Excellent gold market analysis which pretty much reflects my own thinking
Bottom line -- bullish but no moonshot in sight.
A Mid-Year Look At The Gold Market
By Chris Temple, The National Investor
June 27, 2003
www.nationalinvestor.com
We’re now at the midway point of 2003, a time of year when Yours Truly likes to go back to his prognostications of January. More often than not, I’m happy to say, such an exercise results in saying we were right about things. Sometimes, it involves talking about why we were not. In this latter area, much to my surprise, the first half of the year has seen an incredible run for U.S. Government debt, with long-term interest rates plunging to their lowest levels in two generations in spite of a drop in the value of the U.S. dollar.
Where the gold area is concerned, the somewhat guarded bullishness I continued to have in January has been warranted. Yes, most factors affecting the price of the yellow metal have remained bullish, or in some cases become even more so. Most important of these in my view is that we have seen no sign during the first half of this year that producers themselves have soured on gold’s prospects, and think they need to lock in the top of the market by instituting new forward sales. Yet, looking at the gold price today, the kind of runaway move some have anticipated has not materialized. As I write this, in fact, yet another strong rally has fizzled, with gold breaking below its 50-day moving average this week before stabilizing some today (Friday).
Presently, I’m finishing up a comprehensive look at the gold market and its prospects for the balance of the year for subscribers to The National Investor. In it, I re-examine what got us here since late 2001, during which time the gold price (as of yesterday’s close) has appreciated some 35%, with gold shares (as measured by the HUI, the AMEX’s Gold Bugs Index) up by over 130%.
Amazing to the more bullish among gold bugs is that these gains have not already been much greater than they are. One of the key reasons they have not been, in my view, is that there is still a dearth of new, long-term investment demand for both the metal and the companies which produce and explore for it, in spite of gold’s dramatically improved fundamentals as a commodity.
Looking at gold’s two brief spikes so far in this volatile year reveals that—rather than those investors who traditionally are NOT gold bugs finally climbing aboard—most of the temporary new buying this year has come from short-term speculators. In first pushing gold up to the $390 per ounce area on war jitters and, later, in driving it back above $370 on a steady decline in the U.S. dollar’s value, it was hedge fund and other "professional" money that seized on gold’s short-term attractiveness and momentum. The trouble is, these are not long-term investors; and these folks turned right around and dumped gold at the first sign the easy money had been made for that particular trade. Gold’s inability to hold technical support at various times suggests to me that there has yet to be the kind of move by "everyday" investors into this asset class that, frankly, I even had expected to see by now.
As has been exhaustively covered of late, the new means by which the average investor will soon be able to participate in the sector (via a new metal-based exchange traded fund, or ETF, and other ETF’s to follow that will invest in gold shares) might finally help to bring fresh long-term money in. Eventually, this will come to pass; but those who are sure it will happen sooner rather than later continue to miss one important fact. Simply put, the average investor STILL doesn’t give a rat’s rear-end about gold.
There are a two general reasons for this. First, most investors still have a surprisingly strong faith, however misplaced, in the ultimate ability of the Federal Reserve to kiss the economy and make it all better. Sure, the first twelve rate cuts didn’t have everyone dancing in the streets, and most investors were underwhelmed by this week’s tentative move and fairly meaningless post-meeting statement by the F.O.M.C. However, this blind faith remains, with investors preferring to react to the financial markets’ confusion by switching allocations between stocks, bonds and money funds while most of them still ignore including gold in the mix. At some point, the notion will start dawning on them that even the sainted Mr. Greenspan can’t change the laws of either Nature or mathematics; until then, the crowd will be tossed to and fro from one paper asset class to another.
Second, gold’s most vociferous advocates have seemingly hurt the sector’s own cause yet again. I have to believe the public (that portion, anyhow, which does from time to time take a look at gold) has grown tired over time of the never-ending predictions of gold’s imminent rise to $1,000 per ounce, $3,000 per ounce, or some other magical number. Though the public has often been referred to as sheep or lemmings (and not without foundation) people aren’t completely stupid. Let’s not forget that these new "recruits" we’re hoping will become new investors in the gold sector are still counting their staggering losses from the last time they blindly followed pie-in-the-sky forecasts where the Internet and most other technology shares were concerned. Sheep and lemmings or not, it’s a bit much to ask them now to throw money at a sector they don’t understand fully, have little or no experience with, and whose most visible cheerleaders
are viewed by most of them as having little credibility due to a combination of obvious hype and too many failed predictions.
Gold’s picture is sufficiently bullish (though not without a couple concerns) on its own as to not need an unrealistic and unreasonable "case" made for it anyhow. I continue to believe this trend will continue; and as I said back in January, I still expect 2003 will close witnessing a new, defined trading range of $350-380 per ounce. This would be a level (using the mid-point of this range) better than 10% higher than in January, making gold’s cumulative gain from its lows around 40%. Gold shares would more than likely be modestly higher as well, though their fate these days rests on much more than just the metal’s price itself.
