Bernie: A Golden Bull

09/18/2002 12:00 am EST


Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

Bernie Schaeffereditor of The Option Advisoris bullish on gold from three different perspectives. He is bullish from a fundamental standpoint. Technically, he also believes the outlook is positive. And finally, he believes sentiment argues in favor of higher prices. Here’s his outlook.

“Gold is staging a comeback,” says Bernie Schaeffer. “I turned bullish on gold on December 18, 2001, and my opinion has not changed in the wake of the recent pullback in gold and the even sharper decline in gold shares. From a fundamental perspective, I believe the case for gold remains sound. In fact, my assessment is that the financial markets do not currently assign sufficient weight to the possibility of major negative developments such as a dollar collapse, a stock market crash that takes out the recent ‘bottom,’ a US debt implosion, foreign market contagion, war, and terrorist attacks. A position in gold and gold shares is an intelligent hedge against such developments.

Another bullish factor from the fundamental perspective is that the market capitalization of the entire gold mining industry is comparable to the market cap of a single large-cap tech stock--Dell Computer. This indicates two things to me. First, that gold stocks are far from being priced at ‘bubble levels.’ And second, if just a fraction of the money currently invested in non-gold equities moved to gold stocks, there would be an explosive rally in the golds, perhaps to multiples of current price levels.

From a technical standpoint, there are numerous indicators showing support for gold and gold stocks after their recent declines. The recent pullback in the December gold futures held at the ten-month moving average, at $300, and at the 50% correction of the rally from the $268.60 low to the $330 high. From a sentiment perspective, a recent study by Ned Davis Research indicated that the percentage of total Fidelity Select sector fund assets in the gold fund is in the middle of its range over the past decade. So despite the huge rally in gold stocks over the past two years, there has been no major stampede into this sector by fund investors. This indicates to me that a major gold top is still further out on the horizon.

Short interest in the gold and silver names took a major pop in July, thus setting up the sector for a potential accelerated rally fueled by short covering. In addition, despite the technical performance of gold, options players have never been more skeptical toward precious metals. Our Schaeffer's composite put/call open interest ratio for the gold sector presently weighs in at 0.50, the highest reading for this sentiment indicator for the past 12 months.

My advice to those who are long gold and/or gold stocks is to hold positions. If you have not yet made any purchases in this sector, the sharp correction off the May peaks presents a good opportunity for you to begin establishing positions.”

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