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Gold Stock Alert:

Caution, Caution, Caution

Bob Moriarty
May 19, 2003

How many times have you read prognostications where the analyst would say something to the effect "If it goes up past 140 it will go up more and if it goes down past 125, it will go down more."

I mean, aren't those the only alternatives? Everything either goes up or down. Things rarely remain exactly the same. And after the fact, you can count on the fact the person making the claim will insist they called it correctly. "Well, I said it was going up." Well, they almost always say it's going down as well and one of them almost has to be true.

Basically, people try to cover all the bases because no one has a crystal ball, we are all just guessing. But some guess better than others.

In late March, I said, "
Buy, buy, buy" in a Gold Stock Alert. I do not claim to have a crystal ball but I am close to the market and try to get a feel for the overall status of things. It felt like a good time to be buying gold shares. At the time, the HUI was about 115, now it's 135 and change. I've put in a chart of the XAU with an arrow showing where I made the call.

So it's about time I come up with a nice ambiguous call because I'm not liking what I see in gold stocks. Bear with me and realize I could be totally wrong. But follow along.

In December, starting about the 10th or so, gold began a long rise from about $320 to just over $390 in early February. And the gold stocks wouldn't wake up. That's not true of all of them, I bought a bunch in early December, for a friend, which went up about 50%. But a 20% move in gold should mean about a 120% move in the small gold stocks and we saw barely half that. Gold was moving but the gold stocks weren't. Sentiment towards gold futures turned overly bullish in January and it should have been clear that gold was getting dangerous.

Sure enough, both physical gold and gold shares got clobbered in the January-March period with many juniors down 50% from their yearly highs as gold retraced all the way back to the low $320 range. We did hit a bottom and have come up from there. As luck would have it, my call in late March was not bad.

XAU chart
Chart courtesy of Yahoo! Finance

But with another $35 move higher in gold, the gold shares as measured by both the HUI and XAU have barely budged higher. They are higher but not by much. And that's with the dollar doing a swan dive and Iraq waking up and not particularly liking the American definition of freedom. Gold's up but don't get carried away thinking this is all there is.

I think we are a lot weaker than we ought to be. And if gold shares don't want to move on a $35 move, the dollar falling out of bed, bonds busting through the rafters and the Canadian peso acting like it's on Viagra, you might want to show some caution.

The US dollar will rebound and when it does, both the Canadian peso and gold will get hammered. The dollar is years from a bottom but even in a brutal bear market, there are violent bull rallies. I suspect we are in for 2-3 months of weak gold share prices. So I am urging caution on the part of our readers.

Richard Russell says about gold, "Buy and hold." And he's right; if you have bought gold or gold shares in the past two years, you probably haven't done badly and can count on doing far better in the future. We are a lot closer to the bottom in gold than to the top. I firmly believe the actions of the Bush administration and the Federal Reserve have pretty much destroyed the future of the dollar as an international reserve currency. When the rest of the world realizes there is nothing supporting the dollar but hot air, look for the dollar to go a lot lower and gold a lot higher. For all purposes, the neo-cons have declared war against both China and Saudi Arabia in public. By dumping their dollar holdings, either country could turn the US into a 2nd World nation in six months. And they might just bite the bullet and do it.

Harry Schultz on the other hand suggests you trade gold shares and gold. Actually, he almost insists on it. So if you believe him and my warning makes sense to you, you might want to lighten up on the gold shares. But within the next 2-3 months, there will be an extraordinary opportunity to buy gold shares cheap. So keep your powder dry. If you don't agree with me, you need do nothing. But I am seeing warning signs and I want to point it out. I could be dead wrong.

While I suspect gold shares are going down a bit, I also suspect the Dow and S&P are on the verge of doing a nose dive. May through October is traditionally the worst period of the year for holding common shares. The VIX is screaming complacency and the sheeple are about to get sheared again. October would make a real good time for a stock market low before the market begins a nice 150% advance.

Bob Moriarty
May 17, 2003

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