Welcome to USAGOLD's "Gilded Opinion" pages. We invite you to browse our index of outstanding gold-based commentary.
Gold Bugs Beware -- part 2.
by Professor von Braun
July 27th, 2002
On June 10th, concerned about the bullishness surrounding gold stocks, I wrote an article entitled "Gold Bugs Beware" and stated that one could expect a substantial retracement at some point in the not too distant future.
With the XAU now 35% of its recent peak of 89.11 this qualifies for a substantial retracement. Gold too has declined, although not as much in percentage terms.
Is the worst over or is this just the beginning of an ongoing decline, perhaps a final bankrupting low that ends a 22 year bear market?
Arguments that the fundamentals have changed, that the Central Banks have sold all their gold, that gold is the safe haven, etc, etc appear daily but these arguments did not stop the decline over the last few weeks. The same arguments will reappear in short fashion no doubt.
Central Banks have a vested interest in keeping the gold price low and they still have the means to achieve this end. The IMF has stated that a strong US dollar is needed to keep the world economy moving and they will be instructing the CB's to buy this currency. The Bundesbank is still making noises about selling gold and buying equities and bonds - it's the third time this announcement has been made, the Swiss are still sellers of gold with about 850 ton to sell and the mining companies have either stopped hedging or are attempting to unwind their hedges, which reduces demand for physical metal.
Never mind the rumours about "x" amount of ton's being leased and sold into the market, or CB's having little gold left, or Japanese grandmothers buying gold in record amounts, the bottom line is that the CB's are still in control of this market.
Will they eventually lose control? Yes, but we are not there yet. When the CRB Index begins to rise to enough of a degree that inflation and rising prices becomes obvious to the public at large then that event could be close at hand.
As for gold stocks, well lets face reality. For the last five years these companies have been struggling to stay alive. The weaker ones are already gone, mostly by way of merger, with a few bankruptcies and those that are left are far from being strong. In previous articles I have referred to these mergers as a process of cross contamination, whereby unhedged producers merge with a hedged producer and they all end up in the same boat. Or they overpay for something that was worthless to begin with, an example of this being Placerdome's purchase of Getchell Gold. Why would you buy a high cost producing gold mine in an environment of low prices and then shut it down?
These companies have little left in the way of cash reserves, their ability to either borrow, or raise additional equity is impaired (even more so with the drop in the XAU), they have been high grading their deposits, using fancy accounting tricks to hide their true cash cost and have in most cases been depleting their reserves without adding more.
Could most of these companies continue to operate in an environment of lower gold prices for any period of time? With difficulty is the answer. Is owning shares in a company suffering from ever diminishing returns a wise investment? Are these stocks really the safe havens they are supposed to be?
No doubt there are exceptions but in a bear market what difference does it make. The bear is not usually selective and sectors that get decimated rarely contain "exceptions". Better perhaps to wait on the sidelines, in cash until a final bottom has been reached, then see who is still standing and what condition they are actually in.
Another indicator that the bottom is not in is the attitude of some of the recently laid off industry professionals who have done quite well out of stock options, believe that they can go out and find support for the pet projects and get investors to back them. They too are still way too bullish and are still expecting an immediate rebound in the gold price. This is a bear market folks and the worst is yet to come.
It is becoming apparent that equity markets around the world are in trouble. It will be difficult for the Central Bankers to maintain a strong currency and a strong stockmarket at the same time, but they will try.
The only safe investment is something that is not somebody else's liability, which leaves few alternatives. Should the gold price decline further (and it will) then the buying opportunity of a lifetime is arriving. Buying gold and taking delivery of the metal at prices below $300, looking to add more if the decline continues below $250, is one of the safest strategies there is. You are insured against stock market collapses, currency collapses, bank collapses, etc and that insurance is included in your purchase! Buying gold removes the counter party risk and ALL paper investments contain counter party risk.
The next bubble to burst is most likely to be the real estate bubble as it, too, has been described of recent times as a safe haven, which is not a good sign.
The Prof can be contacted by email at firstname.lastname@example.org
Copyright by Professor von Braun. All Rights Reserved. Reprinted at USAGOLD by permission.
Return to the The Gilded Opinion Index Page
The Rocket School of Economics -- The Lecture Series Index
Centennial Precious Metals
Gold coins & bullion since 1973
Denver, Colorado 80246-0009
and purchase information.