THE IMMINENT EXPLOSION IN GOLD SHARES
MY FIRST INTRODUCTION TO GOLD
I first found my way to the gold camp way back in ancient economic history, 1971. During the last great bear market from 1973-74, I rode the bull up as well as staying short the stock market until the bottom hit unexpectedly in late 1974. The combination of the end of falling stock prices and rising gold shares removed me from the markets by mid-1975. I basically tuned out of the markets even during the parabolic rise in gold at the end of the decade. When the collapse came in 1980, I felt that it would take many years to repair the technical damage of the bubble. But even so, I have always believed that the enormous move in gold in the 70's was not the last cyclical top but the first cyclical leg. But also I never would have dreamed that the next 20 years would end in the fantastic and mindless stock market speculation.
But as the full fury of the mania was publicly taking place, and while interest in gold and the shares were depressingly low, I began to look for evidence that gold was preparing for a new cycle now founded upon a much more fragile world order And in early 2001 it became obvious from the capitulation in the gold share charts, in particular, Newmont, which declined for an amazing 13 consecutive weeks, that gold’s time had come once again. I re-entered the gold arena with a resolute belief this would not be a truncated cycle, and that this time gold’s rise would come with earth shattering economic and political events.
At that time in early 2001, I made five basic assumptions. 1) It would be a much longer and lasting cycle than the first one because the world’s economic and political landscape was far more vulnerable. 2) It would feed off the other asset classes that had risen so spectacularly from 1980-2000. 3) It would be supernatural, with startling events coming straight out of scripture--the main stage being in the Middle East and, specifically, Israel. 4) The move would be parabolic and far beyond all assumptions. It would not be normal or measurable by traditional technical standards and it would confound almost everyone who did not understand what was going on. 5) By far, the greatest move would be in the exploration companies. The fundamentals of gold, a rapidly declining reserve situation and a international debt disaster based upon untenable debt and fiat currency would eventually make these companies the center of the gold rush. In short, we were entering a once-in-history time, but this time it would end with the world being turned upside down and like humpty dumpty, the fracture would be irreversible. The end could very well be the conclusion of a worthless paper currency system.
So far, things have followed this path such as the world events moving the pawns into place and a parabolic blow out. But their have been two other points that have not happened. 1) The surprising tenacity of the world economic system to continue functioning. I would have thought that by now we would be rapidly descending into a depression, and eventual chaos. 2) The gold shares, on the whole, have lagged behind where I thought they might be at point in the cycle, particularly as gold approaches $700 per ounce. You might say, perhaps like yourself, that I am frustrated by the continued cluelessness of the financial world and the shallowness of the gold believers who are still strangely shut out from much of the gold excitement. Many at this historic moment are actually on the sidelines. Part of the reason for this lack of interest in the smaller companies come from many having bought at the top of the moves in a burst of excitement and greed and then, in disappointment selling at the bottom. Another reason is that many of the so-called proponents do not understand the nature of the times. Except for those like Midas and many of the contributors to this site, very few can’t see it.
THE COMING EXPLOSION IN THE JUNIOR AND EXPLORATION COMPANIES.
I believe that from here on we are about to see some unthinkable moves in the smaller companies. Some might go up 100-1000 times before the entire move is concluded. The primary reasons for this are two. One, the gold world is facing declining world production for as far out as the eye can see. There will be very little major projects coming on stream just as the world financial structure finally comes unhinged. The smaller ones, some with market caps of around $10-20 million, as they make viable finds will see their share prices explode exponentially. While the larger gold companies were walking away from properties, these smaller, hungry companies, many with top committed geologists, came in and bought their locations for miniscule amounts. It is ironic that many of these the larger companies, that desperately need to replenish their depleting resources, will end up paying multiple times the amount it would have cost them to keep these properties. Second, the market psychology which now is dormant will become the most fiercely speculative market in history. This is the nature of parabolic moves. Excitement builds as prices rise and all rational thought leaves. Just look at the smaller tech stocks back in 1990 and where they eventually topped. But this one will even dwarf the high tech mania before it is done.
This seems far fetched at this moment since many of these companies remain as unwanted orphans, but I want to give you some technical observations that I have gathered over the past four years that tells me that we are still at the bottom of the move that is ready to rocket upward.
1) There has been no real mention or acceptance in the media. Even at nearly $700 an ounce, there has not been a real headline in the mainstream media. All that you will read are warnings about the danger of gold and silver investing, and that this is a bubble that will end up in a disaster Of course, where were they back in 2000 as the real bubble was imploding? 
2) The sharpness of the corrections. It is a rare day when the XAU or HUI do not have a 1-3% decline during the day. That tells me that most players are more concerned about a top than they are of a bottom. This is remarkable since the HUI is up over 8 times since its bottom in 2001. At this very time how many of the public gold advisors are advocating buying gold or the shares at these levels?
3) The flow of funds into the Rydex Precious Metals Funds. When the public gets excited, they will put their money into this trading vehicle. But right now, the funds are at the approximate level when the gold shares were 50% lower. This is remarkable but consistent with an absolutely lack of conviction or speculation.
4) And of course, the lack of interest in the smaller companies. I know of many companies that are sitting on potentially and even known large deposits that can’t get out of their own way. History teaches us that before any extended cyclical move is over, there will be speculation in the smaller companies. Right now, my belief is that we have almost the opposite action. Many of these are still a distance away from their highs two years ago when gold was $200 lower.
6) Analyze the real estate bubble for guidance. The rule of value here is that prices rise initially in the better areas and then as prices rise unreasonably, they extend to the next area until even the junkiest house in the junkiest location is priced exorbitantly. This will happen to the gold shares. At the moment, the highest quality companies that are making money such as Goldcorp and many of the Canadian mid-sized companies have risen non-stop. Now the next level is beginning to join in. I believe that Golden Star will once again be an exciting stock that will rise way beyond the old high. Lastly, attention will turn to the more speculative stocks and their rises will dwarf all others.
BEING PREPARED FOR THE MOVE
Profitable investing requires patience, a knowledge of the big picture and an understanding of how stocks behave within the grand cycle. Gold stocks and groups have exhibited certain personalities throughout this move. At the tops, they act and trade differently. But all through the move from $420, there has been a consistency in their behavior. Sharp sell offs, little interest in the smaller ones and a strong leadership of the quality and profitable companies. These are the hallmarks of a massive move that tends to keep investors cautious and even fearful, and prevents them from committing their funds. At some point, this will change, and funds will go into the smaller ones and will drive them up to much higher levels. Take ECU Silver as an object lesson.
If you have been a faithful subscriber to Lemetropolecafe and have not done particularly well then I believe someone else must have your ears and your allegiance We have warned you that this is not a market that you can trade and get back profitably after considering taxes and commissions. As I just heard Jim Sinclair say, "In a bull market, you look to buy on dips and not try to find the tops." Just think about how few of the internet advisors follow that wisdom. They prefer to frighten you into believing a correction is imminent and you should get out until they tell you to get back in.
If you have read my postings, you know I have been one of the strongest advocates of this historic cycle, even at the very bottom such as in September My thoughts are on record for you to check just as you can check up on Midas’s record and many of the other excellent contributors to this invaluable site. Contrast that with the revisionism that you find on many of the other writers. Many will call a top, but you will have to look hard for their advice to get back in.
I believe that in spite of the size of the move so far, the eventual confluence of political, economic and cyclical factors are going to propel not only the metals, but particularly the shares, to undreamed of levels.
Be prepared for the cosmic events that are going to change everything.
Chuck Cohen ikiecohen@msn.com
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