May 16, 2005
Most of us who are active in
the financial markets now were probably not around during the
1929 stock market crash, therefore, this article will not go
there. But most of us remember the recent stock market meltdown
in 2000. And now five years later, bulls are still bullish as
ever, even when many portfolios are down in the double digits.
What does it have to do with the gold market?
A stock market bubble is created when speculation has gone excessive.
But what is excessive? Have we learned anything from the Nasdaq
bubble? Personally I have. I was heavily into tech stocks during
the late stage of the tech bubble, and profits were good. I overstayed
my welcome, by buying all the dips in 2000 and early 2001, and
gave some of that profit back. Then I discovered gold. Its been
heck of a ride, until late 2003. I do not know if the gold market
has met the same fate as the dotcoms did, but with the lessons
I learned from the tech bubble still fresh in my mind, buying
and holding is the last thing I would recommend to my subscribers.
I have stepped on some toes in my last two articles, suggesting
those who recommended accumulating gold stocks were buying on
faith, because my charts were not screaming buy. No offense folks,
I only say what I see, as I do not believe in forecasting and
market predictions. Markets are dynamic and subject to constant
change, and that is the advantage of being a technician, because
any major changes within the markets are quickly demonstrated
by price action, and that alone is the best indicator in the
The tech bubble
Lets go back a few years. The
Nasdaq mania gained 320% in 36 months from April 97 to March
2000. In hindsight, we now recognize that was a bubble. Also,
notice that the biggest gain occurred during the last seven months,
when Naz doubled from Aug 99 to Mar 2000.
The gold bubble
$HUI gained an incredible 600%
in 36 months from Nov 2000 to Nov 2003, almost twice the Nasdaq
mania in the same length of time! Again, similar to the blow
off stage of the Naz, $HUI gained 120% during the last seven
months from April 03 to Nov 03. Was that a bubble? You be the
judge. But gold bulls' argument is that the $HUI is comprised
of mostly junior unhedged stocks, therefore a lot more speculative
than the big caps which comprise the $XAU. Alright....
$XAU - sure, only went up 166%
in the same period, about 28% of $HUI's monstrous gain. But a
bubble is a bubble, once its burst, its over.
If we look at the Dow during
the same period of the Nasdaq mania, it gained only 83%, about
26% of Nasdaq's gain, very much in line with the differential
between $HUI and $XAU. The fact is, big caps almost always underperform
in a bull market and almost always outperform in a bear market.
So, after the mania is over,
what sort of correction can we expect? Lets look at the Nasdaq
Nasdaq lost 77% in 31 months.
While the Dow only lost 33%.
So far, $HUI has lost 30%,
using the Nasdaq correction as a guide, it is quite possible
we are only half way thru the correction in term of price and
$XAU, down 25% so far, should
begin to outperform $HUI if the correction continues. Why? Unlike
the $HUI and $XAU, the bullion is only down 5% from its peak,
therefore, only two things can happen:
#1 - bullion continues up, eventually pulling gold stocks up
with it thus ending the 18 month correction in $HUI and $XAU.
#2 - bullion goes down, corrects 50% or more of the entire advance,
to the $350 area, taking both the $HUI and $XAU down in the process.
However, because the $XAU is comprised of big caps who are notorious
hedgers, the correction in bullion will not affect the big caps
as much as the juniors.
I'm not suggesting that the
$HUI must correct like the Nasdaq, but the fact is the 600% gain
was excessive speculation anyway you look at it, and an appropriate
correction is only normal.
Remember, analysis is nothing more than an educated guess. Price
action is number one and we must be vigilant of supply and demand
as clearly indicated by the best technical indicator in the business:
price itself. A good trading model made up of a few simple technical
parameters should guide us in and out of the markets safely.
I will have no hesitation in issuing a buy signal when my homemade
BPGOLD turns up. Analysis as this merely provides the big picture
which shows the market as is, and it is up to us to accept that
fact and execute our signals accordingly. Do not buy and hope
just because many think that gold can only go higher. Be defensive
and you will not have to suffer two crashes within a decade which
is highly likely at this point. Some may argue that gold stocks
are in a correction, not a crash. Call it whatever you want,
the fact remains that $HUI has now lost 35%, that is the same
as if the Dow was at 6500; headlines all over the world would
be screaming crash, unfortunately gold stock investors are suffering
May 13, 2005