Adviser Soapbox: Gold Stock Resurrection Adviser Soapbox: Gold Stock Resurrection
By Jack Adamo
Forbes Magazine Online
Thursday, May 19, 2005
https://www.forbes.com/investmentnewsletters/2005/05/19/cz_ja_0519soapb
ox_inl.html?partner=yahootix&referrer=
Since backing down from the $460 level late last year and closing
lately in the $420 range, gold prices are making gold investors
nervous. Under pressure are the miners.
Taking a look at a chart of gold bellwether Newmont Mining, you'll
notice a high in December, and a series of declining tops falling
sharply through May. In addition, the daily price has fallen below
the 50-day moving average and the 50-day has just broken below the
200-day. Market technicians will tell you that's a bad sign. The
bullion chart looks no better.
But wait a minute. That's last year's chart! Gee, it looks just like
the current one. Maybe a look at what has happened since last year's
plunge will give us a hint about what lies ahead.
Seven months after the depths of the 2004 drop, the price of bullion
soared from $375 per ounce to a new multi-decade high of $460. It has
since pulled back to $419, but that's still firmly above last year's
low, keeping the gold bull market intact.
During the third quarter of last year, when it became clear that the
dollar had nowhere to go but down, every hedge fund this side of the
Cayman Islands got on the same side of the trade; they were short on
the dollar and long gold. That drove the price of gold up too far,
too fast. Whenever you have a situation like that, there has to be a
correction. Despite the roller coaster ride, gold is 12% higher than
this time last year.
With gold, there's always a battle between professional and
commercial traders whose business interests are affected by the price
of gold. The real Insiders are the commercials. They control gold
flow. They feed the fire in rallies, selling into the updraft; then
they short-sell the metal when prices are high. By doing this they
lock in profits and panic the outsiders. When enough suckers are
scared out of the market, the commercials start building their
positions again at lower prices. That's what I see happening now.
The Insider indicators I watch to judge the short-term trend of gold
are now moving back in the right direction. Following them has been
very lucrative in recent years. Hence, I'm recommending selected gold
shares again.
But my fondness for gold isn't based on only short-term indicators.
Even though the Federal Reserve Board has been gradually raising
interest rates, it has, at the same time, been goosing the money
supply, negating the effect. In the decade prior to 2000, money
supply growth (M-3) had approximately equaled gross domestic product
growth. Since 2000, the growth rate of M-3 has been double the rate
of GDP growth. Cheap money means expensive gold sooner or later. I
don't see the Fed tightening M-3. There is too much governmental and
private debt out there to try to pay off with tight money.
Incidentally, when China finally widens the band in which it allows
the yuan to trade against the greenback, gold should have a nice pop.
That should come this year.
Some of the gold stocks have done a round trip this year. High energy
costs hurt most, and the weak dollar drove up expenses for U.S.
miners operating overseas. Conversely, South African miners were hurt
by revenue in weaker currencies being translated back into the strong
rand. The companies that are doing best are American- and Canadian-
based firms whose operations are mostly in the Americas.
Meridian Gold is my favorite gold stock. Important new finds in Chile
are assaying high grades of gold and silver. Moreover, Meridian
finished closing its hedge positions in silver this quarter and
should be getting the full benefit of the increase in silver prices.
In the past, Meridian had hedged its silver output at below-market
prices. The company also has new projects coming on line in Nevada,
Mexico and Nicaragua. The stalled, but the very promising Esquel
project in Argentina is like a free long-term warrant. If
environmental obstacles are overcome, the stock should take a nice
jump.
Other promising stocks in the group are Goldcorp, Barrick Gold, Royal
Gold, and to a lesser extent, Glamis Gold. Although I own both
AngloGold Ashanti and Newmont Mining, I think they'll rise less
rapidly than the others mentioned due to currency and operational
problems, respectively. Speculative asset plays like Randgold and DRD
Gold are too risky for most investors, but I do own some Randgold for
the long term.