......Fat Prophets.Read on, if you will.....and gracious thanks...

......Fat Prophets.
Read on, if you will.....and gracious thanks go to Fat Prophets, whose musings I share with you.
Carl.
"The King was in the Counting House.........."

Gold
Fat 178, 04 May, 2004

Fear & Greed

In recent weeks gold has corrected lower after encountering heavy overhead resistance near January's fifteen year high. We believe the recent consolidation is to be expected considering the strength of the earlier advance, and maintain that the longer term uptrend remains firmly intact. The last significant correction in the gold price occurred between February and April last year, when bullion quickly retreated from US$388 to US$319.


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"Corrections in bull markets are essential in order to disperse the 'excess optimism' built up during the previous advance."

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During a bull market, corrections are usually painful experiences for many investors. Emotions are often challenged and doubts set in when markets become volatile and fluctuate sharply. A bull market in the early stage takes few passengers, and we certainly believe this will prove true of gold. The latest correction is a perfect example of these extreme emotions interplaying.

The world's largest futures market for trading gold is the Chicago Mercantile Exchange or COMEX. Prior to last months sharp correction, a massive 'long position' had built up on COMEX, where a large number of speculators had taken financial bets that the gold price would continue to rise. Whenever markets become heavily skewed towards one side, the stage is typically set for an adverse counter reaction, and we believe this was the case with gold. In the last flush out, gold spiked sharply downwards into the US$370s, as the long positions were liquidated in a flurry of stop loss selling. The downward pressure rapidly abated after the selling became exhausted, and prices then quickly rebounded.

Corrections in bull markets are essential in order to disperse the 'excess optimism' built up during the previous advance. When the counter reaction arrives, speculators and investors typically question the validity of the primary bull market, and many head for the exit. This is exactly the type of action that typifies the early stage of a bull market. With respect to gold, the latest correction is setting the price up for the next advance in our opinion.

We believe that profits in the stock market are maximised by investors who buy or sell at extremes, and then hold their position for months or even years while the primary trend runs its full course. During this primary trend, many traders are caught out through attempting to time the markets, and are consequently at risk of being out of the market when a major upside move occurs.

We expect gold will continue to be volatile, and that sharp corrections will take place through the entire course of the bull market. Staying with the longer term trend requires discipline - as the present correction has shown - however we believe substantial profits will result for those who remain invested. In our view gold will rise to US$500 this year, and that significantly higher prices are possible in the years' ahead. Accordingly, we strongly recommend Members maintain exposure to gold and gold shares.

Disclosure: Interests associated with Fat Prophets declare a holding in gold companies.