"Special Edition: To the Moon, Alice" Market WrapUp by Jim Puplava

SPECIAL EDITION
To the Moon, Alice
BY JAMES J. PUPLAVA, CFP WITH ERIC KING

As an investment, it isn’t on anyone’s radar screen, at least not on the screens of the general public. Yet in the last three years, the price of the yellow metal has risen 54% from its nadir of $255.55 on April 2, 2001 to today’s 7-year high of $394.45. The last time we saw gold prices this high was back in May of 1996. The movement in the price of the metal is nothing compared to what has happened to the price of gold shares. The Amex Gold Bugs Index (HUI) has soared by an incredible 440% since January of 2001. The index is up 82% over the last 52 weeks and has surpassed even the gains in the NASDAQ this year. The HUI is up 53% this year compared to 47% for the NASDAQ.

For the first time in many years, the price of both precious metals are moving up in tandem. In Nymex trading today, the price of silver rose sharply right on the heels of gold’s strength. December silver jumped $.25 to $5.31. With the price of gold edging closer to taking out the $400 level, it looks like silver will be challenging $5.50 level. The rise in silver is now confirming the rise in gold.

The rise in metals is also mirrored by the price of most commodities. Since hitting a bottom in March of this year, the CRB Index has advanced nearly 25 points for a gain of 11%. Individual commodities have done even better. The price of crude oil has moved from just slightly under $25 in January to today’s price of $31.28. Soybean prices have moved from a low of $507 in January to a price of $769 today. Base metals are also moving with copper prices challenging $0.95.

Wall Street analysts and anchors dismiss the price rise in commodities as just a passing fad. The movement in the price of gold is explained by the fall in the dollar and the rise in oil by the Iraq war. However, the Iraq war ended six months ago and the price of the dollar has been confined to a narrow trading range between 92-98 since mid June. If the war and the dollar are used to explain the rise in the price of gold and oil what explains the rise in price of copper, platinum, soybeans, wheat, cotton, and cattle this year?

There is something going on here and it is more than just the price of the dollar. Demand for commodities has been rising each year and most commodities are running a supply deficit. The real driving force behind the rise in commodity prices is demand. The other driver is the value of the dollar.

Energy Demand
However, demand growth will ultimately become the biggest driver of commodity prices over the long run. Demand growth is coming from Asia and especially China. For example, demand from Chinese steel makers is lifting prices for iron ore in most major markets around the globe. The Chinese appetite for commodities has become insatiable. In the area of energy, China’s demand will more than double by the end of the decade. The daily consumption of oil globally will rise from 75 million barrels per day (mbd) to 89 mbd by 2010. World energy demand will consistently rise by 1.6% a year.

World Oil Demand
2000	2010	2020	2030
75 mbd	89 mbd	104 mbd	120 mbd
Source: International Energy Agency (IEA), World Energy Investment Outlook 2003, p. 181

In order to meet this demand, the IEA estimates that it will take an investment of $16 trillion by 2030 in order for supply to be able to keep up with the world’s expanding need for electricity and energy. Of that amount, China the world’s fastest growing major economy is going to need to invest $2.3 trillion from now until 2030 to meet all of its future energy needs.

Precious Metal Supply Deficits
On the gold and silver side, supply deficits have been going on now for well over a decade. This will be the 14^th year that silver has run a supply deficit. Gold has been running a supply deficit equally as long. If it hadn’t been for central bank sales of gold at rock bottom prices, the price of gold would have been much higher years ago. However, the supply of gold in central bank vaults is now half empty. In the case of silver, aboveground stockpiles are being depleted in order to meet supply deficits and those stockpiles are becoming thinner and thinner each month. The only way to keep gold and silver prices down in through the paper markets in derivatives. That won’t work in the long run because the big boys have been buying for the last three years. That is what has driven up the price.

We are only in the first phase of this new bull market in metals. Institutional interest is nominal at this point and individual investors are content chasing tech stocks at exorbitant prices. As an investment, gold and silver investments are the furthest thing on investors' minds at the moment. Individual investors are still chasing the last bull market in equities, believing that a new bull market has arrived.

Paper is Out
It is clear from looking at long-term charts that paper assets such as stocks and bonds are merely retracing some of the losses of the first phase of what I believe will be a decade long bear market in equities. The S&P 500 has retraced 38% of its losses from the July and October lows of last year. The NASDAQ has only recovered 23% of its losses. Both indexes have much further to fall before this bear market ultimately ends. The price of both indexes should be closer to 300 when the third and final phase of the bear market plays out.

Gold and silver investors have been having a feast over these last three years and the bull market has just begun. There is going to be a tidal wave of new money flowing into this sector as smart money managers around the globe move billions of new capital into the sector.

Exploration Budgets Increased
Already this year worldwide exploration budgets are up 26% after five years of consecutive declines. Much of this money is going into junior mining and exploration companies. That is where the big payoff is going to be in this new bull market. The shares of junior mining companies are up 100-200% this year as a group with some companies up as much as 2,300%. Junior mining and exploration companies have been doing the lion's shares of exploration over the last few years. However, the major mining companies are increasing their budgets, recognizing the dearth of new projects moving into the pipeline. Newmont Mining recently raised $1 billion in new equity to pay down debt and finance future acquisitions. The company is going to have to find and replace nearly 8 million ounces of production each year, which isn’t easy. One way to replace those reserves is through acquisitions.

Canada Leads
Mining experts believe this year’s increase in exploration budgets from $1.73 billion to $2.19 billion reflects the slowdown in industry consolidation. From 2000-2002 a number of mining companies disappeared through mergers and acquisitions. This absorbed a major portion of exploration budgets. Junior mining budgets are also rising by as much as 25% this year over last year reflecting higher bullion prices and improving investor sentiment. Most of the improvement in investor sentiment is coming from Canada as a result of the flow-through of tax rebates to investors for funds raised for domestic exploration. Canada’s share of exploration reflects almost 50% of this year’s exploration budget.

Global and Canadian exploration budgets are expected to increase next year at a high rate and remain high for at least the next two years as the price of gold, silver, copper and nickel remain buoyant. Higher prices are attracting new investment dollars as mining companies sense that a new bull market has begun for precious and base metals that has years to run. Even if exploration budgets prove to be fruitful, it will be 5-7 years before much of that new supply comes on board. In the meantime, demand for both categories of metals continues to grow at an accelerating rate driven by demand from the developing world, especially China and currency debasement which has yet to run its course. The U.S. dollar could eventually fall to as low as 80 on the charts and even lower if budget deficits and trade deficits don’t improve.

The Stealth Bull Market in Metals
The best thing about this new bull market in metals is that it has just begun and nobody has noticed. You won’t find gold on investment recommendation lists. It isn’t on the cover of investment magazines. It doesn’t make the front pages of the local newspaper and it is barely mentioned on BubbleVision. Most investors don’t understand the bigger monetary picture nor are they paying attention to what is going on in Asia and China, India, or the Middle East when it comes to demand and supply fundamentals which are the primary driver of this new bull market.

Like 1999 and early 2000, investors are chasing the price of Internet shares and tech stocks and paying astronomical prices to buy what is essentially a slow growth, cyclical commodity business. The little guy is buying what he doesn’t understand and paying exorbitant prices that are absolutely senseless. The small investor is buying essentially what the insiders are unloading. Technically this is called distribution. For distribution to take place you have to have a willing seller and a willing buyer. The willing sellers are the management and owners who run the company. The gullible buyers are John Q., Herbie Homeowner, and Larry Lawnmower who think we’re going back to the good ole days of the late 90’s.

At this point owning gold or silver would be offensive to most people. If you want to offend someone at a cocktail party when the subject of investing comes up, just tell them you’re buying gold and silver. This happened to me recently at a social event. Knowing that I was in the investment business, several socialites asked me what I was buying hoping to get a few good stock tips out of me. They mentioned the NASDAQ's impressive rally this year. A few of them mentioned how well they were doing with their tech stocks. I could tell they expected me to confirm the wisdom of their purchases and fire off a few tech tips of my own. Instead, I told them I was heavily invested in silver and gold and that my juniors were up 200-300 percent this year--a fact that would have been impressive if the returns had come from techs. Instead what I got were strange looks as they quickly became uncomfortable with the conversation. The topic of investing was changed and my inquisitors moved elsewhere as if I was suffering from a severe case of flatulence.

Several friends of mine have expressed the same sense of strangeness whenever the topic of investing comes up and I talk about commodities--whether it is gold, energy, or the price of soybeans. They simply don’t understand it. When I explain the returns of 400-1,000 percent from precious metal equities these last three years, they look at me like there is something wrong. I tell them about the demand and supply fundamentals and how you want to buy when things are out of favor and the price is low. It still doesn’t make sense to them until I start talking about what they now have to pay for gasoline, their groceries each week, or their monthly utility bill. It then starts to make sense because they can relate and lament at what has happened to their cost of living each month. They have trouble when it comes to gold and silver. I try to explain to them that the inflation that they are now experiencing is all related to Fed inflation polices. The Fed is printing more money than has ever been printed before in all of history. The reason prices are rising for most things they need to buy each month is that the value of the dollar is depreciating.

I believe most people have a hard time understanding the concept of inflation. They look at the symptoms instead of the cause. Many people I talk to believe that rising prices are caused by greedy corporations raising prices or unions demanding more money. They don’t understand that inflation has always been and will continue to be caused by government polices to inflate the money supply and to print more money than they take in, cheapening the value of the currency.

If you explain the same concept in terms of company CEOs issuing more stock and diluting shareholder values most people understand. The only difference is that the government is doing the same thing that tech CEOs are doing. The only difference is that they are doing it on a much larger scale. As a U.S. citizen, you are a stockholder in the largest corporation in the world, the U.S. economy and its stock price is the U.S. dollar.

The one hard lesson to understand about new bull markets is that very few people recognize them when they begin. Bull and bear markets have three phases. The first phase of a new bull market is driven by insiders and the smart money that quietly move in and start accumulating when prices are rock bottom and when values are compelling. Smart money buying at this stage begins the bull market. Rising prices don’t get noticed or they are simply ignored, because most investors don’t believe in the sector.

“In reading the history of nations, we find that, like individuals, they have their whims and their peculiarities; their seasons of excitement and recklessness, when they care not what they do. We find that whole communities suddenly fix their minds upon one object, and go mad in its pursuit; that millions of people become simultaneously impressed with one delusion, and run after it, till their attention is caught by some new folly more captivating than the first.”

I’ll end today’s missive and leave the reader with the above three charts: one is of gold, the other of the HUI, and the last is the NASDAQ.

The reader should ponder these charts and arrive at your own conclusion. Which one of the charts reflects a new bull market and which one represents a bear market that is just in its formative stage? As for my own views, I believe we are just in the formative stage of what will become the greatest bull market for metals in all of history. It's to the moon, Alice, and maybe beyond.

Stock prices rose today after better-than-expected earnings from Computer Science and news that GM will ship 11,000 new vehicles to China. This is all noise, but it was noise that moved the markets. The Dow was able to recover from the losses of the last few days, hitting a 17-month high in the process. The NASDAQ got a lift from a report by the Gartner Group forecasting that chip sales will rise by 20% next year.

Investors were also impressed by a surprise earnings report from Applied Materials which earned its first profit in a year. The company’s profits fell 90% from last year. Net income dropped from $147.2 million to $15.5 million this year. Sales fell 16% from $1.45 billion to $1.22 billion. The company earned $.06 a share. Like most tech company earnings, the earnings figure excluded many items. The good news was that the company beat Wall Street estimates as sales and earnings plunged from the previous year. The stock price is up 95% this year on worsening earnings. To management's credit, they manage to beat estimates each quarter as sales and profits plunge lower. The stock rose $.54 to close at $25.44. It is up in after hours trading. Investors can purchase this stellar performer at 181 times trailing earnings.

Aside from the usual silliness that goes on in the market each day, today was a day when precious metals prices soared through the roof. While the Dow may have hit a 17-month high, the price of gold hit a 7-year high closing on the Nymex at $395. While the Dow is close to clearing 10,000 again, gold prices are edging closer to $400. At $400 an ounce, a whole new level of buyers comes into this gold market. The price of silver was also soaring. Silver prices rose $.26 to close at $5.335 an ounce, a gain of 5.3% for the day. If the price of gold and silver bullion was climbing higher, so were the price of metals mining shares which hit a six-year high on Wednesday. The Philadelphia Gold and Silver Index (XAU) rose 5.6% to close at 101.86. The Amex Gold Bugs Index (HUI) soared 15.91 to close at 224.82, a gain of 7.6%. Individual issues did much better. Shares of Coeur d’Alene were up 14.6 %, Durban Deep rose 11.6 %, Hecla Mining gained 14.8 %, and shares of Bema were up 12%. Alice, it’s to the moon!

Volume was light at 1.32 million shares on the Big Board and 1.8 billion on the Nasdaq. Breath was positive by 25-8 on the NYSE and 24-8 for the Nasdaq.

Folks, the real bull market is in gold, silver and the CRB. For now I just want to focus in on gold and Richard Russell's favorite miner, the "big daddy" of the mining sector, Newmont Mining.

The following chart of gold shows the 65-week moving average has been supportive for gold since the 9-11 tragedy. This moving average also halted the decline in gold in April of this year.

In the following chart, we also see the long-term monthly moving average was supportive in the mid 90's. After acting as resistance in early 2002, gold broke decisively through this resistance on it's way up to the highs of February around $385 (New York). This moving average then became support once again, halting the decline in gold in the spring of this year at just under $320. Gold has since accelerated to new recent highs, closing today at roughly $395, a new 7-year high.

The following multi-decade monthly chart of gold shows a secular bull market in its infancy. Notice the MACD stretched to the 120 level at the peak of the previous bull market in gold in 1980, but it has only just crossed the zero line into positive territory very recently. Despite what some in the media are saying about gold being "tired," the reality is we are in the very early stages of what will in all probability be a very, very long secular bull market in gold.

The following multi-decade quarterly chart of gold shows we are very early in this secular bull market in gold. Note the MACD is just making its way to the zero line, when in 1980 at the peak of the previous bull market in gold it reached as high as the 150 level! Also note the RSI crossing above the 50 line with conviction for the first time in over 16 years, which is also very constructive.

Next I would like to move on to Newmont Mining (NEM). My charts of NEM and my commentary were published by Richard Russell on June 17th of this year (charts are updated and current):

"The following chart of NEM shows the breakout you have been describing. Looking back at past advances from NEM the 100 monthly moving average has acted as excellent support when it goes into a 'bullish' phase."

Newmont had closed at $33.84 when that was published, but the current chart shows the nice continuation pattern towards the $45 area.

"The quarterly chart shows the 50 quarterly moving average has been supportive during Newmont's bullish moves. NEM is attempting to break out above that resistance and a quarterly close above that area at the end of June would be extremely positive. Note the RSI breaking above the 50 line in '02 for the first time in many years which also looks constructive."

The updated chart shows NEM punching through the resistance and heading up strongly to the $45 area. RSI which had just broken above the 50 line when the above was published on June 17th, is now showing strong conviction for the first time in over 7 years.

The next set of my charts and commentary were published by Russell on June 21st of this year:

"The following daily and weekly charts of NEM show 500 is an important number on both moving averages. This daily chart shows the 500 daily moving average which has acted as excellent support for NEM on a number of occasions since the beginning of 2002."

The updated chart shows how strong NEM has been during its latest advance. Although Newmont is extended above the daily support and may correct long-term, the action in NEM is very strong.

"The following chart of NEM shows the 500 weekly average has provided excellent support during bullish moves in Newmont. Recently that average acted as resistance in '02 as shown on the chart. NEM has just broken above this moving average for the first time in about 6 years. In this chart Newmont's shares briefly broke below the 500 weekly average in early '97 before having a tremendous snap back rally above the moving average. Its share price cratered in late '97 when it decisively broke this support."

Newmont closed at $33.60 when the above was written, again the updated chart shows NEM's strong upward progress closing today at $43.91. You can see the strength of the money flows as well.

"What does it all mean? It is possible for Newmont to shake back down below the 500 weekly moving average all the while staying bullish technically (above daily support) before breaking decisively above the weekly average and continuing it's long-term advance. Subscribers should keep this in mind and not be shaken out of Newmont if this temporary reversal was to occur."

The above still applies and the 500 daily and weekly averages will provide support on any declines in NEM if necessary. Not saying we will pull back to these averages, but they are there for support in the event they are needed.

For the record, Richard Russell did an excellent job of calling the dead lows of the gold pull back in April of this year:

"Today gold actually opened higher at $321.70...Also, although gold closed lower for five days in a row, neither the XAU or HUI confirmed by breaking to new lows. In fact XAU and HUI made their lows on March 27...My conclusion is that there's a good chance that gold is either at it's low, or that gold is in the process of bottoming."

Very nice call, Richard, and very fruitful for your subscribers who acted on that call by purchasing gold/gold stocks.

On May 6th of this year after the big shakeout in gold, Richard Russell published some of my gold charts and commentary, but the final portion of my commentary will be true throughout this bull market in gold:

"I hope all of your subscribers are keeping their eye on the 'big picture' with regards to gold and gold stocks. Smart money will take advantage of weakness in gold and gold stocks to accumulate while the weak hands are shaken out of what in all probability will be a very, very long bull market in gold."

The bottom line here folks is that when there are significant shakeouts or periods of weakness in gold and gold stocks, "smart" money will use those periods to accumulate positions.