In addition to gold mining executives heavily buying shares of their own companies, professional portfolio managers have been loading up on gold mining shares at their highest rate since January 1993, the last time the XAU was below 70. On Wednesday, for example, Trimark Investment Management announced that they had purchased 300,000 common shares of Kinross Gold (KGC).
On the New York Stock Exchange there were 10 new highs and 972 new lows, with 360 stocks advancing and 2871 stocks declining. The index put-call ratio was a neutral 1.23, while the equity put-call ratio was a very strongly pessimistic 0.65.
The volatility index or VIX, a measure of implied volatilities for U.S. stock index options which demonstrates complacency vs. fear in the market, closed up 8.50 at 39.16. Its intraday high was 41.46 and its intraday low was 33.42. These high values indicate that investors and portfolio managers are willing to pay top dollar for portfolio insurance, such as put options; values above 35 often signify a short-term bottom in the stock market, though the VIX did reach a peak of 55.48 on October 28, 1997 when the Dow briefly plunged to 7000. Any level below 25 indicates that investors are complacent about the possibility of a stock market decline; each intraday drop below 20 in the VIX shows exaggerated lack of fear, and is a strong buy signal for index put options. On Monday, July 20, 1998, the VIX hit an intraday low of 16.73, its lowest level since November 25, 1996, with most stock market indices at all-time highs. This demonstrated a shocking level of investor complacency typical of a major market top.
Thursday's COMEX gold estimated volume was a heavy 60,000 lots. Total COMEX gold open interest on Wednesday fell 2,884 to 196,890, while silver open interest climbed 796 to 84,264 lots. COMEX gold warehouse stocks were unchanged at 912,517 ounces, while COMEX silver warehouse stocks rose 71,668 to 78,686,634 ounces, slightly above their lowest level since 1982. The Johannesburg gold index closed Thursday morning at 784.7, up 4.3 rand, with the U.S. dollar quoted at 6.6110 rand. On Monday, July 6, 1998, the dollar hit a new all-time record high of 6.7600 rand.
I will attempt to give an unbiased outlook on the intermediate-term prospects for worldwide gold mining shares, based upon a collection of the most important fundamental and technical indicators. The objective will be to indicate critical turning points in the market. The indicators are listed in order of importance, most important first. Information in boldface has been recently updated.
The current outlook has been upgraded to EXTREMELY BULLISH, having risen from the previous rating of STRONGLY BULLISH due to the following factors, in order of importance: 1) a sharp increase in commercial accumulation of COMEX gold futures to near record net long levels, indicating that industry insiders have reason to believe that the price will rise in the near future; 2) the volatility in the U.S. financial markets, which will spur a small but critical mass of investors to seek out alternative places to put their money; 3) the retesting of the long-term triple bottom in the XAU, demonstrating that skeptical or non-committed investors are bailing out at the bottom; 4) nearly unanimous bearish forecasts for precious metals and their shares by major brokerages; 5) traders' commitments in other commodities and financial instruments that correlate strongly with gold and which are currently showing powerful commercial accumulation, including crude oil, soybeans, corn, sugar, and the Japanese yen.
REASON TO BUY GOLD-A number of analysts frequently are quoted by one media source or another exclaiming that "there is no reason to buy gold". Other than the fact that any strongly undervalued financial asset is almost always worth purchasing in expectation of an eventual regression to the mean, the current world financial situation virtually guarantees that gold will increase in value. With one currency after another collapsing around the world, the U.S. trade deficit is ballooning as U.S. goods become less competitive in countries where the local currency has fallen, while those country's goods become more competitive in the U.S. The U.S. is attempting to rectify this severe imbalance by periodically selling dollars and buying other countries' currencies, but this is a band-aid approach to a major structural problem and cannot be successful over the long run. The only way that the U.S. dollar can be set on the path of a sustained decline is for the U.S. stock market to drop, thereby causing outside investment in U.S. assets to slow naturally and thus triggering a fall in the dollar to regain its equilibrium in relation to the rest of the world's currencies. Therefore, the U.S. will realize that it is in the long-term best interest of the economy to have the stock market drop and will artifically induce such a situation intentionally or not (as happened in 1981/1982 and 1987), or a critical mass of investors will conclude consciously or subconsciously that the trade gap implies lower share prices and/or a domestic recession, and will push stock prices lower as a result of their selling into a buying vacuum caused by a virtually fully invested public, as is currently occurring. The dollar value of commodities will inevitably rise as the U.S. currency falls, thus pushing up the values of precious metals, especially gold, which is a proxy for all commodities.
RECENT CHANGES:
Thursday, August 27, 1998: The price/volume statistics indicator has dropped from SLIGHTLY BEARISH to MODESTLY BEARISH as the price of gold retests its January 1998 low of $276.50.
Wednesday, August 26, 1998: The price/volume statistics indicator has dropped from SLIGHTLY BULLISH to SLIGHTLY BEARISH as the XAU broke below its 1986 bottom.
Friday, August 14, 1998: The insider stock transaction activity indicator has risen from SLIGHTLY BULLISH to MODERATELY BULLISH.
Friday, August 14, 1998: The traders' commitments indicator has climbed from STRONGLY BULLISH to EXTREMELY BULLISH.
Friday, August 7, 1998: The gauges of future inflation indicator has fallen from SLIGHTLY BEARISH to MODESTLY BEARISH.
Thursday, August 6, 1998: The overall current outlook has been raised from STRONGLY BULLISH to EXTREMELY BULLISH.
Friday, July 31, 1998: The other precious metals indicator dropped again from SLIGHTLY BEARISH to MODESTLY BEARISH.
Friday, July 17, 1998: The other precious metals indicator fell from MODERATELY BULLISH to SLIGHTLY BEARISH.
TRADERS' COMMITMENTS (COT):
One of the most important factors affecting the market is the traders' commitments as reported every second Friday by the COMEX. These commitments tell you what the commercials, or industry insiders, are doing vs. the non-commercial outsiders, also known as speculators. If the insiders, such as producers, jewelers, fabricators, and industrial users, are buying, while the speculators are selling short, this is BULLISH. If insiders are selling as fast as they can, while speculators are buying left and right, this is BEARISH. In any business, especially in commodities, people in the thick of things obviously know much more about the supply/demand situation than people who have no connection to the industry and are just trying to get rich quickly.
As of August 11, 1998, released at 3:30 p.m. on August 14, 1998, the commitments for COMEX gold futures show commercial insiders long 129,913, short 65,851; speculators long 9,059, short 68,769. Small traders were long 29,736, short 34,088. The average historic ratio for commercials is 2:3 long to short; for speculators, 2:1 long to short. This has improved strongly from the readings from two weeks earlier, and are now at an all-time record, and clearly EXTREMELY BULLISH. A continued recent surge in open interest suggests strongly that commercials have continued to buy gold heavily since the commitments were tabulated, creating an even more lopsided commercial net long position in COMEX gold futures.
COMMODITY INDICES:
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. This doesn't say, however, whether you got your suit on a markdown sale, or whether you prefer to shop at Brooks Brothers or at K-Mart. A quick check at Barney's showed their executive suits averaging about $600, so this is bullish for gold. (Either that, or the price of men's suits is about to undergo a dramatic collapse!)
The Journal of Commerce (JOC) index is a basket of seventeen raw industrial materials used by the U.S. factory sector. It is designed to signal upcoming trends in the government's consumer price index by 6-9 months or more in advance. It is not nearly as publicized as its counterpart, the Commodity Research Bureau (CRB) index. Whenever the JOC is going in one direction and the CRB in another, the JOC has been more accurate historically in predicting a rise or fall in future inflation. This value will usually be reported with a one-day delay. On Wednesday, August 26, 1998, the JOC index closed down 0.10 at 95.84. On Friday, June 19, 1998, the JOC ended the day at 94.19, its lowest closing level since February 1994.
On Thursday the CRB index inched up to an early morning top of 198.23, then sank to a late morning bottom of 195.38, its lowest level since August 27, 1977, before closing down 1.88 at 196.24. The CRB index has broken slightly below its triple bottom from 1986, 1992, and 1998.
This indicator is MODESTLY BEARISH.
GAUGES OF FUTURE INFLATION:
The Economic Cycle Research Institute (ECRI) future inflation gauge (FIG) for July, released August 7, 1998, was at 106.6, its lowest level in 21 months, compared to a revised 108.1 for June. Its smoothed annualized growth rate dropped from -3.4% to -5.4%.
The Columbia University Center for International Business Cycle Research (CIBCR) monthly leading inflation index, released August 7, 1998 for the month of July, was measured at 102.5, unchanged from June (revised downward from 102.9). Its smoothed semi-annualized growth rate climbed from -2.7% (was -2.1%) to -2.5%.
This indicator has fallen to MODESTLY BEARISH.
WORLDWIDE INTEREST RATE POLICY:
Gold must always compete with time deposits as a short-term investment. Therefore, as interest rates rise, there is more to lose by being invested in the yellow metal rather than in an interest-bearing instrument. As interest rates fall, there is less to be sacrificed by being invested in gold. The recent economic and political volatility, especially in parts of the third world, will make it much more difficult for the Fed to raise short-term interest rates regardless of a moderate acceleration in domestic inflation. Almost surely the Fed will be unable to lower interest rates given the strong U.S. economy and year-over-year wage gains currently 4.2 percent in hourly terms, the highest wage inflation since 1983, coupled with a tight labor market. Worldwide concern about high unemployment seems roughly balanced with inflation vigilance, creating a general stalemate.
One key item to watch is the relative direction of short-term versus long-term interest rates in the U.S. If short-term rates are raised aggressively by the Federal Reserve, while long-term rates stabilize, this would be bearish for gold as short-term time deposits would become a more compelling investment, while inflation fears would be minimized due to steady long rates. On the other hand, if the Fed is slow to raise short-term rates, while long-term rates soar, this would show that inflation is a concern of market participants in the face of an indifferent or hamstrung Fed, which would cause gold prices to rise sharply. Notice that the U.S. Federal Reserve has done exactly nothing in many months.
On Wednesday, March 18, 1998, the Bank of Portugal cut its repo rate by 0.20% from 4.90% to 4.70%. On Thursday, March 19, 1998, Norway raised its deposit rate by 0.25% from 3.50% to 3.75%. On Wednesday, March 25, 1998, China cut its key interest rates by 0.60% apiece. On Tuesday, April 21, 1998, the Bank of Italy cut its discount and lombard rates by 0.50% each, with the discount rate now 5.00% and the lombard rate at 6.50%. On Tuesday, May 5, 1998, Denmark's National Bank raised its discount and repo rates by 0.50% each, with the discount rate now 4.00% and the repo rate at 4.25%. On Thursday, June 4, 1998, the Bank of England raised its repo rate by 0.25% from 7.25% to 7.50%. On Tuesday, June 30, 1998, China cut its main deposit rate by 0.16% from 5.38% to 5.22% for one-year deposits. On Thursday, August 27, 1998, Canada raised its bank rate by 1.00% from 5.00% to 6.00%.
This indicator is SLIGHTLY BULLISH.
INSIDER STOCK TRANSACTION ACTIVITY:
If an officer of a corporation is buying stock in his or her own company, it is a strongly bullish sign, since such a person would logically be the most familiar with the actual profits and losses, as well as pending projects and other relevant news. Similarly, if a corporate insider is selling, even if the stated reason is to pay for a child's college education, it is clearly a reason for turning bearish, since that person has rejected this investment in favor of another course of action. The higher ranking the corporate insider involved, the more emphatic the signal, since the more knowledgeable such a person would be with the entire outlook of the company.
On Thursday, March 5, 1998, a small purchase was announced by a director of Hanover Gold Co., Inc. On Wednesday, March 11, 1998, a small sale was declared by a vice president of Royal Oak Mines. On Monday, March 23, 1998, a small purchase was announced by a director of Freeport McMoran Copper and Gold Inc. On Tuesday, March 24, 1998, a very small purchase was announced by a vice president of Alta Gold Co., Inc. On Friday, April 3, 1998, a very small purchase was announced by a director of Hanover Gold Co., Inc. On Wednesday, April 15, 1998, a very small sale was declared by the president of Royal Gold Inc. On Thursday, April 23, 1998, a very small purchase was announced by the president of Central Fund of Canada, Ltd. [a closed-end mutual fund consisting entirely of gold and silver bullion stored in vaults, and which has recently been selling at a modest discount to its net asset value]. On Wednesday, May 6, 1998, two purchases, one small and one very small, were announced by directors of Hanover Gold Co., Inc. On Wednesday, May 6, 1998, two sales, one moderate and one small, were declared by directors of Freeport McMoran Copper and Gold Inc. Class A. On Wednesday, May 6, 1998, a very small purchase was announced by a director of Battle Mountain Gold Co. On Thursday, May 14, 1998, two sales, one small and one very small, were declared by the president and a vice president, respectively, of Royal Gold Inc. On Tuesday, June 9, 1998, a small purchase was announced by a director of Hanover Gold Co., Inc. On Wednesday, June 10, 1998, a moderate purchase was announced by a director of Hanover Gold Co., Inc. On Monday, June 15, 1998, a moderate sale was declared by the president of Stillwater Mining Co. (note: platinum and palladium mining, not gold). On Monday, June 15, 1998, a small sale was declared by a director of Stillwater Mining Co. (note: platinum and palladium mining, not gold). On Monday, June 15, 1998, a small purchase was announced by the CEO of Royal Silver Mines, Inc. (note: silver mining, not gold). On Monday, June 15, 1998, a small purchase was announced by a vice president of Royal Silver Mines, Inc. (note: silver mining, not gold). On Wednesday, July 8, 1998, a very small purchase was announced by a director of Hanover Gold Co., Inc. On Thursday, July 9, 1998, a small purchase was announced by the Chairman of the Board of Stillwater Mining Co. (note: platinum and palladium mining, not gold). According to CDA/Investnet, gold mining is ranked #15 for insider accumulation among all industries as of June 22, 1998. On Tuesday, July 14, 1998, a very small purchase was announced by a director of Royal Gold Inc. On Tuesday, July 14, 1998, four small purchases were announced by insiders at Americana Gold and Diamond Holdings, Inc., including one each by the CEO and the CFO. On Wednesday, August 5, 1998, a very large purchase was announced by a beneficial owner of Homestake Mining Co., Inc. On Tuesday, August 11, 1998, a very small purchase was announced by a director of Hanover Gold Co., Inc. On Wednesday, August 12, 1998, a very small purchase was announced by a director of Royal Gold Inc. On Thursday, August 13, 1998, a very small purchase was announced by a director of Hanover Gold Co., Inc. On Friday, August 14, 1998, three purchases were announced at Newmont Mining Corp.: CEO--moderate purchase; CFO--small purchase; vice president--very small purchase. Also on Friday, August 14, 1998, two purchases were announced at MK Gold Co.: CEO--very small purchase; CFO--very small purchase. On Wednesday, August 19, 1998, a large sale was declared by the CEO of Royal Oak Mines Inc. This is the only insider sale reported by any gold company executive since May 14. On Monday, August 24, 1998, a small purchase was announced by an officer of Newmont Mining Corp.
Due to the recent surge in insider buying by gold mining corporate executives, this indicator has been raised to MODERATELY BULLISH.
OTHER PRECIOUS METALS:
The behavior of silver, platinum, and palladium can serve as an early signal for gold, since these metals often rally or decline first. As is typical, silver continues to be more volatile over the short run than gold. After trading in early December 1996 at a very small discount to gold, spot platinum reached a huge premium to spot gold as it hit a new 7-year high in August 1997, then declined almost all the way back to its 1985 low in December 1997 before rebounding once again. If nothing else, this certainly debunks the myth that sentiment about any particular commodity is unlikely to change rapidly over a short period of time, a reason often cited by ignorant though admittedly highly paid gold analysts! Palladium has been rallying the most sharply and consistently since Tuesday, December 31, 1996. Silver made an upside breakout in late 1997 and again in 1998. Both platinum and palladium also made upside breakouts, with platinum reaching a 7-year high in 1997 and palladium soaring to a new all-time record high of $420 per ounce spot on Monday, May 18, 1998. Since all precious metals are subject to significant common fundamental factors, the multi-year highs that were set by palladium, platinum, and silver will eventually be enjoyed by gold once the enormous short-term combined downward pressure of gold loans and gold short selling is unwound.
The traders' commitments for these three metals as of August 11, 1998, released at 3:30 p.m. on August 14, 1998 were mixed, and have generally improved over the past two weeks. For COMEX silver futures, commercial insiders were long 18,208, short 59,727; speculators long 32,264, short 6,483. This means that the commitments for silver remain extremely bearish, but have improved modestly compared with two weeks ago. Looking at NYMEX platinum futures, commercial insiders were long 2,513, short 8,045; with speculators long 4,411, short 310, which remains extremely bearish for platinum, but has improved modestly from two weeks ago. For NYMEX palladium futures, commercial insiders were long 2,685, short 2,407; and speculators long 626, short 1,011. This is significantly bullish for palladium, and roughly the same as two weeks ago.
This indicator remains MODESTLY BEARISH.
PRICE/VOLUME STATISTICS:
On Thursday, August 27, 1998, the XAU touched a historic intraday low of 53.13, thus breaking below its triple bottom from the bear market lows of July 25, 1986 (58.72) and November 27, 1992 (64.38). Since February 1996 the XAU has been in a general downtrend. In November 1997, December 1997, and January 1998, virtually all gold mining shares hit new annual lows, with additional annual lows being set in July 1998 and August 1998. This indicator has been downgraded to MODERATELY BEARISH.
Silver touched $7.500 in the active March 1998 contract at 7:22 a.m. EST on Friday, February 6, 1998, the highest level for the active COMEX silver contract since July 25, 1988. Silver had previously made a bullish key reversal on Thursday, July 17, 1997, by touching its lowest point since October 1993 in early trading, and then rallying to end the day with a net gain. The silver/gold ratio continues generally to increase as the "poor man's gold" has steadily outperformed its yellow cousin since its generational bottom in the first week of February 1991 during the Gulf War. Platinum, palladium and silver thus all made upside breakouts in 1997; palladium and silver once again in 1998. Gold broke below its 1985 lows, and is retesting levels from 1979, gold's strongest rally year to date. At 8 p.m. EST on Monday, January 12, 1998, and again several times in the late afternoon on Thursday, August 27, 1998, gold touched $276.50 per troy ounce, its lowest spot price since June 28, 1979. The current attempt to push gold below 18-year lows is an important guide to its short-term price movement. This indicator has been lowered to MODERATELY BEARISH.
Total gold mining equity option U.S. daily volume is moderately above normal levels while put-call ratios are moderately above normal levels. This is MODERATELY BULLISH.
Synthesizing these three signals as a group, the price/volume statistics indicator has been lowered to MODESTLY BEARISH. All indications seem to show a final washout as investors fleeing stocks and bonds are dumping their holdings indiscriminately, and have not yet found long-term alternative investments.
XAU "MAGIC MULTIPLE FIVE":
The XAU is a weighted index of large-capitalization gold mining shares, with management primarily based in Canada and the U.S. There is a historical correlation between the behavior of the XAU as it approaches or crosses any multiple of five, and the short-term future performance of the XAU. The most bullish behavior is if the XAU begins the day above a multiple of five, goes below a multiple of five during the day (particularly if the intraday low is the lowest level in several weeks or more), then closes the day with a gain. The most bearish behavior is the exact opposite. On Thursday, August 27, 1998, the XAU opened moderately lower at 56.80, edged up to an early morning top of 56.88, then collapsed to a late morning bottom of 53.13, a historic low, before closing down 5.98% at 54.23. Since the key level of 55 was broken to the downside, this is SLIGHTLY BEARISH.
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PAGE ACCESS:
Similar to the way that some count advertisements in business publications or a survey of investor sentiment as a useful contrary indicator, consider the number of times this page is visited on a daily basis. If that number is less than 900, gold mining has become boring, which is generally bullish. If more than 1800 people access the page, the market is overexcited, which is bearish. Currently, there are about 1650 visits per business day, based upon reliable hourly samplings. This is MODESTLY BEARISH.
SPECIAL POLITICAL CONSIDERATIONS:
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.
ROBERT RUBIN REDUX: There have been so many tributes to Robert Rubin's performance as Secretary of the Treasury that it is necessary to submit an opposing view, if only for balance. Consider what would have happened had Mr. Rubin decided to stay at Goldman Sachs: 1) MR. RUBIN WOULD HAVE BEEN BETTER OFF--According to the New York Times, Robert Rubin as a 5% owner of Goldman Sachs would have seen his stake in that company, which recently announced plans to go public, worth about $1.5 billion dollars. Even if his stake had been reduced to 3%, this would mean $900 million dollars, which when added to his current net worth of $100 million would make him a billionaire, or ten times as wealthy as he is now. 2) THE ADMINISTRATION WOULD HAVE BEEN BETTER OFF--With Mr. Rubin jump-starting the U.S. economy, and prolonging its expansion, President Clinton has felt that he can say or do almost anything and still receive strong public a |
