article: Gold gain points to market meltdown
Stock turmoil, dollar's slide highlight trend
by Thom Calandra, CBS.MarketWatch.com
SAN FRANCISCO (CBS.MW) -- When gold stocks rise sharply as a group on extremely heavy volume, it's always a sign of trouble ahead for the overall stock market.
Analysts say the 7.5 percent advance for U.S.-traded gold shares earlier this week -- the sector's largest increase since May 2000 -- points to renewed interest in the metal. It's also a sign investors accept the possibility that the stock market, and those few industries still holding onto gains this year, could come crashing down in coming days or weeks.
On Wednesday, the stock market was getting pounded - down 2 percent for major indexes with 90 minutes to go in the trading day. Down volume on the New York Stock Exchange was overwhelming up volume by almost a 9-to-1 margin.
Gold's price, subdued until this week, is up almost 20 percent from 12 months ago. The spot price Wednesday in New York was $316.40 an ounce, holding onto all of its almost $4 gain the previous day. Trading activity in top gold mining companies like Newmont Mining (NEM: news, chart, profile), Gold Fields Ltd. (GFI: news, chart, profile) and Barrick Gold (ABX: news, chart, profile) this month is regularly exceeding the stocks' three-month volume averages.
Analysts and newsletter writers say the metal and corresponding shares have been winners at a time when the stock market and the U.S. dollar are losers. What is new is the growing belief that the metal's gains, and those of gold mining companies, are telltale signs of an impending stock-market meltdown.
"What the market seems to be saying is that we've seen the end of Wall Street's oversold relief rally, and the resumption of gold's bull trend," said Bob Bishop, the longtime editor of Gold Mining Stock Report. "I'm guessing that (the July 5) lows in many gold stocks are likely to be the lows for some time, principally because of the amount of bad news that appears to be baked in the cake of the broader market and the U.S. dollar. That's good for gold, and bad for U.S. stocks and the dollar."
Gold shares with 90 minutes to go Wednesday were down about 1 percent after the powerful rally earlier in the week, as measured by the XAU (XAU: news, chart, profile) index of major miners.
Barry Cooper, gold mining analyst at CIBC World Markets in Toronto, is convinced gold's gains will proceed lockstep with the fall of the dollar against other major currencies, such as the euro. The euro is flirting with the $1 level for the first time since January 2000.
The rise of gold mining shares "suggests the broader markets are not that healthy, but most people could have surmised that," says Cooper. "The equities have been leaders to bullion for the past while so I would expect we will see some further strength coming." One of Cooper's top gold stocks, Canada's Goldcorp. (GG: news, chart, profile), staged a 9 percent gain in a single day this week.
Joseph Duarte, a Dallas fund manager and author of "Successful Energy Sector Investing," says the mining companies stellar stock-market gains this year bode poorly for other industries. "Gold is the refuge du jour, because there isn't any place else to run. Hospitals, HMOs, drugs, banks, oil -- everything that is 'safe' is getting clobbered," Duarte said Wednesday.
Homebuilder stocks were one of the few industries holding onto substantial gains this year. No more. Says Duarte: "Look at the charts of the home builders, especially Toll Bros. (TOL: news, chart, profile) and Ryland Group (RYL: news, chart, profile). These stocks are clearly under heavy selling pressure, suggesting that even these invincible stocks are being abandoned. That may well be the sign that indeed capitulation is either here or just around the corner, as when people are truly getting scared."
Not everyone expects a surge for gold this summer, traditionally a weak season for jewelry sales. James Turk, founder of payment system GoldMoney.com and a longtime precious metals newsletter editor, sees a trading range of $300 to $320 an ounce for gold "in the next two to three months, then gold makes another attempt to hurdle $325 in September or October."
Mike Darda, an economist at Polyconomics Inc. in Parsippany, N.J., sees a "slight upward bias" for dollar-gold prices, "but not a bias that will cause the price to rise by leaps and bounds. We'd need an attack on Iraq for that -- and we still think that prospect remains remote." Polyconomics sees gold prices moved most by the supply and demand for currency and bank reserves, which are influenced in turn by tax policy expectations and geopolitical developments.
"For gold to fall hard, we would need to see a turn in U.S. fiscal policy (i.e. a cut in the capital-gains tax) or another big downshift in global political risk," Darda says.
John C. Doody, editor of Gold Stock Analyst, expects gold mining shares will continue to reflect gains in the metal. The "rule of thumb is a 1 percent change in gold price yields a 3 percent change in stock price," says Doody. "This is because the price increase adds directly to the bottom line, or takes from it if the price falls. Witness the recent $15-an-ounce slide, or 5 percent, that saw most stocks off 15 percent to 20 percent."
Higher gold prices provide gold miners with more cash flow from their annual production. Investors in turn are more willing to pay a higher price for a miner's reserves, generally 10 times annual production for the best companies. "The price increase," Doody says, "makes all the reserves more profitable and may make marginal ounces profitable now, which weren't economic at a lower price."
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