please click banner to support our sponsor.
Home   Links   Editorials

That terrible four-letter word "Gold"

Ralph Kettell
Archives
October 1, 2003

Just like Frank Sinatra, Gold Bugs love NY, and NY is beginning to love gold.

The 2003 NY gold show was quite well attended and everyone was upbeat as would be expected given that the prime mover behind the show, GOLD, was making new multi-year highs. The talks by analysts and company representatives were extremely well-attended with a couple being standing room only.

One of the most interesting observations was that most of the gold analysts were cautiously optimistic about the gold shares while the average conference attendee, aka gold bug, was far more bullish. I think that this is very hopeful for the gold shares, because if the analysts were overly bullish the market would be far closer to an interim top.

On Monday morning, Rick Rule spoke about the gold shares and was particularly keen on pointing out that the easy money had already been made and that during the next phase of the bull market investors would have to be far more careful. This seemed like good advice, but I was intrigued that he was so cautious while the golden bull is still so very young. Then he went on to say that in the current "dot gold" market, investors needed to be exceedingly careful as gold stock valuations are so high.

I thought, "Wait just a minute Rick, what "dot gold" market?" This is not a "dot gold" market, not even close. One day several years from now we will get to witness a spectacular dot gold market, but certainly not now. When it finally does happen, it will dwarf the dot com market of early 2000. The gold bubble will suck in everyone, not just gold bugs and the "smart" money crowd.

The dot com market was a mania that drew in a large percentage of private and corporate investors and resulted in outlandish prices for stocks with almost no inherent value. The sky was truly the limit for those companies that had little chance of ever turning a profit.

Let's do a side-by-side comparison of the current gold bull market to the dot com market of the late twentieth century.

The dot com market began with the advent of the world wide web. Around 1992 this started as the Arpanet morphed into the internet and began to be utilized for more than just communication and data transmission between government, industry, and academia. At that time, very few investors had heard the word internet, and it was viewed as quite risky. Then by 1996 it was a world wide phenomenon and computers were selling like gangbusters as the prices dropped daily. Communications companies, with business models that read like Alice in Wonderland, sprang up right and left and strung fiber from coast to coast and everywhere in between. The stocks of networking equipment manufacturers soared. The interesting thing is that as they soared investors became complacent and somehow the sector became less risky at enormous valuations than it had been years before at comparatively tiny valuations. Yeah sure, you can't miss with these babies!

In 1998 businesses based on some of the most foolish premises imaginable sprang up to "profit" from the internet. In the end, the only ones to profit were the Wall Street "Professionals" who organized the IPOs, and the insiders whose penny stocks went to $100s of dollars per share. The dot com market was truly a bubble of bubbles. The singular thing that levitated those stock prices to the stratosphere was hot air from promoters playing to the "investors" greed. There was no, none, nada substance underneath supporting the valuations, but thanks to CNBC every potential "investor" in the U.S. and much of the world was learning what a great investment they were not!

The early stages of the tech bull market were impressive. While they were based on some pretty optimistic assumptions, the early big gainers in the tech move were the likes of Cisco, IBM, Microsoft, and Intel. They were all real companies with real products, but they were sporting real high valuations. That was while it was still a bull, a very strong bull mind you, but nonetheless a bull. It had not yet progressed to the bubble stage where companies with no earnings, no expectation of earnings, and no business model that contained a hint of earnings were raising enormous sums of money. The money raised was not spent on capital equipment, it got spent on rent, salaries, software, and the closest item to capital equipment in the internet business, computers. The only problem is that computers depreciate faster than new cars leaving the dealership. The money was Gee Oh eN Eeeee, gone!

How does this picture stack up against the current gold share market? I would say that we are somewhere around 1995 in comparison. The big gold mining companies have had a good run, the juniors and exploration companies have recovered from the depression level valuations of 2000 to 2001, and it seems like happy days are here again. There is talk of $1,000 plus gold, but the share prices certainly don't reflect anywhere near that sort of enthusiasm. Most importantly, however, is that the investing public still doesn't know that there is a precious metals bull market in progress. I was on a plane last week and informed the gentleman sitting next to me that we were in a huge bull market in gold and he was amazed when I quoted him some very convincing statistics. His initial comment was, "I hadn't heard a thing about it." My reply was now you have and you now know more about it than 99.9% of the world investment population.

Why doesn't the public know about the bull market in gold stocks? Ah., a most excellent question grasshopper. It's simply because the powers that be who control the media and everything else for that matter do not want Mom and Pop America to find out about it. The only time that gold is mentioned in the news or on CNBC is when it has a particularly bad day. "Oh and gold really tanked today, it was down $4.50." Excuse me, but isn't is still within $10 of a 6-7 year high. Oh puhleeeze, don't confuse the audience with the facts. I must confess, however, that in the past few days, even CNBC has started to make a minimal mention of that terrible four letter word "gold."

We are just now beginning to enter the second phase of this bull market. The initial accumulation by the "smart" money has been completed. During the current phase, the major players on Wall Street begin to discover that there is a new game in town. At this year's NY gold show, there were several specialists from the American Stock Exchange walking around and talking to the exhibiting companies. As they start to cover this market and more interest is generated there will be increased liquidity. The precious metals bull will accelerate to the upside (as is happening right now), eventually it will get significantly ahead of itself. Then, we will have a long healthy correction.

After the "cleansing" period has run its course, the smart money will again begin to accumulate the gold stocks. It will begin slowly at first and gradually pick up speed, and finally "everyone" will discover gold. Gold stocks will be the popular topic at cocktail parties and black-tie events. There will regularly be front page articles on numerous financial publications touting gold as the greatest investment of all time. They will be both right and wrong. They are right that gold is the greatest investment of all time, but unfortunately for them the tense is wrong. Gold will have been the greatest investment of all time once the general public has discovered it. By 2008 or 2009 it will be the next bubble market for the masses.

The final blow off of this bull cum bubble will be spectacular. Aided by computers and online trading, this bull will dwarf 1979 to 1981. It should inflate to the biggest bubble of all time. Everyone will be smarting from the decline in their net worth from the stock market bear which may still be grinding out then. Their house values will be in the red, because of the bursting of the real estate bubble in 2004/2005. The only investments in positive territory will be gold and silver. When the entire world tries to squeeze through the wee little door into the gold investment arena, the stampede will be tremendous.

When we near the bitter end, the newly enlightened precious metals geniuses will create a new cadre of day traders. This group will likely not be trading stocks as they were during the dot com market. No this newly minted group of day traders will have discovered commodity trading and the wonderful leverage available. Why play with stocks at a measly 50% margin, when you can trade gold and silver at say 6 or 7 percent initial margin. As in 2000, the mechanics will go to their computers between tune-ups and check on their commodity accounts. Taxi drivers and shoeshine boys will be discussing trading strategies. That my friends is what a dot gold market will look like. Sorry Rick, but we're not there just yet!

I understand where Rick Rule and some of the other analysts are coming from. They are trying to get investors to take some profits and be careful. This is certainly good advice, but I believe that the greatest risk to investors at this juncture is not being in quality gold stocks. There is just too much chance of missing the big move. If investors try to get too cute, and play each little move, they could be very disappointed when gold and silver stocks unexpectedly burst through their trading channel. Sometimes runaway stocks will give investors an opportunity to get back on for the ride, but many times they will just take off and never look back.

Gold Bugs Beware! Don't be right on your call for significantly higher metals prices and then miss the ride of your life by selling out too early. You will be like the lottery winner who spends all his winnings and ends up poor again. "He was far better off before he won the lottery and didn't know what it was like to have money."

Investors who didn't know about the gold bull will wish they had seen it coming, but the poor gold bug who saw it coming, but missed the ride, will never forgive himself.

Oct 1, 2003
Ralph Kettell
Archives

email

Disclosure:
The author is not an investment advisor and this article should not be construed as a recommendation to invest in the discussed securities. The author is merely presenting some possible scenarios and what the potential risks and rewards associated with an investment in these securities could be. The author has not been paid to write this article, either in cash or securities. The author is a share holder of these securities along with about 15 to 20 other mining companies. The author sells shares from time to time to rebalance his portfolio as well as invest in other opportunities which present themselves.

Disclaimer:
The author's objective in writing this article is to make potential investors aware of the possible rewards of investing in this(ese) security(ies) and to elicit interest on their part in this stock to the point where they are encouraged to conduct their own further diligent research. Neither the information, nor the opinions expressed should be construed as a solicitation to buy or sell this stock. Investors are recommended to obtain the advice of a qualified investment advisor before entering into any transactions.
_______________
321gold Inc