Special Report: Go for the Gold
01/17/2003 12:00 am EST
When five leading advisors, each with exceptional long-term track records, take the same position, it behooves us to listen. In this case, Jim Stack, Mark Skousen, Adrian Day, Elliott Gue, and Schaeffer's Investment Research's Tom Reynolds all suggest the importance of gold as a portfolio hedge. Here is their commentary and some top picks.
"Gold stocks provide a valuable portfolio hedge against the effects of currency weakness, terrorism, and possible war with Iraq," says Jim Stack, editor of InvesTech Market Analyst. "Gold and gold stocks are moving steadily higher due to a combination of factors. The US dollar has shown increasing weakness. After falling from favor in the late 1990s, gold is again viewed as a traditional safe haven as global tensions increase. With gold prices rising and interest rates at a 40-year low, there’s less incentive for gold producers to hedge by selling borrowed gold and depositing the proceeds. The same applies to Central Banks, which in the past have found it more profitable to sell their gold reserves and hold Treasuries. Finally, gold stocks are in short supply and mergers are reducing the number further. Note that the 345 largest gold companies have a combined market cap of only $52 billion, which is less than 1/5 the size of General Electric. With these fundamentals supporting higher gold prices, we’re comfortable holding up to 10% in gold stocks. Our preferred investments in this sector are Newmont Mining (NEM NYSE) and American Century Global Gold Fund (BGEIX ). More risk-tolerant investors might also want to take a closer look at Glamis Gold Ltd. (GLG NYSE) and Harmony Gold (HMY NYSE)."
Adds Mark Skousen, editor of Forecasts & Strategies, "With the dollar falling, and gold and real estate rising, it looks like non-traditional investments are the place to be in the New Millennium. The Fed is determined to reinflate, and the money supply has been growing at double-digit rates; interest rates are extremely low and commodity prices are starting to rise again. As a result, I highly recommend you earmark 10% of your portfolio to gold stocks and gold mutual funds as protection from such possible future inflation problems. We recommend Newmont Mining (NEM NYSE) and American Century Global Gold (BGEIX )."
"I suspect gold will lead the market again this year," says Adrian Day, editor of Global Analyst. "Most commentators are only just beginning to notice gold’s advance and they are attributing gold’s strength to geopolitical concerns, primarily the looming war with Iraq. No doubt these are contributing to gold’s move, but it’s much more fundamental than that. Various factors driving gold are declining new mine supply; increasing investment interest in Japan and elsewhere; the reversal of forward selling by mining companies; and gold’s role as a hedge against stocks. More recently, the evident desire of the Fed to reinflate at any cost lit a fire under a gold market where all the fundamental conditions were already in place. Is there a short-squeeze ahead? No doubt, short-covering has helped the rally. But there’s much more to come. The reputed enormous short positions in the gold market will eventually be forced to buy gold on the open market, and there is not enough supply for all to cover at anywhere near the current price. This is just the beginning. We recommendHarmony Gold (HMY NYSE), at prices under 16, Newmont Mining (NEM NYSE), at prices under 28, and Meridian Gold (MDG NYSE), under 16."
Adds Elliott Gue, editor of Wall Street Winners, "Gold took out the recent high and traded all the way up to $360/ounce. Recently, it has been holding at $358.50 on news that Hans Blix found empty chemical warheads in Iraq. Also, gold stocks after holding very well for a month seemingly broke down in recent trading only to prove that it was a 'head fake'. The sector is turning and as the only gold stock in the S&P 500, Newmont Mining (NEM NYSE) is going to be a major beneficiary of any move in gold stocks. It's the most liquid gold stock and a good proxy for the sector. Buy the Newmont Mining March 30 calls under 1.75."
"Gold continues to draw a lot of attention in the current market environment," says Tom Reynolds of Schaeffer's Investment Research . "And it could be that the party is just getting started. Consider the recent pullback. Many gold stocks are now closing in on areas of potential support that could provide a staging ground for their next move higher. The PHLX Gold and Silver Index (XAU.X), which represents a basket of these stocks, has spent the past few weeks consolidating into its rising 20-day moving average. This follows a break above previous resistance at the 76 level (from September) that could now act as additional support. The combination of potential support at the 20-day trendline and the 76 mark bodes well for the XAU (see the chart below). Similar patterns can be seen in the charts of Freeport-McMoRan Copper & Gold (FCX NYSE), Goldcorp (GG NYSE), and Agnico-Eagle Mines (AEM NYSE).
"Let's look at sentiment, which often provides a good contrarian read on a stock's future direction. In a nutshell, this means that low expectations (i.e., "high pessimism") on a stock in a technical uptrend can often lead to higher prices. That's because there are plenty of potential buyers on the sidelines that can still jump into long positions – driving the stock to new heights. The XAU's Schaeffer's put/call open interest ratio (SOIR) has increased from 0.54 on December 30 to its current reading of 0.75. This is a sign that puts (bearish bets) are increasing at a faster rate than calls on the sector. This ratio has also climbed for Newmont Mining (NEM NYSE) and AngloGold (AU NYSE). In addition, puts on gold futures have been rising and recently topped 90,000 contracts. This has the call/put ratio for gold futures breaking below 2.00 and declining to 1.68, which may well be the lowest ratio in a decade. Pessimism is definitely rising on gold stocks and as long as the group continues to show strength, this has bullish implications from a contrarian point of view. So the outlook for gold remains bright. The recent pullback in many stocks could provide a perfect opportunity for investors to get in on the "ground floor" before the yellow metal makes its next run higher."