Is the Gold Rally Coming or Going?

February 7, 2002

Patiently shining your coins, and bullion may be a wiser pursuit than currently buying most gold stocks.

The XAU is up 19.88% since December 31, 2001. That is 0.56% per day, every day including weekends this year: not bad for something that produces nothing, offers no interest income to the investor, and is being demonetized.

However, whether or not the recent run-up in gold stocks can be sustained is a difficult question to answer. To be sure, in recent years gold has a knack for taking two slow steps forward, and three quick steps back. Furthermore, certain producers have a knack for unloading hedges when prices are low, and loading up their hedge books when prices are high. Admittedly, the words 'low', and 'high' are unfairly vague. However, if gold were to break above $293.50, and then $300 an ounce lets just say that this would be an 'extremely high' level.

Perhaps I am being overly pessimistic in thinking that gold will drop in the near term. Perhaps also I carry I bias because I am now waiting for an opportunity to re-purchase my favorite gold shares when other investors begin to throw theses shares away. Regardless, all that can be assured is the POG is playing catch up to the XAU – translated this means that investors appear to be becoming overly optimistic. For as long as my memory serves, when a gold rally brings with it investor optimism of still higher prices this rally has been unexpectedly, and abruptly hacked at its knees.

With these things in mind, those investors trying to catch the latest gold rush could easily be called suckers, and not so easily be labeled wizards -- this depends on what the shares do tomorrow, not necessarily on what the fundamentals are telling us today. This is not to say that some unforeseen crisis will not materialize tomorrow, and gold will not finally soar above $300 an ounce. Quite frankly, you can take your pick (Enronitis, Argentina, Japan) why $300+ gold will soon happen (main focus being a dropping U.S. dollar).

That said, It is worth remembering that following September 11 gold never came close to spiking above $300 an ounce. Was gold held back because of blatant market manipulation from central bankers, and the PPT? Probably. However, this knowledge doesn't help the investor unless the manipulation ends – when, if ever, this will happen is the million dollar question…

The idea when buying gold (for the investor not the gold bug) is that it serves as a hedge against uncertainty. With this in mind, unless the price of gold continues to rally gold shares themselves could certainly one of the most dangerous areas of the marketplace to be in near term.

The California Gold Rush began on January 24, 1848 when gold was found by James W. Marshall at Sutter's Mill in Coloma.