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The past few months must be frustrating for gold bugs. After a good year in 2003 that saw the Gold rise 19.5%, the TSX Gold Index up 13.6%, the Philadelphia Gold & Silver Exchange (XAU) jump 41.8% and the Amex Gold Bugs Index (HUI) leap 67.4%, the first few months of 2004 have been disappointing with the all of the exchanges down on the year. Since the topping in November 2003 the gold indices and the stocks have been generally in a gentle down trend of roughly 10%. When one compares this to the sharp drops seen in the first few months of 2003 this has, in some respects, been barely discernible. Gold’s fortunes of course are tied to the US Dollar and for the past couple of months the US Dollar has been trying to bounce after a sharp drop through 2003. Indeed gold stopped rising before the US$ bottomed and therefore it should be no surprise that gold once again has started to rise even as the US$ tries to maintain a firmer stance. Indeed gold made its most recent bottom in early March 2004 and since then is up about $20 and is not far off the highs seen in early January. Gold prices could be leading the market. In the latter part of 2003 as the US$ continued to fall and gold stocks started their period of softness, physical gold prices continued to rise into early 2004. This divergence was eventually realized when gold prices fell bottoming just below $400 in early March. At the same time the gold stocks failed to put in new bottoms a potential positive divergence. But since then gold has broken out of a triangle pattern while the stocks are still struggling to catch up. The breakout has targets of up to $450. Further gold has, as our chart shows below, broken out against other currencies including the Euro and the Canadian Dollar. Gold in Yen is in a steady uptrend. This is a very positive sign as while Gold in US$ has been rising since the lows in 2001 the gains in other major currencies had been muted. We have long suspected that in a world of ongoing currency devaluation that gold would eventually begin to rise against all currencies and not just the US$. That process may be getting under way. There are numerous reasons that gold’s fortune is going to continue to rise. Many of them are found in a recent article in Financial Sense (www.financialsense.com) by Jim Puplava entitled "Super Bull". The reasons are well worth repeating.
This has resulted in huge budget deficits in the US and a feeling that the Fed will in any economic slowdown or market meltdown they will come to the rescue. This has resulted in a massive increase in debt over the past year particularly from the consumer who has reached record levels of debt to income and has encouraged spending growth, which continues to outpace income growth. The massive monetary and debt stimulus has contributed to a new mini bubble in the stock market and a housing market bubble. - The falling US Dollar. Despite a sharp drop in the US$ against major world currencies in the past year the US trade and current account deficits continue unabated. The trade deficit has reached over 5% of GDP, levels higher than in 1987 when the growing trade deficit caused a stock market crash. Charts point to the US$ going considerably lower before it bottoms. The ongoing fall in the US$ has caused Japan and Europe in particular to take unproductive measures to protect their rising currencies setting off a potential round of competitive currency devaluations and trade wars. - Global gold demand (up 4% in the past year) continues to rise particularly for dehedging and for investment purposes even as jewellery demand falls. At the same time mine supply (up 1% in the past year) is not keeping up with the increased demand.
As Puplava points out the current global situation is very reminiscent of the 1930s where dangerous conflicts and trade wars were a norm. Only this time the stakes are larger because the amount of outstanding debt is considerably higher. Many believe that if there is a market meltdown that the gold stocks could fall with them. While initially there might be some sell-off history suggests otherwise. In the 1930’s the few gold companies around did fall with the market in the Crash of ’29. By the time the bottom came around in 1932 and the Dow Jones Industrials fell 89% with the revaluation of gold upward from $20.67 to $35 companies such as Homestake Mining surged 10 fold. Dr. Richard Appel presented this argument in a recent article entitled "Will gold shares follow common stocks lower? An historical perspective". Historically the best argument against this happening is the bear market of 1973/1974 whose chart is presented below. While the Dow Jones Industrials was losing some 46% in 1973/1974, Gold soared from the $60 area to over $200. Homestake Mining rose from about $2 to almost $10. The chart of the 1970s, a period of the last great gold boom, is quite interesting. With the markets down in 73/74 and gold and gold stocks up during the same period they switched places in 1975 when the DJI regained its two years of losses while both gold and the gold stocks fell. From 1977 to 1979, the period of the great bull market in gold, both the DJI and Homestake languished in a general downtrend/flat. Note then the unfolding huge divergence between gold and Homestake in 1980 when Gold collapsed then tried to rally back while Homestake and the gold stocks came to life and soared to new highs, a significant major negative divergence which presaged the 20 year bear market in gold and gold stocks.
We leave you with a small group of gold mining producers, which are forming interesting bullish technical patterns for the next leg up in the gold bull market of the first decade of the new century. Company Symbol/Exchange Internet/Phone
Note: Chart created using Omega TradeStation or SuperCharts. Chart data supplied by Dial Data. The opinions, estimates and projections stated are those of David Chapman as of the date hereof and are subject to change without notice. David Chapman, as a registered representative of Union Securities Ltd. makes every effort to ensure that the contents have been compiled or derived from sources believed reliable and contain information and opinions, which are accurate and complete. Neither David Chapman nor Union Securities Ltd. take responsibility for errors or omissions which may be contained therein, nor accept responsibility for losses arising from any use or reliance on this report or its contents. Neither the information nor any opinion expressed constitutes a solicitation for the sale or purchase of securities. Union Securities Ltd. may act as a financial advisor and/or underwriter for certain of the corporations mentioned and may receive remuneration from them. David Chapman and Union Securities Ltd. and its respective officers or directors may acquire from time to time the securities mentioned herein as principal or agent. Union Securities Ltd. is an independent investment dealer and is a member of the Toronto Stock Exchange, the Canadian Venture Exchange, the Investment Dealers Association and the Canadian Investor Protection Fund.
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