big money looking for a safe haven (Gold Stocks)
Gold stocks finally react to bad news
[Getting Technical - By Bill Carrigan]
September 27, 1998
Las week, Placer Dome Inc. hit a new 1998 high.
Barrick Gold Inc. was up 50 per cent from
the Sept. 1 close of $20.50.
You can't ignore moves like that. Think of
the money it takes to move the shares of
these big companies.
Over the past five days, about $500
million alone poured into Barrick Gold. I
don't think the motive for all this buying
is pending inflation. I think it is big
money looking for a safe haven.
This could be exciting for the holders of
gold stocks. There is not a lot of
investment-grade gold stocks to go around,
and we could see lots of dollars chasing
too few gold shares.
In the 1990s, gold hadn't reacted to wars
and currency devaluations - to the
frustration of the gold bugs. But with the
latest sudden surge, could it be that
something has finally got money running
into gold?
Well, there may be clue in last Thursday's
stock markets, which sold off amid
mounting worries over the damage done by
financial derivatives on U.S. banks and
brokerage firms.
The news of the near-collapse of a major
hedge fund and an admission of steep
market-related losses by Europe's biggest
bank sent the gold stocks higher for the
third day in a row.
A hedge fund is like a private mutual fund
and, as such, is not subject to the
restrictions of a fund offered for public
sale. In many cases the owners of a hedge
fund, which can have participants such as
banks, want above-average returns and so
they take risky positions in futures
contracts.
These fund managers do make trading
errors. If the fund is big, the errors are
big. (Remember Nick Leeson, whose
derivatives deals in Singapore brought
down Britain's oldest merchant bank,
Barings.) The fund Long-Term Capital
Management L.P. admitted losing $2.5
billion (U.S.), or 52 per cent of its net
assets.
There was speculation that the hedge fund
is carrying a huge short position in gold.
If so, the fund would eventually would
have to buy back gold to cover its short
position, thus driving gold prices higher.
Many of the world's biggest banks and
brokerage firms met at the New York
Federal Reserve Bank to put together a
rescue plan worth in excess of $3.5
billion (U.S.).
Under the terms of the plan, more than 12
firms will each pitch in $300 million and
take an ownership position in the fund.
Financial stocks in Toronto and New York
sold off on the possibility other
leveraged players with huge losses in
futures and options positions may step
forward. Hard assets like gold and oil
look good at a time like this.
I think every portfolio should have a gold
component, perhaps at least 10 per cent.
Placer Dome is one of our market leaders
in the gold stock complex. We have charted
it along with the smaller producer,
Kinross Gold, and the tiny Eldorado Gold
Corp.
Gold stocks tend to move in an orderly
sequence. The leaders like Barrick and
Placer get underway first. They are then
followed by the intermediate producers
like Kinross, and then by the small
producers like Eldorado.
Placer has broken up over its trend line
and should now lead the smaller producers
higher over the next few weeks. As the
gold price advances over several months
(or years), the exploration plays get
active and then the speculative blow-off
is just around the corner.
All full-service brokers follow the gold
stocks. Ask for their research material.
Watch the leaders, trade in active,
producing gold mining stocks and don't
invest all in one stock.
-------------------
Bill Carrigan is an independent stock
market analyst. His Getting Technical
appears Sundays. He can be reached by
E-mail at carrigan@vaxxine.com
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