DOHMEN CAPITAL RESEARCH INSTITUTE, INC.

66 Queen Street, Suite 3801, Honolulu, Hawaii

(December 1997) METALS: PRECIOUS METALS–Gold has just dropped below the $300 level, just as we thought it would. (See last month's issue.) Next stop is $285. Gold should be able to stage at least a short-term rally from there. That is support, going back several years.

Once again, the rally will be accompanied by the entire precious metals crowd advising it's a bottom and a bargain opportunity. The scamsters will use it to lure investors into the penny mining stocks. No matter how often people get burnt, they always seem to come back for more.

Investors don't know it, but there are entire networks of people who buy big positions in the penny stocks, then promote them to the world, and sell just when everyone is excited to get in. Thereafter, the promotion stops and the stocks go back to selling for pennies.

The head of the so-called World Gold Council was on TV when gold broke $300. He had a tough time coming up with some reasons to buy gold. He repeated several times that gold would be a “hedge against a worldwide stock market decline.” He said “gold goes up when stock markets go down.” But that is absolutely false.

He also said that gold served a very good purpose for investors in Asia as it protected them against the decline in their currencies. That's a flimsy argument. Having their money invested in the U.S. or any U.S. Dollar instrument, or just plain U.S. Dollar bills, would've done an even better job of protecting against their currency declines.

Beware of anyone who has an ax to grind. This includes mutual fund managers specializing in specific sectors. My experience is that such people rarely see a time to sell. He will only look at the positive aspects, even when the negatives are staring him in the face. I am not suggesting that this is deceptive, only that the expert in a certain area is usually the last to recognize the negatives.

I remember in 1980, a very good friend called me about a dinner he hosted at his house with several heads of very large U.S. companies. Included was the chairman of a huge energy company. The price of oil was about $31 per barrel. Privately, they said their analysts were looking for $65 per barrel. Soon thereafter, oil prices plunged, eventually getting down towards the $10 level. The “experts” were the last to know.

At the investment conferences, I suggest you seek out the best fund managers managing widely diversified funds. They will tell you frankly and honestly which areas they like and which ones they don't. They have no ax to grind.

Getting back to the precious metals, it's interesting that while gold was plunging, silver actually rose in price. I believe that this is a short-term situation based on tight supplies in the warehouses which back up the future contracts traded in the commodity market.

In the late 1970s, when anyone mentioned a major company was working on electronic photography, silver would plunge sharply. But now that electronic photography is a reality, and sales of electronic cameras are rising explosively, I haven't heard anyone mention the potential negative on silver demand and thus prices. Maybe I am reading the wrong stuff. Eventually, however, the word will get out, and some will realize that within 5-10 years, electronic photography will be more popular than film. Silver prices will plunge.

This chart shows the continued waterfall decline in gold prices. Note that even the financial turmoil in Asia could not boost prices. In fact, as I commented the day after the U.S. stock market crash, it presented a great short-selling opportunity in gold. Usually stock market crashes produce a long-term decline in gold prices. That's a fact.

CONCLUSION–Except for a technical rally from the $285 area in gold, whenever gold gets there, I believe the only way to make money in gold over the longer term is by short-selling the mining stocks. Stocks you could consider are Placer Dome (PDG), ASA (ASA), Newmont Mining (NME), Newmont Gold (NGC), etc...

Those who trade the Fidelity Select funds could consider selling short the Fidelity Select. Precious Metals and Mining Fund. As you may know, you can short some of the Fidelity Select funds, but not all.

SUMMARY–Gold has just dropped below the $300 level. My first target of $285 is now around the corner. From there we should see a natural reflex rally. It may be sharp, but it won't last long. At the top of the rally, you will see a flurry of buy recommendations from the gold crowd, which will get their clients back into gold right at the top of the rally. Eventually, gold will be much, much lower in dollar tenns.

Bert Dohmen

Consensus National Futures and Financial On Line Index

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