Gold Stocks: A Time to Start Buying

By Bill Cara
The Gold futures have now topped the $395 level and finally appear to be headed further north in the next three months. That’s what it will take to bring some glitter to the languishing gold stocks and turn them into bulls.
If you happen to be a gold bug, there is now good reason to be optimistic. I have been priming your pump for a couple weeks, particularly in my June 7 article, Watching Gold Stocks for a Breakout. I have also been holding off issuing a Buy Alert only because the Monthly chart data has been negative across the board. That is no longer the case.
Now is the time to start a buying program. Gold stocks will rally. The gold bull is out of the barn!

Later in this article, I will make a general recommendation for even the most risk-averse investor. I believe it will pay off with a solid return on investment. Happy Father’s Day.
The reason for my optimism is all about the discussion I presented on Friday morning at 7:45am ET, The Word of the Day for Friday June 18: Prevaricate.
The word ‘prevaricate’ means to straddle or to equivocate. In other words, the truth is avoided and people are misled.
I wrote that the Fed’s chairman Alan Greenspan was sucking and blowing (i.e., prevaricating) as hard as he could over the inflation-signaling Consumer Price Index and Producer Price Index numbers that were released by government this past Wednesday and Thursday.
Knowing the significance of Greenspan’s Charlie McCarthy act, CNBC’s Bob Pisani called it “an Academy Award Winning Performance”.
You will note, as did I, that it wasn’t until Friday’s trading action that the gold futures market lit up with prices rising sharply from $6.50 to $9.00, depending on whether it was New York or London. It should have happened Wednesday and Thursday, but with Greenspan playing the music, Wall Street was pulling the wool over the eyes of the audience while these blokes were loading up their own accounts with gold shares.
Prove it’s not true Goldman Sachs, Merrill Lynch, Morgan Stanley et al!
You see, I know the Game.
So, while Greenspan was telling the world not to fear inflation, his buddies were buying gold shares and the action was being reflected in the technical indicators. These numbers do not prevaricate.
The best way to track the gold shares market is via an Exchange Traded Fund (ETF) called the iGold Fund (TSE: XGD). This Barclays Global Investors product tracks the Standard & Poor’s TSE Canadian Gold Index.
With the extra buying of gold shares on Wednesday, Thursday and Friday, the Bi-weekly data for this gold index tracking stock has now turned positive on the Stochastics indicator, so the Monthly data chart is next to go positive.
At that point, there will be an All Points Bulletin to Buy Gold Stocks. I want to be the first to shout the Alert, which I am doing this morning.
Here is the Daily, Weekly and Monthly data charts for the XGD.
As an aside, the XGD ETF is also an excellent investment as opposed to the purchase of ANY gold mutual fund, as the fees and costs of all mutual funds are quite excessive.
Until I receive this final confirmation on the Monthly data series, I would stick to a policy of 1/3, 1/3, 1/3 of any investable funds you wish to commit to the gold market. Remember, the bull trend has not yet been firmly established. Otherwise, you might go ½, ½.
In any event, unless you are a pro trader, it should not be more than twenty percent (20%) of your total portfolio.
Some may say that’s too much, but remember gold is a hedge play against the U.S. dollar and rising interest rates. By buying gold stocks, you are in effect shorting the U.S. dollar and U.S. interest rates (i.e., bonds).
That reminds me, I should be writing an article about trading in the U.S. dollar.
For political reasons (this is after all an election year and he was just re-appointed for another term) Fed chairman Greenspan appears to want to delay ratcheting up interest rates. He will raise them, without question at the June 29-30 meeting of the FOMC, but not to the same degree as his central banker counterparts in Europe.
Therefore, I expect to see a widening of the Treasury bond yield spreads (3-month T-bills to 30-year T-bonds) here and a serious decline in the Trade-weighted U.S. dollar.
As if the trade deficit in the U.S. is not already putting the policy makers in a straight-jacket!
If I’m correct in my outlook, that particular scenario is good for the gold bullion, which means of course there will be a bullish market for the gold stocks.
When bullion is bullish, even the gold stocks that are known in the industry as turkeys are going to be flying like eagles. For investor’s, it will be like catching fish in a bathtub. Take your pick.
If you are a serious investor though, you will put some thought and planning into your portfolio decisions. Some of the gold junior companies are not bullion producers; and some are not even serious gold explorers. Many are just paper plays led by pump-and-dump promoters.
I’ve met a few hundred of those guys in my career and know that game as well.
As an equities investor, you have many choices. You can buy the shares (and options), the mutual funds or the ETFs. There is the gold bullion futures market for expert traders. You may wish to analyze this market yourself or you may find comfort in reading the work of the many analysts in this field. To each his own.
My view is that if you are going to pay for independent advice, make sure it is backed by market-proven experience and expertise.
Out of several hundred available services, there is one gold stock market advisory I would recommend highly. The cost is US$1,000 per year — and I receive not a dime for telling you about it.
Bob Bishop, a Californian from the San Francisco area, has been at the Game for 21 years and I have known him for that long, although I probably haven’t seen or even talked to him for the past six or seven years.
Bob is an independent analyst who has visited more mining properties, met more mining executives and attended more mining conferences, all with a keener eye for gold, than probably anybody you or I know. In fact, I have even been present while he has done all of that.
He’s good and he’s honest – at least that was my professional opinion of the man when I knew him well. In a gold bull market, his service is worth buying.
The key to the gold market
If you happen to be going it alone, you will be hearing a lot in the media that gold is rising out of fears related to the Middle East conflict. Friday, after all, was another horrible day for Americans as the al Qaeda group executed another civilian worker.
While these so-called political acts are barbaric and they are escalating, it is not the primary reason why gold bullion had a big lift on Friday.
The U.S. Treasury yield spread moved Friday from 419 basis points to 422 (1.15% on the 3-month T-bills and 5.37% on the 30-year T-bonds). This move (albeit a small one) reversed the narrowing trend in the Treasury bond spread. It directly reflects a return to inflation as evidenced in Wednesday’s CPI and Thursday’s PPI numbers that were over the top.
The process has just started. If the yield spread widens from here, there will be even more bond investors growing anxious of an impending inflation problem. That definitely means higher prices for gold stocks.
You can track the bond yield spread, as I do, at Yahoo Finance. You can also do so at Bloomberg or many other information sources.
For a free daily updated summary on gold stocks, I’d also turn to the Yahoo Finance web-site under the industry tab for gold.
At Yahoo, look at the Gold Industry Top Five Performers from Friday. These stocks were up from 5.77% to 16.57% on the day, which is impressive for a single day.
Here are the current leaders and laggards based on P/E Ratio. Beginning investors ought to avoid the leaders here until they gain an understanding of this industry. High P/E Ratios could mean poor earnings or they could be a reflection of investor confidence. So, be wary.
Yahoo also lists the leaders and laggards in year-over-year Quarterly Revenue Growth. Beginning investors ought to avoid the laggards here until gaining an understanding of this industry.
If you are a newbie gold shares investor, you might think that a gold producer’s guidance of falling revenues and profits is a negative, which could be untrue, as it is for Goldcorp (NYSE: GG $11.52) (TSE: G $15.70) this week.
As gold stocks are typically bullish in a rising interest rate scenario, it might be best to avoid the industry leaders in the Debt/Equity Ratio category, as reported today at Yahoo. The same thing, of course, could be said about any company in any industry.
Here via Yahoo are today’s leaders and laggards in Long-term (5 year) Growth Rates. If you are a buy-and-hold type investor, you might want to first look at the leader board here. Traders, on the other hand, are unconcerned about a 5-year quantitative analysis. Three-month price cycles are what they study.
A good trade I’d recommend
I made reference that shrewd gold trader Bob McEwen at Goldcorp has reported that he is now guiding towards falling profits because he is going to withhold sales of a significant percentage of future bullion production. That means he is going to inventory it, believing that gold prices are headed north here.
I recommend that conservative investors write long puts here on Goldcorp. This is not an aggressive strategy.
If the stock moves up, you earn the options premium, no questions asked and no risk. If the stock goes down, and you have the shares put to you (i.e., you have to buy them), then you will pay effectively the strike price less the premium income you already received.
This is a good deal either way given that Goldcorp shares then move higher on the New York and Toronto exchanges.
They will almost certainly move higher or Bob McEwen would not be holding back sales of its future gold production, given his expertise in the business.
Bullion by itself, you know, does not generate income. The income happens when the bullion price rises. When that occurs, the gold share prices also rise.
I have said before that Bob McEwen knows what he is doing in the gold business and it pays to follow his lead. Right now he is pointing north.
Happy Father’s Day!
Source: Trader Wizard

2 Responses to Gold Stocks: A Time to Start Buying

  1. Trader Wizard November 18, 2004 at 12:07 pm #

    TW’s Daily Show: Nov 18

    TW’s intra-day ramblings can be read here. Reader inquiries and comments are welcome. Comments are reviewed for spam. Nov18/2004 10:59 AM (New Gold ETF) Nov18/2004 9:15 AM (KMRT, S Déjà vu; Gold pulls back $1 to $444.10) Nov18/2004 7:29 AM…

  2. Invest Offshore November 18, 2004 at 5:12 pm #

    Trader Wizard talks about Gold

    By Bill Cara – The info on the new gold ETF is at this link. The ETF Fact Sheet is at this link. The GLD Prospectus (for U.S. investors only) is at this link….