Ed Bugos Discusses the Following Issues: Newmont Mining, S&P Gold Sector Index, AMEX Gold bugs Index
Business Wire - June 06, 2003 06:01
CHICAGO--(BUSINESS WIRE)--June 6, 2003--Nothing is what it seems, at least as far as inflation and recent market moves go. Find out what Ed Bugos thinks of inflation, the market, and which gold stocks can add a little shine to your portfolio. Learn about Newmont Mining (NYSE:NEM), S&P Gold Sector Index (Philadelphia:XAU), and AMEX Gold bugs Index (AMEX:HUI). Click here for the full story exclusively on Zacks.com: featuredexpert2bw.zacks.com
Here are the highlights from the Featured Expert column:
We appear headed for another test of the $360 level on gold, as the dollar bullish environment on Wall Street extended yet another day. The Dow continues to defy our bearish call, and surged another 116 points to close at 9039 Wednesday. The bulls made a higher intermediate high intraday, but closed four points below December's (intraday) high, so I wouldn't call it a signal yet, even though it might be by Friday. Moreover, key intermediate resistance is at August's (2002) high - 9077. The odd thing about this rally is that the bulls are cautious. The headlines read "is this for real," rather than, "choo, choo, the train's leaving the station." Even Tom Gavin - whose remaining clients could well be hanging on to the stocks they bought three years ago - sees a pullback here, as well as a much less rewarding stock market environment going forward than was the case during the nineties.
Our sentiment indicators are mixed. Some are showing extreme bullish sentiment, while others suggest there is room for this sentiment to grow. None suggest too many bears. The CBOE's put/call ratio suggests there's room for bulls to get more bullish. The indicator set off an incorrect sell signal in April. Then a correct one a month later - in the middle of May. But it was immediately followed by a buy signal - too many bears.
Since then, it appears bullish sentiment has been rising more cautiously. I don't know what's going to happen next. The shorts might as well be careful here. The environment isn't unfriendly, but it might pay to wait out either a crack in momentum or a clearer reading from the sentiment indicators. In the near term, much may depend on the labor news this week. Meanwhile, the bond market isn't letting up. Players could be acting out a little war anxiety, or they may be betting on a bad labor report, or they are bullish on deflation and the prospect of a Fed yield cap, or they're just momentum trading.
Gold stocks have been surprisingly strong in spite of the dollar's tiny bounce this week. Even Wednesday as gold prices fell, and the dollar recovered some ground against the Euro, Swiss Franc, Rand, and Mexican peso - it rose sharply relative to the latter two - gold stocks gained. Newmont (NYSE:NEM) led the S&P gold sector index (Philadelphia:XAU) to a higher intermediate high, and now approaches last June's high at $32.75 for Newmont (and about 81 for the index).
They closed at $30.87 and 72.7 respectively, which are their best levels since. Still, the picture was mixed in this sector Wednesday. Decent gains in the blue chips were offset by losses in the speculative end of the market.
Overall the charts of gold stocks aren't very telling. There has been an increasing bullish bias within the one year trading range most of them have been stuck in. We were asked by a client to find some data on how gold stocks had performed during the seventies environment - which happens to be our model for the future.
Some important observations include:
1. The entire bull market in gold stocks was marked not by a period of rising inflation, which was a constant, but of rising inflation expectations (implied by rising bond yields 1947-1981), and currency debasement
2. There is a strong inverse relationship between gold share values and broad market values (even stronger relative to earnings multiples)
3. There is a strong positive correlation between bond and broad stock market values (or between bond yields and gold share values)
4. The long term trend in prices and currencies reveals Mises was right about a secular dollar devaluation interrupted by boom periods - usually manifesting in credit expansions
5. The cycles in yields and dollar devaluations or plateaus last anywhere from 15 to 40 years - they average about 25 years (the current one is 20 years old)
6. The gold share bull market began after the major market peak this time around, while it began six years ahead of the sixties peak last time
7. The only two periods since 1959 where deflation was actually a threat were 1968 and 1992 - in both years, gold corrected, as it should (and as opposed to some of the popular arguments today)
If we used the seventies as a model for the most likely direction of the economy today - which I think is very appropriate - and assumed a similar devaluation in the dollar (and bull market in gold), the upside in gold shares is probably enormous. According to the extent of gains in the Barron's gold stock index back then, we could expect up to a 20-fold increase in the value of gold stocks on average over the next ten years or so. Maybe the AMEX Gold bugs (AMEX: HUI) index will go to 1000. I don't know. For now, we'd be happy with 225. |
