Latest from Jon Kaplan
truecontrarian.com
SUMMARY: My current outlook for gold and gold mining shares has improved to MODESTLY BEARISH. The XAU and HUI are no longer nearly as overvalued as they were when the last update was done on September 19. Insider selling is occurring at a relatively modest pace, and sporadic insider buying is seen whenever XAU goes below 60. The traders’ commitments remain negative for gold, with an unusually low total of speculators both large and small who are selling short. As November is often a month in which the commitments rule, especially since such a large percentage of the COMEX futures contracts are concentrated in the key December 2002 month, it is likely that as the first notice date approaches on November 27, thousands of stale speculator longs will be liquidated instead of being rolled over into 2003, especially if the gold price is declining as the month progresses further. A continued generally lopsided ratio of call trading to put trading on gold mining shares is also a negative factor; although the call buying is far below the frenzied levels of the late spring, put buying has almost vanished entirely, indicating that very few investors have positioned themselves for a sudden drop in the gold price, and thereby making it a far more likely occurrence. Senior gold shares are finally performing better relative to juniors, which is a bullish sign for gold shares. Probably the most negative current factor for gold are the incredibly high ratios of short to long positions by commercials in currencies which correlate closely with gold, such as the Swiss franc, the euro, the British pound, the Canadian dollar, and the Australian dollar, and a correspondingly unusual bullish ratio in the U.S. dollar index. As a group, these ratios are at extremes seen only once every few years, and therefore strongly suggest that the U.S. dollar is about to stage a sharp rally, even if only in the short term. When the U.S. dollar is moving higher, gold generally declines. When purchasing any securities, gold mining or otherwise, avoid buying on margin and never purchase call options, so that the magnitude of the eventual gain is the only important issue, rather than the vagaries of precise timing or interim volatility. Always stick with companies that have strong, growing earnings; avoid companies with losses. Occasionally a money-losing company will suddenly turn around and become profitable, but that is the rare exception.
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