of the juniors to experience further weakness and
losses.
Much of the damage to the precious and base metal markets, as
well as to the stock prices of companies that either produce
or explore for them, did not have to occur! It is true that all
of these markets had gotten price-wise far ahead of themselves.
It is also true that this exposed their markets to bear raids.
This, by both the professional pit traders who make much of their
income from targeting vulnerable short-selling entry points and,
in the case of gold, by those powers that desire to restrain
its advance. However, much of the damage was produced by those
who lacked conviction in their belief of gold's Bull Market,
and the fear that the steeply falling prices generated.
Nevertheless, I for one am steadfast in my belief that we remain
in secular Bull Markets in gold, silver, gold and silver shares,
as well as in commodities in general. Despite the difficult few
weeks that we have been forced to endure, and the possible small
declines that may temporarily lie ahead, I am confident that
by years end we will look back upon the recent events, and wish
that we had bought more and sold less. It will likely be a similar
experience that we struggled through when gold plummeted from
$388 to $319 during early 2003, only to explode to above $430
an ounce a year later. When this correction has run its course,
the gold stocks will likely rapidly rise from their bases. This
will leave many investors who waited too long for still lower
prices in the lurch, and without the positions that they had
hoped to acquire.
The above was
excerpted from the May 2004 issue of Financial Insights ©
April 25, 2004.
Dr Richard
Appel
contact
website: Financial
Insights
I publish Financial
Insights. It is a monthly newsletter in which I discuss gold,
the financial markets, as well as various junior resource stocks
that I believe offer great price appreciation potential.
Please visit
my website www.financialinsights.org where you will be able to
view previous issues of Financial Insights, as well as the companies
that I am presently following. You will also be able to learn
about me and about a special subscription offer.
CAVEAT
I expect to
have positions in many of the stocks that I discuss in these
letters, and I will always disclose them to you. In essence,
I will be putting my money where my mouth is! However, if this
troubles you please avoid those that I own! I will attempt wherever
possible, to offer stocks that I believe will allow my subscribers
to participate without unduly affecting the stock price. It is
my desire for my subscribers to purchase their stock as cheaply
as possible. I would also suggest to beginning purchasers of
these stocks, the following: always place limit orders when making
purchases. If you don't, you run the risk of paying too much
because you may inadvertently and unnecessarily raise the price.
It may take a little patience, but in the long run you will save
yourself a significant sum of money. In order to have a chance
for success in this market, you must spread your risk among several
companies. To that end, you should divide your available risk
money into equal increments. These are all specula-tions!
Never invest any money in these stocks that you could not afford
to lose all of.
Please call
the companies regularly. They are controlling your investments.
FINANCIAL INSIGHTS
is written and published by Dr. Richard Appel and is made available
for informational purposes only. Dr. Appel pledges to disclose
if he directly or indirectly has a position in any of the securities
mentioned. He will make every effort to obtain information from
sources believed to be reliable, but its accuracy and completeness
cannot be guaranteed. Dr. Appel encourages your letters and emails,
but cannot respond personally. Be assured that all letters will
be read and considered for response in future letters. It is
in your best interest to contact any company in which you consider
investing, regarding their financial statements and corporate
information. Further, you should thoroughly research and consult
with a professional investment advisor before making any equity
investments. Use of any information contained herein is at the
risk of the reader without responsibility on our part. Past performance
does not guarantee future results. Dr. Appel does not purport
to offer personalized investment advice and is not a registered
investment advisor. The information herein may contain forward-looking
information within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of
1934. In accordance with the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995, the statements contained
herein that look forward in time, which include everything other
than historical information, involve risks and uncertainties
that may affect the company's actual results of operations. ©
2004 by Dr. Richard S. Appel. All rights are reserved. Parts
of the above may be reproduced in context, for inclusion in other
publications if the publisher's name and address are also included
for credit.
_______________
321gold Inc
|
