May 10, 2003 |
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Notwithstanding the current two day decline, key stock market resistance levels have been broken with authority, tech stocks are back in style, and many analysts are forecasting even larger gains. The bull is back, or at least the Acampora’s would have us believe (‘any hesitation is a buying opportunity’). The Gold Rally is for Real… The price of gold has a funny way of being slammed lower for no apparent reason just when it looks like it will consolidate gains. However, this time, and this is my first time making such a claim, things could be different. To begin with, the COT data suggests that much of the speculative excess that was present during the last rally has vanished. For example, when gold peaked earlier this year, the commercials were more than 4.5-1 short. Today (April 29) commercial interest is less than 2-1 short. Furthermore, speculative interest at the peak was nearly 4.5-1 long, whereas today the speculators are less than 3-1 long. Suffice it to say, a lot of weak hands were shaken out when the POG collapsed, and the commercials (as the story usually goes) used this opportunity to nearly double their long positions while reducing their short positions. Along with the moderately bullish COT numbers, the fact that the dollar is in a slump bodes well for the POG. And although it is mugs game to speculate on what the dollar will do in the near term, longer term, say 2-5 years, the dollar is likely to encounter some setbacks. This dollar forecast is nothing new. However, what could be ‘new’ as far as the POG is concerned, is that when the inevitable ‘oversold’ dollar rally arrives that it will be short lived. In sum, a crash in the POG is about as likely as a sustained rally in the U.S. dollar. But Gold Stocks Are No Steal Since early 2002 Todd and I have researched the gold industry countless time. Yet we continue arrive at the same conclusion: stocks/industries which are unattractive have more attractive properties than gold stocks do. Some comments that didn’t make it into the 1Q03 WL report highlight this point of view: “If Goldcorp can be expected to emulate its 2002 performance in 2003 (consensus estimates suggest as much) the investor is paying roughly 40 times free cash flow for a stock that has great potential if the POG rallies. However, if GG made say soup instead of mined gold and it had the same price/FCF ratio as Campbell Soup it would be trading at roughly $5.30 a share, not $10.61. Point being, Campbell Soup has a 3% dividend yield and we are fairly certain it will be around for the rest of lives, whereas Goldcorp offers less than a 1% dividend yield, and unless the company continues to find more reserves and/or the POG doesn’t decline, its days are numbered…” Regardless of the rich valuations compared to other stocks, I’ll be the first person to admit that it is difficult not to purchase a company like Goldcorp, write some out of the money covered calls, and sit on the position. Indeed, there are many gold stocks which could potentially serve as income generating gold futures contract; the covered calls generate income and offer downside protection on your original investment while you participate in any gold rally up until your strike price. Moreover, if the calls expire worthless you continue to write calls and hope that the POG doesn’t collapse (this ‘strategy’ is based upon ‘hope’ if you don’t believe he company is undervalued). Suffice it say, and despite being bullish on the POG, I lack the speculative flare to venture into gold stocks at current prices. Yet the thought continues to cross my mind. Conclusions Gold could be due for a near term setback (the COT stats are not always reliable and they are dated), but because the dollar’s decline is likely just beginning, the long-term outlook for gold is positive. I don’t believe that purchasing gold is something you jump up and cheer about. Rather, buying gold serves as an admission of defeat -- you can not find an attractive use for capital and you are apprehensive about holding paper, so you purchase some gold. The stock picker cannot help but be discouraged by the current rally, as many stocks that were nearly attractive two months ago are now completely unattractive. Nevertheless, and as Wall Street begins to bombard the public with claims of a new bull market, the investor should remain resolute. Purchasing a stock because you believe someone will pay a higher price for your shares tomorrow – not neccessarily because you believe the stock is attractively priced and the stock will mirror corporate performance – is living dangerously. Gold on the other hand, is one of only safe choices. |
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