Dave, thanks for the good reading. I shortened. ( Part 1 of 3 )
Be sure to read Eugene Ionesco's fabulous play RHINOCEROS, and decide if
this doesn't exactly describe the current state of the U.S. stock market.
GOLD MINING TAKEOVERS IN THE NEWS:
Placer Dome on December 13, 1998 announced its intention of buying
Getchell Gold. Barrick Gold on December 9, 1998 made a hostile
takeover bid for Argentina Gold. Homestake Mining on December 10, 1998
completed its purchase of Prime Resources. Many smaller names have also
been involved in mergers and acquisitions.
BY THE BOOK:
Nearly all of the classic textbook elements are in place for a rise
in precious metals prices and a sharp decline in the stock market:
1) historically extreme price-earnings ratios, indicating extraordinary
public clamor for shares without regard to fundamentals;
2) a deteriorating worldwide economic picture;
3) fear of missing out on a market rally exceeding fear of a market decline;
4) extreme bearish sentiment for precious metals and their shares as an
investment class;
5) a recent increase in volatility in most financial assets, which almost
always precedes a major change in trend;
6) the recent hypercharged internet sector, signaling the most overextended
specific manifestation of the general mania;
7) politicians and others in charge of financial decision-making around the
world being far more concerned with preventing recession than in fighting
inflation;
8) fewer and fewer equities increasing in value during each successive rally
attempt, indicating a sharp narrowing of the viable base of high-performing
stocks (as happened dramatically in the late 1920s, and again for the "
Nifty Fifty" in the early 1970s);
9) a classic head-and-shoulder bottom in the implied volatilities of index
options, as epitomized by the chart behavior of VIX; and
10) stocks are able to rally only at the expense of bonds, and vice versa,
indicating that there is little cash available which has not already been
committed.
The current outlook for gold mining shares is SIGNIFICANTLY BULLISH
due to the following factors, in order of importance:
1) the volatility in the U.S. financial markets, including several in
what will surely be a long series of hedge fund failures, which will
spur a small but critical and inevitably growing mass of investors to
seek out alternative places to put their money;
2) the successful retesting and recapture of the long-term triple bottom
in the XAU, demonstrating that skeptical or non-committed investors finally
decided to bail out at the bottom in late August 1998;
3) an accelerating worldwide trend toward cutting short-term interest rates
to prevent a severe recession, thus lowering the carrying cost of gold as a
competitive investment and stimulating the economy without regard to its
potentially inflationary implications;
4) bullish traders' commitments for gold;
5) generally bearish forecasts for precious metals and their shares by major
brokerages, as is typical of the early stages of any major bull market
following a long-term bear market;
6) traders' commitments in other commodities and financial instruments that
correlate positively with gold and which are showing powerful commercial
accumulation, including especially cotton, the Swiss franc, the British
pound sterling, cocoa, unleaded gas, rough rice, copper, crude oil,
lean hogs, pork bellies, and short-selling T-bonds; and
7) significant insider buying by corporate executives of gold mining companies.
There is a strong correlation between commodity indices and the price of gold,
which makes sense since gold is a proxy for all commodities. It is often
said that the price of a good quality men's suit has always been equal to the
price of one troy ounce of gold.
A quick check at Barney's showed their executive suits averaging about $600,
so this is bullish for gold.
Due to the sustained surge in insider buying by gold mining corporate
executives, this indicator is SIGNIFICANTLY BULLISH.
GOLD FORECAST:
Gold will establish a clear primary bull market.
In the year 2000 it will make a brief euphoric peak just above $500 per ounce,
then as the flood of latecomers enter the market, it will punish them by
strongly retreating to about $377. This will be followed by typical
commodity bull market behavior, including corrections after each period of
investor overoptimism, until the final euphoria late in the next decade
carries gold to a level between $1000 and $2000 per ounce.
Currently there is no incentive for the government to prop up the stock
and bond markets or to depress the prices of precious metals. In fact,
the U.S. government would like the financial markets to perform poorly now,
so that they can rally just before the election in the year 2000.
There is also a significant political risk to allowing the stock market to
become even more substantially overvalued, since investors who would buy
near the top would thereby suffer even more substantial percentage losses
by the next bear market bottom, depressing the nationwide creation of wealth
and creating undesirable economic discontent. A drop of "merely" eighty
percent will cause enough problems as it is. |
