Posted on 07/26/2002 7:57:59 AM PDT by arete
SAN FRANCISCO (CBS.MW) -- Gold is misfiring as much as its polar opposite, the paper-lined stock market. Yet the metal's believers say gold's postponed gains will make future bullion rallies among the most powerful on record.
Gold mining shares, and the metal, saw a steady flow of investor interest until early June, when bullion indexes hit their highest levels in almost three years. Reality hit hard. Gold mining shares lost 11 percent in a day earlier this week, then gained back 6 percent. Such large percentage moves usually come only once every four or five years.
The good times were very good. Holders of gold mutual funds were sitting on gains of 80 percent and more for this year's first five months against steep losses for the overall stock market. Yet against the backdrop of the stock market's July swoon and a fading U.S. dollar, the rallies for gold and gold mining shares stopped in their tracks.
Those convinced bullion would keep feeding off dollar weakness, Mideast turmoil and the flight from tainted corporate America are asking themselves what in gold's name happened.
"I am somewhat perplexed by gold's moves of late. Lots of possibilities but none of them sound enough to say, 'This is what is going on,'" says Barry Cooper, precious metals analyst at CIBC World Markets in Toronto.
Gold, the actual metal that is supposed to be attached neither to corporate liabilities nor sovereign debt, flirted with $330 an ounce in late May, giving the metal an 18 percent gain for the year. That was the best return of any class of investments in the world. Bullion then came hurtling back to earth. On Thursday morning, spot gold was $310 an ounce, down $1.
The mining shares, many of them having manufactured 100 percent-plus profits for their followers this year, were hit hardest. As a group, gold mining shares in most countries have lost 30 percent of their value since late May/early June. At one point this week, shares of the world's largest gold miner, Newmont Mining (NEM), were back to where they were in late January.
"Gold has failed to break through $330 on two occasions, and with gold needing to advance to continue to drive the (mining) shares, gold shares were vulnerable to a sell-off. That vulnerability has been compounded by the wholesale liquidation that's playing out on Wall Street," says the longtime editor of Gold Mining Stock Report, Bob Bishop.
To be sure, gold mining stocks are still far ahead of the overall stock market for the past 12 months. The U.S.-traded mining shares are up 10 percent for the past year vs. an almost 30 percent loss for the Standard & Poor's 500 Index.
Some point to hanky-panky on Wall Street as one reason for the gold selling this month. Wall Street critics say investment banks used large gold derivative positions to finance failed companies such as Enron. J.P. Morgan Chase and Co. (JPM: news, chart, profile), the largest issuer of gold derivatives in the United States, is at the center of such speculation.
Others see banks, and the Wall Street community, being forced to raise money in order to cover their gaping losses from the plunging stock market. Thus, large banks are selling gold to meet their fiscal obligations. Or so the thinking goes.<
Gold, like many commodities, is often the subject of cloak-and-dagger talk. Yet few can pin down how, or why, an investment bank manipulates the metal in trading pits and on the global stage, where central banks own vast supplies of bullion.
"As one would expect, there have been rumors galore of manipulation," says Adrian Day, a Maryland fund manager and editor of Global Analyst newsletter. "One might reasonably ask why today -- with stock markets collapsing, and the derivative problems of J.P. Morgan and Citibank (C) suddenly grabbing the headlines, why would anyone chose today to dump his gold? One cannot dismiss the possibility of official intervention in the gold market."
Brien Lundin, editor of one of the oldest bullion publications, 31-year-old Gold Newsletter, also thinks governments might be meddling in the gold market, just as they do in currency trading. "On Monday, gold reached $324 -- and the Dow was in free-fall. Something had to be done and, over the next two days, the dollar soared and gold dropped like a dead duck. The intervention was obvious."<
Lundin's Jefferson Financial LLC stages one of the year's biggest gatherings of gold and contrarian investment advisers, the New Orleans 2002 Conference in November. Newsletter editor Richard Russell and mutual fund icon John Templeton will make presentations this year. See more on the conference.
John Hathaway, manager of the Tocqueville Gold Fund (TGLDX) in New York, is one of the metal's biggest believers. His writings on miner hedging, derivatives and the thinly traded and easily moved gold-futures markets are among the best on offer these days. "Gold got hammered (earlier this week) because (Goldman Sachs unit) J Aron had built up a short position front-running against a central bank seller, probably European," says Hathaway. "A nice trade for them, and I don't think there was more to it than that. Physical buying had been absent for a month but started to reappear at the low end of the range."
Gold mining stock analysts, such as Cooper at CIBC in Toronto, are sticking with their heady price targets. Cooper sees gold going to $350 an ounce sometime next year. In a 100-page examination of gold and gold mining shares, Cooper features a picture of a 78-ounce gold nugget from Greenville, Calif. He uses the hunk of metal as a launching point on why gold mining shares deserve to be very expensive.
"Based on the spot price of bullion, the gold in the sample is worth about $22,000 at spot prices. The specimen's market value, however, is more than $60,000 given its rarity," says Cooper. "Gold stocks are also rare as an investment, with a worldwide market capitalization of under $60 billion, or less than 1 percent of the market capitalization for the combined S&P 500 companies. Gold deposits are rare, as any exploration geologist will tell you, and therefore, premium valuations can be expected."
At his California office, editor Bishop at Gold Mining Stock Report is waiting for the next phase of the gold rally. "A month ago I believed gold to be in the early stages of a long-term bull market; nothing has happened in the interim to change that view."<
In Louisiana, Lundin at Gold Newsletter sees great things ahead for those who stay the course on bullion. "The bad news for gold investors is that the $325 price level will be furiously defended by those who are on the wrong side of the gold trend," he says. "The good news is that, when it is finally breached, some pretty amazing things are going to happen for gold and gold stock investors."
The trend of a higher dollar and lower gold is continuing today. Central Banks are defending the dollar. Pure manipulation to prop up a couple of corrupt banks and keep people in the funny paper issued by the NYSE.
Richard W.
Richard W.
I have an order in -- but for silver.
Richard W.
I like your investment strategy, short term, in and out, with a quick pop in the index. A true definition of insider trading if I ever saw one.
Richard W.
If you would have bought and held gold over the last five years, you'd have done one heck of a lot better than you would have in the stock market. Unlike the Global Crossings, Enrons, WorldComs, Adelphias and countless others, gold hasn't filed for backruptcy. Gold is a great hedge against the lying thieves on Wall Street and in Washington who only want us to buy and hold their overvalued paper. It is pyramid scheme and you end on playing on their turf where they set the rules. It is so much easier to track, manipulate, clip, and tax that government and Wall Street paper.
I do not sleep well at night knowing that ruling class elitists like Greenspan and Rubin have so much influence over the markets. I would definitely not sleep well if my retirement money was up for grabs in a system that fosters and even encourages corruption and criminality as was evidenced by the exposure of the JPM's and C's involvement in corporate fraud. No thanks, not right now.
Richard W.
Merrill Banker Won't Testify on Enron
Richard W.
He also ran Safeway markets, making it a national chain.
Someday, you too will be a believer!
Richard W.
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