Fat City? Not Exactly
Robert Bishop
(12/6/04) 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 over-owned and still overvalued status. When its chief proponents are a Treasury Secretary traveling the world talking of a strong dollar policy and the Fed head 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.
(Excerpted from GMSR Alert #326, originally published 12/6/04.
( www.goldminingstockreport.com )
(As originally published at www.theaureport.com )
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