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July 01, 2002

Cheap Gold
by Ed Bugos

Fresh 4 year highs (nearly) in the price of wheat pushed CRB futures to new 52-week highs, as wheat bulls continued to try and complete a rounding bottom on the long term charts Monday. The nearest wheat contract gained almost 2 percent, while the other grains were up from 2 to 3 percent for the day.

It was enough to signal a primary bull market for wheat, as well as an intermediate bull market for the CRB, but not enough for the Goldman Sachs commodity index to follow suit. Several of the commodities were up more than one percentage point on Monday, but the Goldman Sachs index sports a heavy weighting in Oil, which was up only marginally today (up in Europe, down on NYMEX).

Cocoa prices extended their string of highs, and although coffee prices didn't, they were up 2.5% at the time of writing. Helping the CRB up besides the grain complex was a 4% gain in world sugar prices (a bounce from the recent drubbing), and like gains in some of the Livestock prices.

Gold bounced around between support at $310 and resistance at $315 after a Friday late day sell off where the bears took out "some" support (June's low), but hardly the meaningful type. There are several factors affecting gold trade (for most of the last decade almost no factors affected gold prices except on the downside). However, it is our opinion that the most dominant, until recent weeks, has been the slide in stock prices and the US dollar. Speculating on war is a tough thing to do, and even if one could do it, the bulk of the evidence supports the best correlation between the dollar, stock prices, and gold (inverse correlations) over the medium to long term.

The short term is always filled with noise that'll promise to take investors eyes off of the correct ball in terms of gold market valuation - the question of dollar valuation. We suspect in hindsight, gold's lag in confirming last week's dollar break will be seen as its last buying opportunity perhaps for a long time.

We are of the opinion that gold's weakness in recent days is related to expectations the bulls will be able to lift US share averages. The averages were largely flat last week, but the broader markets were up a little bit compared with the prior week. A bounce in stocks would I believe offer support for the dollar.

Another factor driving gold lower recently has been renewed weakness in the South African Rand and the Australian dollar, which could explain why the weakest of the gold stocks happen to be the hedgers with exposure to hedges in those currencies, such as Newmont, Placer Dome, Anglogold, and Barrick.

It is those stocks that have taken out their June lows. The unhedged gold stocks, as measured by the Amex Gold Bugs index, "technically" fared better, which I think is bullish for our near term outlook - that the recently weak Aussie and Rand are keeping the price of gold from confirming a primary bull market ($339) even as the US dollar just signaled a primary bear. The HUI was up on Monday.

Also supporting our near term outlook is the fresh high in the CRB index, the breadth of that participation, and the rising prices paid component of the string of reports in the monthly US ISM (a national manufacturing) index, indicating a recovery of some pricing power for the commodity producers.

Nonetheless, there was another wave of gold selling at the close Monday on COMEX, but it only managed to shave one point off the market's best for the day. The Rand was firmer Monday, but the Aussie was off half a percent against the dollar matching the bulk of the action in Forex trading up to midday. The US dollar index (trade weighted average) backed up(ward) by ½ percent by midsession.

All eyes were focused on Wall Street, whose bulls were struggling to hold their heads above water for most of Monday. The broad market was under pressure, but was buoyed by the averages until we neared the end of the trading day when bulls closed up shop early. My gut, for one, has been a little confused. It's been telling me that equities could bounce one minute but that they could collapse the next. Certainly they're due for a bounce in the short term, but they're also due for that collapse we have been waiting on, ever since last year. You know, the one to Dow 6000!

The US dollar ended back down, and the Dow finished down better than 125 points by the time the bell rang. This also supports our view on gold as the price of gold popped in overnight ACCESS trading that begins shortly before the Wall Street close, obviously in reaction to the late session Dow and Nasdaq sell off.

The sentiment data is sending us mixed signals, but that data is driven as much by news as it is by price. Moreover, we're approaching a heavy news season guided by second quarter profit reports. What's more is that it is about that time when belated profit warnings might roll out, particularly from any of the companies that have bad news but have been putting off telling us about it.

The third quarter promises to have a more favorable comparison year over year, but in many cases analysts may have postponed reducing their forecasts for the quarter, which are probably dependent on second quarter results to some extent.

So if one were to ask us whether we'd place greater weight on the sentiment data or the technical data, we'd vote for the latter, which has been forecasting a poor second quarter, and perhaps even worsening sentiment as a result.

Bugos Wisdom (or not... read on at your own risk)

In a bull market we buy the dips. In a bear market we sell the rallies. I think this is the mistake many investors still haven't corrected to this day. Buying the dips in a bear market could become a costly strategy, since during a typical bear market the dips invariably give way to greater declines.

I'm not sure how well the lay investor may know it, but in the investment business I think we generally agree on the existence of market trends even if we differ on their interpretation, criteria, or method of evaluation. In the case of the beginning trader, for instance, the criteria may consist of nothing more than arbitrary lines on a price and volume chart.

In my experience this is usually done wherever those lines (conveniently) support an already preconceived outlook.

Without giving away our trade secrets, largely because they're not really secrets (it is only by looking at chart after chart, year after year, the investor will eventually know what not to conclude, or what the data does 'not' mean), suffice it to say that investors' progress in deriving a use from the data on a chart will depend on the extent that they become aware of their own biases.

In fact, as we continue on, learning our trade (as investors, speculators, or traders), we become more and more aware of our internal biases, specifically how they affect our own analysis of the market environment - micro or macro - and consequently, how they affect our decisions.

This is the trader's biggest challenge, I believe. As Ed Seykota said, in J. Schwager's Market Wizards, "everybody gets what they (really) want." Parentheses are mine.

RBC Controversy, Rambles, & Mainstreet Bashing
Mainstreet has finally written about GATA's claims of gold market suppression. The amusing thing is that hardly a word was written when Reg Howe announced litigation against the BIS, Treasury, and the Fed. And only a few words were written when the case was thrown out of court (before it got there). But now, virtually every business paper we've picked up is running the story written by John Embry, the Royal Bank of Canada's gold fund manager - the only gold fund manager to outperform the HUI (Amex Gold Bugs index) over the past six months or so - endorsing GATA's claims as well as stating that gold market suppression is nothing new in the annals of history.

What has changed to make this argument worthwhile for publishing? Only that gold prices and gold shares have outperformed any other investment class for the better part of a year. Otherwise Mr. Embry might have held back. Already, the Royal Bank denounced it as the independent opinion of one of its employees, and nothing more, which makes it a controversy now. For Mr. Embry isn't the bank's janitor after all.

Without getting into all the reasons for our own bullish position on gold, and risk redundancy, I'll say this: by the time the (gold) bull market is over, we fully expect the media to be making up its own conspiracies altogether. And we fully expect to be shooting them down as we had their nonsense about tech stock valuations. Mainstream has always lagged the truth, a little, but in the Internet age it is puzzling and implies interesting things. No, no, don't go there. We're not talking about conspiracies. We don't need that label to know that mainstreet's monopoly over information and the publishing of it is threatened by the golden age of the Net.

At any rate, bull and bear markets produce nonsense. The chief difference is that in one case the nonsense is optimistic, while in the other, the nonsense is pessimistic.

The longer that a particular trend continues, the more religious the nonsense is likely to become.

At the late stages of any trend, the opposite arguments tend to be the most cogent. Only, the hard part is identifying the late stages. But that's why it is important for investors to understand the contrarian argument, particularly at the times they least want to.

So if we're at the late stages of a bear market in gold, any media reports thumping Mr. Embry's and GATA's claims are probably still nonsense. The headline of a report by the Globe & Mail, for instance, recently states:

"RBC Manager Endorses Gold Conspiracy Theory"

Using the word "conspiracy" reveals to us that the bullish argument is still embraced only hesitantly despite its cogency. For, there is no conspiracy. It's always been the job of a central bank to replace gold's monetary role in an economy, as Mr. Embry is aware apparently. Would even Greenspan deny that? I doubt it, for he's as much as admitted it in the past. Gold price suppression should not be news. What is news is the discovery by the media that it exists.

The covert mandate of any central bank that intends on surviving the long term is to sustain the inflation and persuade the market that its currency is better than the one it (the market) might otherwise choose. It is those words which the central bank will refuse to use (I think). But to not acknowledge this means to refuse to accept the economic fact that the Fed's notes (US dollar) compete with gold for the prestigious role that money plays in any economy - to facilitate the free exchange of goods and services.

To call it a conspiracy, however, helps the central banker's cause. It helps because it makes the thinking unpopular, despite its verity. Personally, when I hear that word, I become quickly convinced the person using it doesn't know the first thing about money, capitalism, or history at that.

To believe that central bankers are really willing to sell the rest of their gold reserves is what requires religion, for it is their only ammunition. Though they've been robbing us with a blank gun for years, it is paramount that people believe the gun is loaded.

Until the day the press stops calling it a conspiracy, a common understanding of the forces unfolding right under their noses will continue to elude its readership, and in that way will keep the bull market alive because the faster investors awaken to the monetary implications of the past decade's inflation, the sooner the gold bull market is likely to conclude - for in our view that's what it is largely about. Perhaps unwittingly mainstreet will carry on as the Fed's preacher, religiously preaching yesterday's trend as tomorrows' because productivity now determines all values bullishly regardless of the extent of government intervention and resultant market dislocations.

You see, it isn't the gold bulls that are religious, folks. It's the paper preachers that are. They are the ones constantly preaching falsities to solicit our full faith & credit.

Buy and hold; Buy the dips; Stocks are not expensive over the long term; the dollar is money; money supply has to grow with the economy; inflation is measured by price indexes; aggregate computing power determines productivity; Greenspan is a capitalist.

These things are largely false but can work to an extent if we believe they will. They can all be made true by the economic participant's willingness to offer his or her faith. Isn't that Larry Kudlow's favorite line? Have faith?

But if you don't, just buy gold. 'Cause it's still really cheap.

Sincerely,
Edmond J. Bugos
GoldenBar.com

Edmond J. Bugos is the founder and editor of the Goldenbar Report - calling markets accurately since 2000.

The GoldenBar Report is not a registered advisory service and does not give investment advice. Our comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While we believe our statements to be true, they always depend on the reliability of our own credible sources. Of course, we recommend that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.

Copyright © 2000-2008 Edmond J. Bugos

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