Go for the Gold

09/18/2002 12:00 am EST


Steven Halpern

Editor, thestockadvisors.com

Warren Buffett calls it his Noah Rule: "Predicting rain doesn't count; building arks does." A wide variety of leading Money Show speakers are currently emphasizing the need for investors to position their portfolios against potential world conflicts. They are bullish on the prospects of gold, as a means of hedging one's overall portfolio in times of uncertainty. In this issue of the Money Show Digest, we cover their outlook on gold and some top picks in the sector, as well as some alternative ways to hedge a portfolio.

Thom Calandra is a columnist for CBS Marketwatch. His widely-read and highly-popular StockWatch e-mail column is now in its seventh year of publication. In his latest column, he says, "Veteran forecasters, many of them long-time editors of financial newsletters, say a US-led invasion or coup would wreak havoc in financial markets, with much damage to stocks and the US dollar and possible strong gains for gold.

"There are an uncommon number of safe-haven factors working in gold's favor right now, including a potential stock market crash (maybe), a further plunge in the dollar (likely), and war with Iraq (almost assured)," says Brien Lundin, editor of the 31-year-old Gold Newsletter Alert.

"While initial action in Gulf War II may be taken by the US, we expect a similar price spike (in gold) as tensions heat up, but this time the fear will not be Saddam's army, but his possible early use of chemical weapons," says John C. Doody, editor of Gold Stock Analyst.

Almost off the radar screen of Wall Street is the amazing rally in a number of commodities, including wheat, sugar, and corn. Commodity prices, as measured by the Commodity Research Bureau's benchmark gauge of about 20 products has gained almost 15% this year after years of torpor. Higher prices for hard assets, be they agricultural, metal, or energy-linked, is usually a sign of looming turmoil in financial markets. Gold, at the same time, has become the second-strongest investment class of the year, after Treasury bonds. Many forecasters say they expect the gold price to reach $330 an ounce this year (its high thus far in 2002) and then launch a rally into the $350 range."

Jim Dines has been writing his Dines Letter since 1960. He is known as the original gold bug, for his accurate predictions for the early 1980s gold bull market. Dines turned bullish on gold last September, and he believes gold is in its third major bull market of the past century. Here’s his current outlook:

“The chart of the XAU shows that gold has finally dropped from its overbought position into an oversold position, an encouraging sign for owners of precious metals. Meanwhile, instead of gold miners selling future production (hedging) to nail down prices before an expected drop in price, some are now holding gold off the market. Further, central bankers are nearing the end of liquidation of their national patrimonies. Also, the long economic depression in the gold mining industry has drastically reduced exploration and development budgets, which means gold production will be declining for years regardless of higher gold prices.

Most bullish of all is the huge short position out against gold in the form of derivatives that could implode with horrifying speed. A radical leap in the price of gold would also put at risk many of the big banks and insurance companies that are at the other end of call options for example, and lead to a full scale gold buying panic. Such events tend to occur with little warning."

Among Dine's core gold holdings are: Agnico-Eagle (AEM NYSE), Barrick Gold (ABX NYSE), AngloGold (AU NYSE), Placer Dome (PDG NYSE), and Meridian Gold (US:MDG NYSE). Among his near-term trading ideas—recommended for high-risk, high- potential capital gains—are Glamis Gold (GLG NYSE), Harmony Gold (HGMCY OTC), and Rangold (RANGY OTC).

Walter Rouleau, editor of Growth Fund Guide, notes, "Our belief is that an investor's portfolio should be well diversified and hedge in an effort to lower the risk and help protect against the unforeseen and usually major problems that have a habit of cropping up out of the blue following the breaking of major mania market bubbles. For growth investors we suggest at least a small hedge position in a good gold fund such as Gabelli Gold. We also like the no-load, no-redemption fee Prudent Safe Harbor Fund as a hedge against problems that we expect to see ahead. The fund is currently structured to benefit from a declining US dollar and to a smaller extent, the bull market in gold and gold securities. This fund has been a low volatility, conservative fund that has risen 22.6% over the past 12 months. 

For aggressive investors, US World Precious Minerals is the most volatile and speculative of our gold funds. It invests in companies that aim to create wealth by discovering new deposits, developing promising properties, and/or profitably mining gold. Its portfolio includes junior and intermediate gold comapnies. We  believe this type of portfolio has large upside potential in a big gold bull market and is worth a small portfolio commitment by aggressive investors."

Finally, I'd like to share an intriguing precious metals play that is a core holding of Kennedy Gammage, editor of The Richland Report. He believes that every investor should have no less than 10% (and perhaps more) of investible assets in some form of precious metals. He suggests that half that position be in physical metals themselves as an insurance policy against adversity and the other half in mining stocks for trading and capital appreciation purposes.

Says Kennedy, "Now might be a good time to accumulate positions in Central Fund of Canada (CEF ASE). Central Fund is a trust; 98% of its assets are silver and gold bullion, in a ratio of 50 ounces of silver to each ounce of gold. The metals are stored in a Canadian bank vault. This fund offers the total liquidity of a publicly-traded stock, with the added advantages of safety from fire, flood, theft, or government confiscation, without assay or storage costs. It can act as a substitute for your holding of the physical metal."

In this issue of The Money Show Digest, we turn to several of the leading Money Show speakers for their outlook on gold and other ways to add a level of protection to one's overall investment portfolio.

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