pring and hathaway on gold

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    Once Again, Stocks Not as Good as Gold

    By Aaron L. Task
    Senior Writer
    02/04/2003 05:40 PM EST
    Click here for more stories by Aaron L. Task



    As major stock proxies battled around headline-grabbing levels of Dow 8000 and Nasdaq 1300 Tuesday, gold soared to yet-another new high in its now 2-year-old bull market.

    The yellow metal jumped $8.30 or 2.2%, to $379.90 per ounce, its highest close since November 1996 and its biggest one-day gain since Aug. 7.

    Gold was aided by anticipation of Secretary of State Colin Powell's planned address before the U.N. Security Council tomorrow, and rising tensions between the U.S. and North Korea. Conversely, those geopolitical developments pressured the dollar and stocks. The U.S. Dollar Index fell 0.87 to 99.03, wiping out modest gains in the past few trading days and closing at its lowest level since August 1999.

    Although they bounced from midmorning lows, major averages also were hit by negative corporate news from American International Group ( AIG:NYSE - news - commentary - research - analysis ) , Alcatel ( ALA:NYSE ADR - news - commentary - research - analysis ) and Genzyme ( GENZ:Nasdaq - news - commentary - research - analysis ) , as reported earlier.

    After trading as low as 7935.12, the Dow Jones Industrial Average closed down 1.2% to 8013.01. The S&P 500 lost 1.4% to 848.18, vs. its earlier low of 840.19, and the Nasdaq Composite fell 1.3% to 1306, up from its nadir of 1292.20.

    The price of the benchmark 10-year Treasury note rose 16/32 to 100 18/32, its yield falling to 3.93%.

    Metal Madness
    Gold's latest rise indicates recent purveyors of the "gold is topping" theory were panning in the wrong river. But none of the toppers cited here recently were tossing in the proverbial towel on Tuesday.

    "Even if the bulls are correct on a larger trend, you'll still get some correction here," said Steve Hochberg, co-editor of The Elliot Wave Financial Forecast. "We're very extended in terms of price and sentiment."

    On the sentiment front, I can confirm that hard-core "gold bugs" have been proud as peac0cks lately and loud as a swarm of locusts. Meanwhile, www.WhisperNumber.com is now including gold sentiment among its offering, another sign of the sector's heightened visibility among momentum types. Finally, several gold producers have accessed the capital markets with secondary offerings and/or planned other financings lately, something few other groups can manage.

    "This is a typical spike ending to a commodity move," Hochberg said, noting gold is in its fifth wave, which is the final of the Elliott Wave sequence and tends to be dominated by emotions.

    A longstanding belief that deflationary forces are unfolding and will intensify is the key element to Hochberg's intermediate-term caution on gold. Analysts at Elliott Wave International are "very dogged bulls [on gold] long term because of the fiat money system," he stressed, but believe "the odds for the metal to go down are high" in the near term.

    Nevertheless, a close above $400 per ounce would negate that view and suggest a bull market that should carry gold to $1,000 per ounce ( albeit not directly ) , Hochberg said. "We're not dogmatic. The markets are going to determine whether to be bullish or bearish."

    Martin Pring, editor of The Intermarket Report, seconded Hochberg's contention that an "intermediate-term peak" for gold is likely to occur in the coming weeks, if not days.

    "Obviously this thing has got a life of its own going into hostilities," he said midday Tuesday. "But I feel with the Commitment of Traders report strongly in favor of commercial [speculators] being short and sentiment bullish, [gold] is still vulnerable to bad news here."

    Pring believes gold's rise is primarily due to geopolitical events. The veteran technician, who turned wary on goldlast month, noted his inflation barometer has turned negative again and that gold shares have not confirmed the metal's new high. The Philadelphia Stock Exchange Gold & Silver Index rose 4.7% to 79.64 Tuesday after trading above 80 in late January and as high as 89 in late May.

    Similarly, he observed energy stocks ( which fared well Tuesday ) have not confirmed recent gains in crude prices, which rose 2.5% to $33.58. The shares are saying 'you can have your party [on war fears] but we don't see much of a sustainable rally on the other side,'" Pring said. "When hostilities break out or something unexpected happens to solve this thing, people are going to have to unwind the positions and you could see a dramatic decline" in gold and oil.

    Piling On, Gold Style
    I ran much of the above by John Hathaway, manager of the Tocqueville Gold fund, which I am long.

    Hathaway agreed that recent action in commodity-related stocks is both a "sign of skepticism on somebody's part" and supports the idea that money has come into oil and gold because of war fears. Gold and oil surged in 1990 prior to the Gulf War in 1991 and "everyone remembers that was it" for commodities after Desert Storm began, he recalled. "You went into hibernation for quite a while."

    To Hathaway, the relative sluggishness of gold- and oil-related stocks suggests fear of a repeat if the presumptive war with Iraq goes as smoothly as expected. "I remember 1990 and I'm a little defensive, psychologically because of that," the fund manager said. "People buying gold on a spike like today are desperate or are just momentum guys."

    However, the fund manager remains fully invested. Being defensive translates into not "chasing stocks" and trying to be "judicious and careful," rather than outright selling to raise cash, Hathaway explained. "This is not what you'd call a classic buying opportunity but I'm not going to bet we're going to have a top."

    Currently, he is focused on smaller- and mid-cap names such as Wheaton River Minerals ( WHT:Amex - news - commentary - research - analysis ) . Hathaway applauded the firm's recent purchase of some mining assets from Rio Tinto ( RTP:NYSE ADR - news - commentary - research - analysis ) , which should more than double Wheaton's gold output. The fund manager wasn't worried about dilution from Wheaton River's planned $150 million private placement of common shares to pay for the deal.

    Back on the broader question, Hathaway expressed frustration that reasons for his "extremely bullish" long-term posture on gold have been usurped by all the chatter about Iraq.

    Even assuming the coming war is quick and relatively painless -- a big assumption -- "you still have an overvalued stock market, a sputtering economy, the dollar losing ground, and a crisis of morality in U.S.," he said. "There are plenty of things that have nothing to do with Iraq" fueling gold's ascent.

 
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