Fund shorting become pent-up buying demand Hedge funds, a variable we've not previously had to contend with, only magnifies the momentum-in both directions-and also adds to the phenomenon of bad things happening to good stocks. Large-scale hedge fund shorting of gold shares is widely rumored in the current market, presumably, on the basis that gold is long overdue for a correction. Should that correction not be forthcoming, this will of course become pent-up buying demand . . . .
-- Not The Companies They Used To Be - I've noted on numerous occasions that 2004 has been a year of digesting stock issued in 2003. The pause in the gold price this year exacerbated that process, but given the continuing pace of share issuances, "stock digestion" appears to be a reason that will account for at least some level of underperformance, even in the year ahead
-- In recent months, uranium stocks have been one of the giant sucking sounds that have taken money away from the gold sector. In the month of November, coal stocks were on fire, on the receiving end of buying that might otherwise have found its way into gold stocks. Another large but unquantifiable factor is the number of new deals that have been created in recent months. This is something that always happens as a market evolves, and even discounting the uranimania-driven deals of recent months, I'm not sure I can recall a time when so many deals have been in the pipeline at one time. I have six on my desk right now, all in need of checks this month, and that doesn't even begin to reflect the number of them that I have elected not to do. Most such deals are being funded at the expense of other stocks; whether it's selling stocks and keeping warrants, or simply selling stocks to raise money for new deals, there is a lot of "internal fundraising" in today's market.
I could go on, but the preceding are among what strike me as a number of good reasons to account for, at best, the selective reflection of gold's good fortune in a share market that one would expect to be a beneficiary of gold trading to a 16-and-a-half-year high last week. Another factor, one that relates to the short-term preoccupation of so many in the market, is that we again seem to be in a period when even the believers don't believe. There are widespread calls for the dollar to rally and for gold to correct, but this was true several weeks ago and remains at least equally true today. The dollar and gold action is overextended by any conventional measure, but that is sometimes the nature of bull markets: they leave people on the sidelines, looking for a re-entry point that continues to defy them. My view is that a selloff in gold would not likely exceed $430 for any length of time, principally because the dollar's problems are so relatively large and that a deadcat, intervention inspired bounce is likely to be about the best the dollar can muster in light of its over-owned and still overvalued status. When its chief proponents are a Treasury Secretary traveling the world talking of a strong dollar policy and the Fed head saying he expects to see a "diminished appetite for adding to dollar balances," the disconnect cannot be lost on those sitting on such balances. While the dollar and gold have been almost mirror images of one another, the relative magnitude of the dollar market may mean that the "chump change" gold market may not be as adversely affected on any dollar rally that could ensue at any time. That's another way of saying the dollar's problems are much bigger than gold's so, why should the latter be penalized in lockstep if, as, and when a dollar rally can actually gather some momentum? Rather than try to second guess this market too much, my distinct preference is to focus more on stocks that represent good value on an ongoing basis. Another bias is toward recognition that we are in the early stage of a bull market that has years to run, and my general tendency is to give the market the benefit of the doubt. There are times when stocks lag bullion in a gold bull market, but I know of no precedent for a bull market in gold occurring without participation of the stocks. This one isn't likely to be any different.
(Excerpted from GMSR Alert #326, originally published 12/6/04.
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