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| Fat City? Not Exactly.... |
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For several weeks now newspapers and other media
outlets have been reporting on the dollar's decline and the
corresponding rise in the gold price. Gold has traded as high
as $456 and the impression it is making on the uninformed
is that things must be awfully good in any sector based on
an underlying commodity trading on a 16-year-high. "Things
must be amazing in your business right now" is the paraphrased
comment I've heard several times in recent weeks. That perception
is quite understandable, but as more informed observers know,
there are a few other issues that make the reality a bit different.
A month ago we proposed a few reasons why gold shares are
lagging the rise in gold, and a brief review of that list
seems in order; I'll follow that with a fleshing out of this
topic, a few additional reasons why gold could be doing so
well and the shares could be performing so unevenly.
There's only one gold price, but there are a
few thousand "gold" companies. Following a robust
2001-2003, the market has been wading through gold stock losers
for much of 2004. The more a stock is down from its 12-month
high, the lower the expectations should be for it during the
final tax-motivated days of this year. It happens every year,
this one is no different, and the mere removal of tax loss
selling pressure will make many prices look different as December
gives way to January.
How many gold stocks have you bought this week?
That's the question I ask of confused gold stock investors,
and almost invariably, the answer is "none." Most
of those with current exposure to gold stocks are not pumping
new money into the market, they are waiting for the arrival
of the next wave of buyers to revalue their portfolios. "Long
and waiting" is a pretty good description of most of
the people I speak to, and until the next wave of buyers arrives,
that description isn't likely to change much . . . . At the
risk of being labeled an apologist instead of a journalist,
and only because so many seem so mystified on this subject,
let me touch on a number of other reasons that may help to
account for the current disconnect between gold the commodity
and gold shares. The internet is awash in sinister reasons
to account for this, but I suspect that the following benign
explanations make a good deal more sense.
— A Profit-Challenged Industry –
With gold trading at 16-year-highs, one would think that the
producers would be coining money. One might think that, but
one would be wrong. Gold mining is a marginal business for
most companies at current prices, . . . A dearth of new discoveries
and higher social and regulatory costs, to say nothing of
filling 100-ton trucks with ~$50 oil-based products and paying
high prices for steel, concrete, and everything else that
goes into building the rare new mine, and you have what is
largely a dollar-trading exercise for many companies today.
Except for the rare low-cost producer, gold must go much higher
– and stay there – for gold mining to be viewed
as a sustainable business.
—Hostile and More Hostile – 2004
is likely to go down as the year that the weak tried to survive
by acquiring the strong. Iamgold's proposed merger with Wheaton
River was more an arranged exit for Wheaton than it was overreaching
on the part of Iamgold . . , but Iamgold's earlier bid sparked
competing bids from Golden Star for Iamgold and Coeur d'Alene
for Wheaton. Golden Star failed in its bid, but in the process
forced the market to examine the company more closely –
as one friend says, "They held their x-rays up to the
light and people began to diagnose problems" –
and the market's current legacy is that GSS is trading a lowly
11% above its annual low and 53% off its annual high. There
should be no mystery why a stock such as this can't get out
of its own way in the waning days of tax loss season; . .
.
—Damaged Goods – If prospective
merger activity and the attendant distractions are weighing
on and causing some investors to wonder about some of their
investments, most of the mid-tier companies are damaged goods
in one way or another: . . . (To be fair, most of these stocks
are also well into recovery mode.)
—A Short Attention Span – Given
what investors have been through in recent years, for several
years in resource stocks and more recently in the broader
market, it should not be a surprise that investors aspire
to do a better job managing their resource portfolios in the
current cycle than they have in previous ones. Between the
internet, cell phones, ubiquitous computers, and the general
blackberryization of society, people are closer to the market
than ever before. One result is that they are also more aware
and more inclined to take leave of a stock on any slowing
of momentum, or at the first sign of a potential problem.
Hedge funds, a variable we've not previously had to contend
with, only magnifies the momentum-in both directions-and also
adds to the phenomenon of bad things happening to good stocks.
Large-scale hedge fund shorting of gold shares is widely rumored
in the current market, presumably, on the basis that gold
is long overdue for a correction. Should that correction not
be forthcoming, this will of course become pent-up buying
demand . . . .
—Not The Companies They Used To
Be – I've noted on numerous occasions that 2004 has
been a year of digesting stock issued in 2003. The pause in
the gold price this year exacerbated that process, but given
the continuing pace of share issuances, "stock digestion"
appears to be a reason that will account for at least some
level of underperformance, even in the year ahead . . . .
— In recent months, uranium stocks have
been one of the giant sucking sounds that have taken money
away from the gold sector. In the month of November, coal
stocks were on fire, on the receiving end of buying that might
otherwise have found its way into gold stocks. Another large
but unquantifiable factor is the number of new deals that
have been created in recent months. This is something that
always happens as a market evolves, and even discounting the
uranimania-driven deals of recent months, I'm not sure I can
recall a time when so many deals have been in the pipeline
at one time. I have six on my desk right now, all in need
of checks this month, and that doesn't even begin to reflect
the number of them that I have elected not to do. Most such
deals are being funded at the expense of other stocks; whether
it's selling stocks and keeping warrants, or simply selling
stocks to raise money for new deals, there is a lot of "internal
fundraising" in today's market.
I could go on, but the preceding are among
what strike me as a number of good reasons to account for,
at best, the selective reflection of gold's good fortune in
a share market that one would expect to be a beneficiary of
gold trading to a 16-and-a-half-year high last week. Another
factor, one that relates to the short-term preoccupation of
so many in the market, is that we again seem to be in a period
when even the believers don't believe. There are widespread
calls for the dollar to rally and for gold to correct, but
this was true several weeks ago and remains at least equally
true today. The dollar and gold action is overextended by
any conventional measure, but that is sometimes the nature
of bull markets: they leave people on the sidelines, looking
for a re-entry point that continues to defy them. My view
is that a selloff in gold would not likely exceed $430 for
any length of time, principally because the dollar's problems
are so relatively large and that a deadcat, intervention inspired
bounce is likely to be about the best the dollar can muster
in light of its overowned and still overvalued status. When
its chief proponents are a Treasury Secretary traveling the
world talking of a strong dollar policy and the Fedhead saying
he expects to see a "diminished appetite for adding to
dollar balances," the disconnect cannot be lost on those
sitting on such balances. While the dollar and gold have been
almost mirror images of one another, the relative magnitude
of the dollar market may mean that the "chump change"
gold market may not be as adversely affected on any dollar
rally that could ensue at any time. That's another way of
saying the dollar's problems are much bigger than gold's,
so why should the latter be penalized in lockstep if, as,
and when a dollar rally can actually gather some momentum?
Rather than try to second guess this market too much, my distinct
preference is to focus more on stocks that represent good
value on an ongoing basis. Another bias is toward recognition
that we are in the early stage of a bull market that has years
to run, and my general tendency is to give the market the
benefit of the doubt. There are times when stocks lag bullion
in a gold bull market, but I know of no precedent for a bull
market in gold occurring without participation of the stocks.
This one isn't likely to be any different.
(12/6/04)
***
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