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DOHMEN CAPITAL RESEARCH INSTITUTE, INC.
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(November, 1997) PRECIOUS METALS: The Fundamental Side–During the recent worldwide financial crisis, gold did not provide a crisis hedge, contrary to what so many gold bugs believed. I have always said that gold is not a crisis hedge, especially not in a financial crisis. The simple reason is that in a financial crisis people will sell anything and everything that's liquid in order to get cash. You can't buy your groceries with a bar of gold.
Switzerland announced that it might reduce its gold holdings by 50%. That put a big damper on the market. The financial crisis put the nail in the coffin. Gold mining stocks plunged with everything else.
The chart of the XAU gold/silver mining index, an index of the major precious metals mining stocks, went to a new multi-year low during the recent debacle. Note that the recent rally, which got so many people excited again about the mining sector, peaked out in the 110 area, which is resistance. Such bounces are normal in any bear market. I pin-pointed the rally top to the day. The new low thereafter confirms the bear market. Much lower prices are ahead.
This long-term chart of gold also shows a new low being made. Note the rally up to the $340 area in last month's issue when I predicted this would be the top of the rally. It was.
I expect gold to go to $285, and to find some support there. A rally from there would only be normal. But eventually, gold will go much lower.
My advice: stay out, or stay short this complex.
Summary–I may sound like a broken record, but there is still no reason to be invested in this area. If you want to do something in this sector, sell it short. Worldwide deflationary pressures make a gold-related investment unproductive. The next important move in this sector will be downward.
Bert Dohmen
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