Ted Butler: Silver below $7 today is as cheap as silver below $5 used to be

Section:

By Peter Brimelow
CBSMarketWatch.com
Monday, May 2, 2005

NEW YORK -- Gold and gold shares are diverging. Why?

Last week was grim for gold shares -- but not bad for gold itself.
Both the Philadelphia Gold and Silver Index (XAU) and the usually
more sensitive AMEX gold bugs index (HUI) lost 6 percent. Bullion
actually rose $1.80.

What does this disparity mean?

One thing it means is gloom and fear in goldbug land. As James Turk
notes in his current Freemarket Gold and Money Report:

"The XAU Index of major gold mining stocks broke its 4-year uptrend
line. ... Think about where gold is at the moment. It's only $21
(less than 5 percent) from a new 17-year high. Everyone should be
shouting from the rooftops, but instead, gloom prevails. ... The
bull has done a very good job of emptying the train."

The poor performance of the gold shares was egged on by rotten
results last week from the major mining companies, particularly
Newmont and Placer Dome.

Alert observers have also noted the failure of the big miners
generally to reduce their disastrous hedge books last quarter.

This raises the possibility that these may be more intractable
("toxic") than generally realized -- a.k.a. they pose financial
risk.

The gold share situation now reminds me of the literature that arose
in the late 1970s, evaluating the 1973-4 stock market crash.

All of us who lived though that miserable experience were well aware
things were bad. As a new Stanford MBA, I had no money at risk. But
I did note virtually all my peers lost their Wall Street jobs.

Still, exactly how bad took a little time to sink in.

The point was that while the 1929-34 crash took place against a
background of almost a 50 percent decline in the wholesale price
level. So the "real" losses in the stock market were not anywhere as
near as nominal numbers suggested.

But the early 1970s decline was accompanied by serious inflation. In
real terms, the losses stood comparison with those the old timers
kept boasting about.

What has happened recently in gold shares is a microcosm of this.
Gold is up 8 percent since the November 2004 peak in the HUI -- yet
the index is 30 percent lower.

Reading the company results, the reasons are obvious: explosions in
oil and steel costs, and a surge in commodity currencies, indirectly
a comment on the curious way gold has lagged overall price changes
recently.

In other words, gold shares may have detached from their normal
tracking of the gold price for legitimate, if unpleasant, reasons of
their own.

Some feel this has gone too far. James Turk has a chart showing that
the Gold/XAU ratio has only been lower -- slightly -- in the last
couple of desperate bear markets.

Taking the view that extreme unhealthiness in the gold mining
industry signifies a bottom, Turk thinks this could be encouraging.

Others might prefer to follow the Gartman Letter's example and
shelter in the new Bullion ETFs, GLD or IAV.

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Eagle Ranch discussion site:

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Ted Butler silver commentary archive:

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