Before we get into the meat of the matter this week, here is a snippet of information which tells us that for Gold - this time it is, if not "different", then at least not quite the same as it has been in the past decade or two - or several.
It has been reported that in 2002, world Central Banks (CB) sold 430 Tonnes (13,824,500 troy oz) of Gold. Nothing different here, Central Banks have been reporting Gold sales for years. Yes, but in previous years, all that was reported were the CB Gold SALES. It was never reported who the Gold was being sold TO. Well, this time it has, at least in part. In 2002, the Central Banks of China, the Phillippines, and Venezuela bought 150 of the 430 Tonnes sold.
Given the liftoff in $US Gold prices since the beginning of December - $US 316.80 to $US 379.00 on a spot future closing price basis - the flatness of Silver is surprising and the "inability" of Gold stocks to mirror this Gold price BOOM is extraordinary.
On June 4, 2002, spot future Gold closed at $US 327.80. It did not exceed that level until December 12. On February 4, 2003 spot future Gold closed at a multi-year high of $US 379.00. That's a rise of $US 51.20 or 15.6% since June 4. Silver's spot future close on June 4, 2002 was its 2002 high - $US 5.12. Silver has yet to reach that level. On February 4, 2003, spot future Silver closed at $US 4.91. That's $US 0.21 or 4.1% BELOW its June 4, 2002 close.
The record is even more amazing with Gold stocks, taking Aussie Gold stocks as an example. As you know, The Privateer has been compiling its own Gold Stock Index (XGO) ever since the Australian Stock Exchange (ASX) stopped compiling full data on their own index on April 28, 2002 and then stopped compiling it altogether on July 1, 2002. We have also been compiling a ratio of the rise in the XGO divided by the rise in the spot future $US Gold price, using the XGO low of 661 set on April 11, 2001 as a starting point.
When Gold hit its June 4, 2002 high, the XGO/Gold Price ratio was 5.50. When Gold hit the low of its subsequent correction on July 30, the ratio was 4.99. When Gold regained its June 4 high on December 12, 2002, the ratio was 4.51. And when Gold hit its 2003 spot future closing high (so far) on February 4 at $US 379, the ratio was 3.17. As of February 7, the ratio is 2.99
These ratios, especially the ones since Gold began to storm upwards in December 2002, are extraordinarily low. In the last really BIG Gold stock boom in Australia, in 1986-87, the XGO/Gold ratio hit 10 THREE TIMES - at the beginning of April 1987 and again at the beginning of September and October 1987. In fact, the ratio did not go under 5.0 between November 1996 and the month after the great 1987 crash, November 1987.
This time, the XGO has reacted quite differently. The XGO/Gold ratio was at or near historical norms for a Gold bull market (5.0 to about 7.0) when Gold first breached the $US 300 level for good in March/June 2002. But after the July/November correction, the higher the Gold price has gone the lower the XGO/Gold ratio has gone. The XGO has STILL not taken out its May/June 2002 highs, despite the fact that Gold was recently more than $US 50 above its equivalent highs and is still more than more than $US 40 above them.
Yes. there are some differences. First, 1986/1987 was a bull market period for the stock market as a whole while 2002/2003 has been just the opposite. Second, there were a lot more viable Australian Gold stocks than there are now, most of the bigger "Aussie" Gold companies are now actually owned by overseas miners. Third, Gold miners had not spent years selling years of their future production forward in 1986-87 as they did during the great Gold bear market and doldrums of the late 1990s.
All that is true, but it remains a HUGE anomaly that with Gold having put on a spurt over the past two months which can only be compared with the one in late 1982 and, before that, the one in early/mid 1979, the Gold stocks have underperformed outrageously. To this point, it is clear that most Gold oriented investors are preferring physical Gold to any kind of paper claim in Gold, including Gold stocks and most stock market investors do not yet "trust" Gold stocks.
This (along with Silver's refusal to go along with Gold) is what makes this possible Gold correction so potentially beneficial. As you undoubtedly know, on February 5, (the day after Comex Gold rose $US 8.20 t $US 379.00), Gold was threatening to break out altogether. In Asian trading, Gold reached $US 390.00 and the London AM fix was $US 385.00. But then Colin Powell gave his long-awaited speech to the UN, and Gold fell through almost every syllable of his remarks. By the close of New York trading, Gold had fallen to $US 376.40. Within half an hour of the opening of the ACCESS markets for "after hours" Gold trading, Gold had dropped another $US 5-6 to be trading around $US 370. It closed for the week on February 7 at $US 369.90.
Is this the "correction"? So far, it's not much of one if you look at the charts based on spot future CLOSING prices - here's one and here's another. But if you compare the fall from the Asian highs of February 5 to the Comex close of February 7, you are looking at a fall of about $US 20.00. That will qualify as a "correction" in the minds of many people.
There are many investors who know that Gold stocks have been the best performing sector of the US (and Canadian and South African and Aussie) stock market for the past three years. They have not bought in. First, because they were spooked by the runaway Gold price and were waiting for it to "correct". Second, because they saw that the Gold stocks were not keeping pace with Gold and thought that this was further evidence that Gold was "too high". Now, with this "correction", they have their chance.
We do not know where this Gold pullback will find support. We do know that if the $US price keeps falling, there is major support on all our charts - bar and point and figure - in the $US 356-362 region. Finally, we are absolutely CERTAIN that Gold is in a PRIMARY bull market, not just in terms of the $US but in terms of EVERY major world currency.
Remember the war cry of the investment world during the great stock market run up of the late 1990s? That's right, it was "Buy On The Dips!". It will be fascinating to see if Gold - Silver - and especially Gold stocks - qualify this time. By ALL market history, they should.