-- Posted Thursday, 8 April 2004 | Digg This Article
A few precious metals bulls, some well-known and some not, have recently turned bearish, fearing that a nasty correction may lie just ahead. One is my friend Bob Moriarty at 321gold, who warned last week that recent price action in gold and silver looks dangerously toppy. He reminds us that the real losers in the 1980s, when gold plunged from an all-time high of $850 an ounce, were not the bears, but rather bulls who stayed too long at the party. They made plenty of money on the way up, Bob notes, but on the way down they were too terrified to sell -- and their erstwhile gurus failed them miserably by never even sounding the alarm. How is he preparing to weather the storm that he now considers imminent? “I'm going to go to a much more conservative position, higher on cash and in a much smaller number of companies but a higher quality of stock.”
Another friend who had been accumulating sizable positions in gold shares in recent years and whose investment essays have appeared at some of the more heavily trafficked Web sites, says he is cashing out of mining stocks aggressively these days, fearing that a broad stock-market collapse is about to bring everything down. “I believe it's best to be standing aside soon,” he wrote me last week. “This entire mess is going to be shaking all hands.” When will it be safe to jump back into precious metals shares? “I'd look to buy the hyperinflation balloon in June or July,” he says. Meanwhile, he thinks the miners will make one more push, then dive. “Gold, the metal, will be fine. But silver will be beaten ugly. I'm going to cash/short bias soon.”
Mayday from an Erstwhile Goldbug
There was also this mayday from Dave S., a West Coast subscriber who has racked up some amazing profits in the metals sector over the year or so that we’ve corresponded. Two weeks ago, however, he changed his tune: "Whatever the longer term ( six months-plus out ), it looks to me as though gold stocks are headed to a significant peak within the next two weeks. At this point, I haven’t sold a thing. I still hold the initial 2,000 shares of [Newmont Mining] that I bought for $14+; have no idea what my profit is and no interest in trading the stuff; but am thinking about dumping the whole thing – 10,000 [Goldcorp] and 9,800 NEM.
"Whatever the merits of our analysis of the behavior of gold in a deflation, the first major deflationary impact on the common stocks is in my view going to take the gold stocks down with the rest of the market."
So there you have it. Some of the most bullish gold bugs I know are getting more nervous about their portfolios with each passing day. To be sure, some gurus remain as bullish on precious metals as ever: Jim Dines, James Sinclair, Larry Edelson, Martin Weiss and Doug Casey, to name some of the most visible ones. For my part, I'm going to play agnostic for the time being, even while conceding I am mildly concerned that recent rallies in many of the gold stocks we hold have not quite reached their hidden-pivot targets.
Long-time subscribers will know that my emphasis has increasingly been on finding ways to make money without needing any help from a violent or collapsing stock market. One way we have done this is by trading actively around core long positions in the mining stocks. We’ve been more aggressive than usual lately because I am still smarting from having missed a major profit-taking opportunity when the mining sector was topping out in January.
Can’t Pass Up Profits
It was partly a case of being asleep at the wheel. After relinquishing the freebie Black Box Forecasts to my former employer in December, I published a new, free advisory only sporadically, expanding coverage to include quite a few more gold issues than previously. It was only when the January correction stretched into February, however, that I realized I had created an overall position too big to hedge in the usual way – i.e., with put and call spreads. In fact, many of the stocks I had begun to track and recommend were not even optionable. So we watched our substantial gains ebb with the tide. And that is why we’ve been trading so actively lately: not because I am fearful that the market – gold stocks included – is about to collapse, even though that would be no surprise; but because we should endeavour to take profits as a matter of course, always seeking to lower the cost basis of our positions. By doing so, we can ensure that 1) the corrections are less painful, if not quite painless; and 2) we can create room to augment our positions when the mining stocks correct to bargain levels.
Meanwhle, the question of whether mining stocks are going to plunge along with the broad averages when Wall Street’s day of reckoning finally arrives, may be too complex to analyze. Some who recall gold’s fall after spiking briefly to mirror the October 1987 crash, think it could happen again. But this is not 1987, and the cause of any stock market collapse would almost certainly be due to an historical run on the dollar. This was foreseeable ten years ago, and nothing has changed since. Bottom line, leveraged dollars are tied to more financial disasters-in-the-making than the Fed and all the central banks acting in concert will be able to manage.
All Debt Is Local
So would bullion-based assets get hit if a plummeting dollar spooked the Dow into a 3,000-point dive? I’d say yes, they would, if trading were confined to Europe and the U.S, where abject ignorance of gold’s monetary role is a revered tradition. But Asians, Indians, Arabs and Russians will also have a “vote” on that day when the world is forced to reckon with the dollar’s intrinsic worthlessness; and no matter how much I stretch my imagination, I cannot envision them panicking out of gold, silver, platinum and mining shares in order to raise dollars. In a financial crisis, might the unwillingness of lenders to roll short-term paper create a short-squeeze demand for cash dollars? Maybe. But the spike would be so precipitous as to be unsustainable, and that implies the dollar could only collapse back into itself once the squeeze had subsided.
It is of course possible that some exogenous shock, such as a terrorist attack on London, could send the world’s bourses into a tailspin. But no matter how the markets react initially, it is the dollar that will be affected most severely when confidence in the financial system implodes. Why should this be so? Simply because dollars are the coin of the realm, the currency with which investors around the world have leveraged more than $100 trillion of speculative bets. Although it taxes the imagination to think about how the global derivatives market grew to that size, it is nonetheless true that ultimately, like politics, all debt is local.
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Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2004, Rick Ackerman. All Rights Reserved. www.rickackerman.com
-- Posted Thursday, 8 April 2004 | Digg This Article
