(April, 2004)
SAFE YET FOR THE GOLD SECTOR?
I just signed up for your service and like your methodical thinking and conclusions. However, I would like your guesstimate at a timeline for when you see gold bottoming in its current correction, the US$ topping, and the HUI bottoming, and at what levels? I know these are just guesses but you have fine market sense, and I am trying to get a time frame here......many thanx.
Since the March issue, there have been a few changes to the picture I painted back then. For starters, the price of gold—boosted by increasing geopolitical fears—broke decisively out of its down-trending channel and hit its 2004 peak of over $430 per ounce before backing off in recent days.
The question now, especially since gold saw such a dramatic about-face after hitting its bull market peak, is whether this is now a “double top” that will hold for a while.
A refreshing aspect of gold’s recent surge was that it occurred without any help from the U.S. dollar, and even as the euro was sinking to its lowest levels in months against the greenback. As you see here, the U.S. Dollar Index has stayed fairly steady of late. Two elements have seemed to cancel out one another recently; while the dollar has been under downward pressure due to fears over the escalation of the Iraqi occupation, it benefited recently by the March employment report.
Eventually, the greenback is likely to resume its bear market; and as I discuss elsewhere, its new losses will likely come more against the yen than the euro. Once that occurs, it’s possible we’ll see gold again challenge the $430 area.
Also in the last month, gold stocks—as measured here by the HUI—broke tentatively out of their narrowing trading range. “Tentatively” is the operative word here, though. Gold stocks remain under pressure for a couple reasons. First—having risen for the most part with everything else in the past year, including the broad stock market—they are in many respects just as prone to profit-taking (more on this below.) Also, I sense that some investors are properly waiting to make sure that gold’s own bull market is not suffering from more than a transitory consolidation before taking larger positions in the shares.
To recap, I now believe we’ve seen the bottom for gold’s correction. However, until the metal can get some momentum and break decisively above the $430 level, there is sufficient risk of getting “whipsawed” in the near term—especially in gold stocks—that I’d rather keep powder dry now.
MORE ON POTENTIAL GOLD SECTOR DANGERS
If the markets are doomed to collapse, does it make sense to hold on to mining equities or does it make more sense to hold bullion & cash and purchase mining equities as they drop down with the market? In other words, in your opinion, do you think mining shares will significantly slide down with the general market?
Looks like I’ll pick up where I left off above!
First, we need to ask why the general stock market might come under pressure in the first place. I submit that—whatever else might happen—one reason we see a few cracks appearing already is due to the inexorably higher costs of doing business being faced by many companies. Alan Greenspan and his cohorts might tell us that there is no “inflation,” but that’s not reality. A number of companies are facing pressures to their bottom lines from all manner of fronts, most notably rising fuel costs.
For gold companies, not only are these factors, but so too are currency translations. Bema Gold, for example, took a far worse beating to its bottom line in 2003 than I’d feared, due to the rising South African rand’s effects on the Petrex Mine. Also in that country, Harmony Gold and others remain under similar pressure, as the rand takes away profits faster than a rising U.S. dollar-denominated gold price gives them. Harmony recently announced that it was considering shutting down part of its production until either the gold price rose further or the rand weakened again.
Clearly, until a major new phase to gold’s bull market manifests itself, the easy money in gold stocks generally has already been made. One will need to concentrate on producers with insignificant exposure to a falling dollar, as well as on producers and explorers alike with substantial enough upside in reserves and future production capacity to set themselves apart from the crowd.
Beyond all this, we get back to the scenario feared by some of a broad sell-off in pretty much everything that was boosted by the dollar weakness and low short-term interest rates of the past year or so. This school of thought has been eloquently given by several people recently; one was Marc Faber in a late March op-ed piece in the Financial Times, which you’ll find along with some variant viewpoints on the “Other Experts” page of my web site.
Peter Brimelow in his CBS MarketWatch column of March 22 also went into this theme. He highlighted newsletter writers Jim Dines and Harry Schultz, neither of whom can be accused of being unfriendly to gold. None the less, each was quoted as having given their readers some warning recently not to be overly exposed to gold shares right now. I particularly liked a quote attributed to Schultz, who, according to Brimelow, recently wrote, “What action to take? If U are a bit overweight in gold shares &/or if U own some clearly under performing stocks. . .I would sell them (I have). I would not sell bullion or coins, but weeding out weak golds is no different from weeding out hi-techs, drug stocks or any other group. Keep the strong.”
Even Richard Russell has of late been flashing a yellow caution sign when it comes to gold shares. A man who a bit less than a year ago (if memory serves me correctly) was pounding-the-table bullish on gold stocks and advocated that folks have fully a third of their portfolios there (good advice!) has also suggested that a variety of factors might make bullion itself more attractive down the road.
As for me, I believe the scenario that Faber painted in his FT piece is the most likely in the near term; but, perhaps, not of the magnitude he fears. Personally, I feel we’re moving toward a kind of scenario that Dan Denning wrote about recently (in a Daily Reckoning piece that I also have on the “Other Experts” page) where, in fits and starts, we’ll see deflation in government bond, stock and (to a lesser extent) real estate values, while commodities priced in dollars will continue rising. Thus, longer term, the more fundamentally sound gold and other commodity stocks will still be winners, even if the overall stock market suffers.
So, yes, before your next major commitments to mining equities can be made, we need first to get past the initial blow-off of ALL the assets that have moved up over the last year. As I said in last month’s issue, now is one of those times when a healthy cash position is wise!
PRUDENT GLOBAL INCOME FUND
Hi Chris -- With a long term view (12 to 18
months), is PSAFX (the Prudent Global Income Fund) a fund you would,
buy, hold or sell? I currently own it @ $12.80.
Though it has been a bit of an under performer the last few months, I think with your time horizon as stated that the Prudent Global Income Fund is a decent place for some money; and over 12-18 months should prove, at the very least, better than parking cash in a money market fund. Though I've not spoken with David Tice directly for several months, I know nevertheless that he has lightened up on gold stocks of late (those, I think, are chiefly what kept the fund from doing better the last 2-3 months.)
I'll be checking further myself into his present portfolio make-up soon, as I’d like to see a bit more emphasis on Asian currencies and relatively less on Europe. The last info (also available on his web site) showed the heaviest weighting by far in the Swiss franc and euro. And, surprisingly, nothing in sterling. Hopefully, these latter things are changing as well.
I'll let you know what I find out, if anything else has changed significantly in the recent past.
EMERGING MARKET BONDS?
If the economy and markets tank here, will emerging market bonds from those countries now having a large trade surplus do well? This is something that John Templeton has predicted. . .
I have not personally seen where Sir John has suggested that emerging market nations’ debt will be any kind of a refuge down the road, but can assume what his (or someone else’s) reasoning might be.
I believe that—as I suggested in my recent commentary entitled “The World Turned Upside Down”—we will be working our way toward a world that does NOT revolve solely around the U.S. of A. As other nations’ currencies strengthen against the dollar, they will thus be able to keep debilitating price inflation in check as they grow. For us, though, soaring dollar-based prices for energy and other raw materials will lead to much higher inflation, economic weakness and all the rest.
Initially, as consumer spending thus gets crimped here and both bonds and stocks suffer, almost everyone will be affected. As the old saying goes, when the U.S. sneezes, the rest of the world catches a cold. Not yet insulated or sufficiently strong on their own, almost every other country and economic bloc will get dragged down with us. This will be especially true for most emerging markets, as their bonds have been bid the highest over the last year in anticipation of a great new period of global growth.
After a while, however, I expect that some regions—most likely Asia—will have had some success in extricating themselves from such a close correlation to the U.S. As long as these countries (and perhaps Europe to a lesser extent, helped along by plentiful resources from Eastern Europe) are able to grow their domestic economies apart from the U.S. then, yes, it will stand to reason that those sectors/countries feeding that growth should do well. I certainly do expect to see at least some nations rich in raw materials having dramatically better currencies and public sector finances than we’ll have here, provided that the growth story elsewhere in the world indeed unfolds in spite of it ending here in America.
So, yes, ultimately what you say Templeton has predicted could indeed occur. As far as I’m concerned, however, it’s not timely yet to make such bets.
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