truecontrarian.com
Kaplan:
Updated @ 6:00 p.m. EDT, Thursday, July 31, 2003.
SUMMARY: My current outlook for gold, gold coins, and gold collectibles has improved to MODESTLY BULLISH. My current outlook for gold mining shares remains MODESTLY BEARISH. In recent weeks, junior gold mining shares have increased in price significantly more than has been justified by the gold price itself, or by the performance of senior producers. This appears to be due entirely to P/E expansion, and thus is vulnerable to contraction whenever the stock market as a whole is declining sharply. Those who are interested in the yellow metal should concentrate on buying coins, bars, and collectibles, and avoid the junior gold producers at this time. In the recent modest decline of the HUI from its recent peak of 170.65 on July 28, 2003, its highest level since March 17, 1997, the senior producers have declined more in percentage terms than the juniors. Normally this indicates that the juniors will soon catch up on the downside. In addition, in other market crash years such as 1929 and 1987, while gold itself performed very well before and after the equity meltdown, gold mining shares mostly collapsed along with other equities. In both of the above years, gold mining shares were an excellent buy in November of the same year following the crash. Meanwhile, gold’s traders’ commitments are neither particularly bullish nor bearish. The net neutral price for gold, at which commercials are neither net long nor net short, is probably very close to $330 at this time, which should limit any downside move in the yellow metal. In general, this price has been rising about 1% per month for the past three years, and will probably continue to rise at this pace for the next three years or more. Both silver and platinum may be making speculative short-term tops; if these “sister metals” should suffer a correction, it may put downward pressure on the gold price. As silver correlates inversely with the U.S. 30-year Treasury yield, as silver falls, expect long-dated U.S. Treasuries to rally over the next few months, producing lower yields, and thereby retracing about half of their recent sharp increase by late September. As the U.S. dollar rebounds, gold is likely to retrace perhaps $25-$33 of its recent gains, potentially reaching a June bottom of $333-$342 [not a bad guess, in retrospect: the recent low was $340.50 on July 16, 2003]. The U.S. equity market remains the single greatest extreme in the financial markets, as the record level of insider selling, the very low volatilities as indicated by the VIX dipping below 20, bearish intraday behavior, and pervasive investor bullishness all point toward sharply lower U.S. equity prices over the next few years, and the real possibility of a 1929-style crash in October 2003. Therefore, investors should concentrate on selling short U.S. technology stocks at this time. Should gold mining shares stage a summer or autumn collapse, as they sometimes do, they would also warrant a modest additional purchase, as gold remains in a clear long-term bull market. The Nasdaq could well drop 40% or more by this autumn to a level below 900. 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.
KAPLAN’S CORNER: QUESTION: What do you think about the recent sharp rise in long-term U.S. Treasury rates? ANSWER: The media has finally picked up on this story after having ignored it for several weeks, but almost no one has made the conclusion that higher 30-year bond yields also implies higher mortgage rates, and that housing prices are therefore going to sharply decline. With the U.S. economy slowing for over three years, the only reason that housing prices have continued to rise has been the steep drop in mortgage rates. As these rates have recently moved sharply higher, housing prices will fall proportionately, since potential buyers will not be able to increase their monthly payments. If sellers refuse to lower their prices to match buyers’ demands, the supply of houses will increase sharply, thus forcing eager sellers to underbid other houses in their neighborhood. Such a decline in housing prices would likely make most investors feel poorer and could in itself cause the U.S. economy to move into recession. Another equally important impact of higher mortgage rates is that most of the liquidity in the U.S. financial markets, including the money that has recently gone into U.S. equity funds, has come from consumers refinancing their mortgages. Even if mortgage rates do not continue higher, they are very unlikely to set new lows, and therefore those who have been repeatedly refinancing will no longer be able to do so. Without liquidity, the stock market rise will abruptly end, leaving the insider selling to force equities lower. Eventually the chart pattern itself will lead to further selling, and perhaps even a crash. As for long-term U.S. Treasury rates themselves, they are likely to decline, retracing about half of their recent gain by late September. As money floods out of U.S. equities, some of it will go into long-dated Treasuries. Over the longer term, U.S. Treasuries are likely to remain in a bear market perhaps until 2020 or so. Remember that the recent Treasury bull market lasted from August 1981 through June 16, 2003, and the previous bear market in Treasuries lasted from 1946 through August 1981.
|
