AngloGoldAshanti''s Williams suggests that central banks regulate the gold price


By Dr. Richard S. Appel
Thursday, December 9, 2004

Most of the below commentary was written prior
to Wednesday's $15 gold price collapse. However,
it still remains applicable and further strengthens
my belief that important buying points are
approaching for both gold and the gold equities.

The current disconnect between the price action
of gold and the major and junior gold stocks has
set those analyzing these markets into overdrive,
searching for explanations and the reasons
underlying this condition. The lack of follow-through
in the gold shares while gold moved higher has
made many professionals steadfastly state that a
major correction in the yellow metal is at hand, if
not the end of its Bull Market. They reason that
historical gold price peaks often occurred after
the gold mining and exploration stocks had
previously peaked and had already begun to
decline. Simultaneously, another ardent segment
of precious metal analysts believes that while the
noble metal may slightly decline in the near term,
it will continue to move higher and must
ultimately pull the gold equities with it.

Statements and accusations also abound
surrounding the reason or reasons why the gold
stock universe has lagged the precious metal's
surging price. Some refer to the currency
appreciation in many of the large gold-producing
countries. The increased value of their currencies
against the dollar results in sharp increases in
their dollar costs of production. This negatively
impacts their earnings growth despite the higher
gold prices that they receive.

Further, since the junior sector typically lags
incipient major gold producer price advances,
members of this contingent and others believe
that they are indirectly affected.

Others state that government officials and their
appointees are shorting the gold shares in an
effort to reduce the impact of a rising gold
market. This, to divert the public's attention
from the significance of the dollar's waterfall
decline, and from recognizing the likely affect
upon their lives and futures.

I began writing this essay with the intention of
discussing my belief that many companies
within the junior gold sector have become
greatly underpriced because they have not
participated in the many-month-old gold rise. In
researching dozens upon dozens of companies
I found that the majority seemed to be priced
at levels commensurate with those that existed
when gold was last in the $390-$410 range.
This was well over a year ago. My conclusion
was to be, and still is, that a substantial number
of the nascent companies that possess important
or advanced projects offer even greater profit
potential than they did at that time. This is due
to today's far higher gold price and the improved
economics that it bestows upon their projects.

However, in studying the various gold and gold
stock charts, I stumbled upon a fascinating and
uncanny similarity between today's gold and
gold stock price action with that of an earlier time.

The current price divergence between gold and its
shares is strikingly similar to one that occurred
between May 2002 and July 2003. In May 2002
gold had surpassed $325 for the first time in its
Bull Market. It was accompanied in its rise by
both the major gold producers and their junior
exploration counterparts, many of which also
posted new highs. The HUI rose to about 155.
In the ensuing few months, gold corrected to
about $290 before renewing its advance. Yet,
though gold then continued to trend sharply
higher, both the major and minor gold companies
failed to follow its lead. It was as though they
had hit an impenetrable ceiling. Instead, for over
14 months, the producers, as viewed in the action
of the HUI, traded in a band bordered by about 95
and its May peak of 155. Simultaneously, despite
some sharp but short-lived advances, the juniors
essentially worked lower in price, only to strike
their correction bottom in July 2003. As an aside,
most junior companies made their highs a few months
prior to the HUI's touching its peak

While the gold stock complex was essentially
working sideways or lower, gold went to a new high
at $384 by early February 2003. After that high
point gold too retreated and struck its final $319
correction low in April. It required another advance
into the low $370s and a final pullback to $340 in
July, far above its $319 low, to convince the gold
share buyers that gold was going far higher.

The June to July 2003 period was the time when
most of the junior exploration companies posted
their lows. This occurred after nearly a year and a
half of frightening, frustrating, general price declines.
If you were in the market you will recall that when
the gold stock sector finally shrugged off its
extended correction, both gold and its stocks
quickly made up for lost time and exploded higher
in price.

Fast-forwarding to the present. The HUI hit 259 in
early December 2003, ahead of gold striking $427
in January of this year. However, whereas the HUI
has not again approached this point, gold easily
surpassed $427 and continued moving higher,
nearing $460, before this week's $15 price collapse.
Since gold and the HUI parted company, the HUI
has already spent 12 months in a correction mode.
This was accompanied by a far more severe decline
in the vast majority of junior exploration companies.

In a nutshell, the earlier instance from May 2002 to
July 2003 witnessed the HUI correcting while gold
traded higher in price. It was only after 14 grueling
and frustrating months suffered by the stockowners,
and the yellow metal convincing investors that it
was going higher, that the gold stocks ended their
correction and roared higher in price.

Today we have a similar occurrence. The HUI has
already been in its present correction for 12 months
while gold has again moved to new higher levels.
Further, we should not have long to wait to prove if we
are destined for a repeat performance of the resolution
of that gold/gold stock disconnect. If I am correct,
when gold ends its present decline, the stage will be
set for a similar price advance in gold and its shares,
such as that experienced when their earlier price
divergence ended.

It is amazing how we so easily forgot the pain,
frustration, and losses that many of us suffered during
the extended 2002-2003 gold stock correction. I guess
it is human nature to do this when we are later presented
with great profits such as those that accrued, when the
gold stocks again moved lock-step higher with gold.

Secondary Bull Market corrections such as we are
experiencing with the gold stocks, typically do not
end until the majority of marginal holders exit the
market. In effect, a rising trend does not develop
without a cleansing of the indecisive and unsure
investors. I believe that the strange divergence
between gold and its shares is primarily the result of
these two asset classes attracting different types of
investors. Those who invest in gold stocks appear to
require a longer period of pain, confusion, and suffering
before the last weak holders are shaken out of the
market. Thus, the longer period required in a correction
before the bull again takes control. Gold, on the other
hand, appears to find adherents whose weakest hands
are frightened out of the market far more quickly.

In my December 2004 issue of Financial Insights I
stated: "Finally, what the lagging gold equities may
be telling us is that the gold stock complex is refraining
from staging a major advance until there is some form
of correction in the metal itself. The reversal may not
be terribly steep or long-lasting. It may take gold back
only to its breakout point in the high $420s. However,
the retesting of this range may be the catalyst that is
needed to quell the fears of the gold equity bulls, to
show that gold is truly heading higher, and charge
them boldly into action." I penned those words before
I recognized the similarities that I described above,
and am now more firmly convinced of the validity of
that statement.

My eyes are now sharply focused upon the price action
of the HUI. This week's $15 gold decline caused some
initial sharp selloffs in the major gold shares. The HUI,
after being off nearly 11 points, recovered, and closed
down 3.52. If gold continues to weaken or enters a
trading range and the HUI simultaneously begins to
show strength and advance, it will indicate that the
worst is over for gold and the shares. Further, it will
foretell that the bottom is at hand for both.

In this event I would expect a price advance renewal
across the entire precious metals complex. We may
have several weeks to a few months to pick up the
bargains while gold and the gold stocks consolidate
or trend higher. However, the bells are beginning to
ring. They are signaling an impending major advance
for gold and gold share prices.

It appears that the dollar has begun a correction in its
ongoing Bear Market. Weakness in gold should
coincide with a period of dollar strength. In the charts
that I have going back to 1972, the U.S. Dollar Index
has only once briefly penetrated the 80 level. It has
tested this point on a number of occasions but it has
always held. Thus 80 should prove to be strong support
for at least a dollar bounce. It will be informative to note
how strong the dollar reacts during this correction
because it will indicate its true underlying strength.
The longer it holds the stronger is its international

This is a difficult time for gold investors. We are on
the cusp of ending yet another long, suffering period
for those who invested in gold stocks. Yet most of
what we hear and read tells us that we are foolish
to believe in gold and that we should put our trust
in the dollar. We have invested in gold and its stocks
to protect our assets, but many of our members
have succumbed to the derisive propaganda that
frequents the media and have reduced or sold their

It is imperative that you have confidence in your
knowledge and belief in gold and trust in your judgment.
This will help you overcome the fear that will attend your
either maintaining, initiating, or adding to your positions.
It is at such times that we are shortly approaching when
the largest percentage gains are made. If you trust in
yourself, I am confident that you will reap the rewards
that it will offer.

* * *

I publish Financial Insights. It is a monthly newsletter in
which I discuss gold and the financial markets as well as
various junior resource stocks that I believe offer great
price appreciation potential.

Please visit my Internet site,,
where you will be able to view previous issues of Financial
Insights, as well as the companies I am following. You
will also be able to learn about me and about a special
subscription offer.


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