John Murphy & Jim Dines on Gold

01/31/2003 12:00 am EST


"Gold has worked from Alexander's time and when something holds good for two thousand years I do not believe it can be so because of mistaken theory," said Bernard Baruch. Indeed, few other investments have a history that stretches for millennia, attesting to the staying power of the metal. While we are cautious against chasing recent strength, two leading advisors believe we are at the start of a new bull market move. (For additional information on John Murphy and Jim Dines, please click on their photos below).

Murphy, John "Gold has broken its 15-year resistance line," says John Murphy, chief technical analyst analyst for . "Back on December 20, we showed gold bullion testing a 15-year down trendline extending back to 1987. That line sat near $350. Gold has now exceeded that long term bear line by about $20. That puts gold prices almost 6% above that major resistance line. Normally, we require a 3% penetration to convince us the upside breakout is for real. We certainly think this one is. Our next upside target in gold is $400--the peak reached at the start of 1996. We believe that the bull market in gold represents a generational shift out of stocks and is far from over.

"We believe there's a lot more behind this gold bull move than war jitters. Historically, gold moves in the opposite direction of the stock market. That's because gold is a hedge against bad times. It doesn't matter if the threat is from inflation (like during the 1970s) or deflation (like now). The fact is gold is tied to the stock market--but as an alternative investment. Gold prices peaked in 1980 and were in a bear market for approximately 20 years. Stocks bottomed during 1982 and were in a bull market for most of those 20 years. It seems pretty clear that the big bull market in stocks ended right around the time the new bull market in gold started. The moral is that each asset class has its own time to shine. From 1982 to 2000, stocks were the place to be. Since 2000, gold has been the preferred asset. Since these are 20 year trends we're talking about, we don't expect them to end anytime soon. That's why we believe this bull market in gold is still in its early stages. The media is attributing stock market weakness and gold strength almost exclusively to the Iraq situation. The technical charts suggest, however, that there are much larger forces at work here than Iraq. A smart man once said, 'There is always a bull market somewhere.' Our job is simply to find it and go along for the ride. Gold prices have risen to the highest level in six years. The reasons don't matter. Technically, gold shows a bull market about to start."

Dines, James"Gold will soar in 2003 and 2004," notes Jim Dines, editor of The Dines Letter, which has been published for 42 years. "Mass psychology is crucial in our forecasting, which is why our 2003 forecast is published later than others; we wait until we can review other experts' year-ahead forecasts. What struck us this time was the remarkable unanimity with which they have sloughed off gold strength as some temporary quirk to be blamed on Iraq, Venezuela, and North Korea. Rather, we see a dozen reasons for the historic gold and silver bull market. Here are 12 specific forecasts regarding gold:

1.The biggest opportunity for making serious money in 2003 will be golds and silvers.

2. For decades, governments made a point of fighting inflation. We now predict that these same inflation fighters will now try to increase inflation. Governments will eventually enlist gold by buying back the gold bullion in the open market that they had previously sold at lower prices.

3. Gold is the world’s only currency that does not depend on the assurance of another party for value. Silver has monetary value as well. Nearly every country in the world maintains its capital reserves primarily in US dollars. The plunging American stock market, as well as the decline in the US dollar, makes keeping money in America a losing proposition, so some foreigners are pulling money out. Foreigners will switch out of dollars into gold and silver. Foreigners pulling money out of America, including the sale of US Treasury bonds, implies that interest rates will rise in 2003.

4. Investors now have an opportunity based on an ‘anomaly’. Briefly, an anomaly is when a commodity moves sharply, but stocks have not yet fully aligned themselves with that move. You can often profitably exploit this differential. Gold bullion has leaped to a new multi-year high, a massive upside breakout, while gold shares have not. Currently, we see a double anomaly. Gold bullion is leading gold shares higher, while silver shares are leading silver bullion higher. Therefore, gold shares and silver bullion are especially favored on pullbacks.

5. As it sinks in that gold mining company earnings are going much higher, the experts–particularly the large brokerage houses–will begin recommending gold mining shares. But big institutional investors will be in for a rude shock when they attempt to take substantial positions in gold stocks and are confronted by their relatively tiny market capitalizations. You could buy the entire gold mining industry of the world for the price of one or two of the companies in the Dow.

6. Aside from the fundamentalists, momentum investors will pile in and buy. Mutual funds and hedge funds will jump on board and lead to sky-high gold prices.

7. Short covering will be another key driver of gold share prices. In recent years, there’s been something called the carriage trade in which investors borrowed gold, sold it short, and used the proceeds to buy high-yielding government paper. As gold declined, they made money. At some point, the carriage traders will need to step in and buy the gold back, because the higher gold goes, the more they will lose. Another major factor in short covering is the gold miners themselves. For many years, they sold future production in the commodities futures market, a process called hedging. This was wonderful when gold prices were declining, but the recent rise means that they have to replace that gold at a higher than expected price.

8. Another bullish factor is income. Gold shares in a bull market pay good dividends, and the higher the gold price the higher the dividend.

9. Gold is now an ‘uptrend in motion.’ Uptrend lines for gold are intact, and gold stocks would need to break below their uptrend lines to turn bearish. For now, we see no danger of that.

10. Hi-Ho Silver, Away. Many of the people who agree with us on gold, resist silver on the grounds that it is an industrial metal. Nonsense. A silver coin is good anywhere in the world, just as a gold coin. Meanwhile, silver stockpiles are at historic lows, even as the net demand has run at a deficit for the past 13 years. In our view, silver could eventually go as high as $100 an ounce. If so, silver shares would outperform gold on a percentage basis.

11. We have long warned about the coming competing currency devaluations. For many years, the world devalued against the US dollar. America’s $400 billion current account deficit is also beginning to undermine the dollar. The devaluation of the dollar against other countries is terrible news for foreign stock markets.

12. We ignore such factors as jewelry demand, as we view that as peanuts. Rather, our eye is firmly on investment demand, from central bankers, pension funds, fearful Middle Easterners, dumpers of paper currency, etc. who will desperately trade their paper money for the safety of gold. We foresee a major stampede into gold by those who seek to rescue their capital from what they fear lies ahead. If we are right, gold prices would rise ballistically, and terrified short covering could cause a spike, driving gold up to the $3,000 to $5,000 per ounce level, over ten times its current price."

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