One of the most talked-about stocks in the gold stock sector this week was Kinross Gold Corp. (KGC). On Monday, Feb. 3 there was a 1:3 stock split as the company announced the previous Friday that the shareholders of Echo Bay Mines Ltd. and TVX Gold Inc., along with an Ontario court, have approved the proposed merger of Kinross Gold Corp., Echo Bay and TVX. In a news release, Kinross said that as a result of the completion of the combination of Kinross, Echo Bay and TVX and the acquisition of the 49.9% interest in the TVX Newmont Americas joint venture from Newmont Mining ( NEM), Kinross has become the seventh largest primary gold producer in the world.The net effect of last week's trading was that Kinross closed roughly in the middle part of its weekly trading range on very high volume, the
highest trading volume week for KGC in over 10 years. In fact, it might even
be the biggest single trading volume week in Kinross' trading history.
In order to get a better feel for what happened last week, let's do a review of the past five trading days of Kinross. Kinross opened Monday at $7.12, hit an intraday high of $7.20, then closed down for the day at $6.98 on heavy trading volume of 2.29 million. The next day after the stock split Kinross was trading at $7.30 and closed Tueday at $7.88 on even heavier volume of $3.14 million. On Wednesday, Kinross closed down at $7.61 after reaching a high of $7.97 on volume of $3.14. Thursday the stock was up
slightly at $7.63 on volume of 1.76 million and on Friday KGC closed down at the aforementioned price of $7.42 on trading volume
of 1.59 million.
The price behavior of KGC described above is typical of a stock in distribution by insiders. Now there is always a degree of speculative uncertainty when trading in a relatively low-priced share such as Kinross, and this is especially true among mining shares. But the technical behavior of Kinross seems too odd to be cleverly-disguised insider buying. And since the old stock trader's adage is "buy the rumor, sell the news," when you add it all up it looks like the insiders sold into the inevitable emotional reaction of the public to the news of the Kinross merger.
What's more, if you look back at the previous trading history of Kinross over the past two years you will see that whenever Kinross was in a rally phase and the stock price slid -- even if for a very brief time - below its 15-day/30-day moving averages (the dominant short-term trading moving averages for most gold stocks), it was followed within a few weeks by a sell-off. Since January, KGC has twice slipped beneath its 15-day/30-day MAs. Bottom line: our interpretation of last week's price behavior is that KGC is
being set up for a decline in price. If KGC manages to penetrate and close above the recent highs at $8, we're wrong and KGC can be bought on a solid, high-volume close above $8. But more likely is a decline to the pivotal $6.50 level and possibly lower before KGC finds its next bottom. Incidentally, closing beneath $7.30 will penetrate once again the 30-day moving average and all but confirm that a decline in KGC's price is underway.
The action in Kinross is in many ways a microcosm of what is happening in many other actively-traded gold stocks, large and small. And while the first half of February could witness a pronounced gold market correction, the overall uptrend remains firmly intact. It will take a lot more than a decline to 70 in the XAU to jeopardize that.
A reader asks, "On Friday [Feb. 7], shortly after the national alert was raised to Code Orange and gold jumped almost $5 while gold stocks rose 3%, [gold and gold stocks] again got hammered and ended the day with a substantial loss. Do you not think that the government and the FED simply treat gold as a currency and consider the interventions as a matter of national security under a war measures act, as the war is also an economic war? Any substantial rise in gold in the wake of security or war news would imply panic by the public and the stock market would further decline, something the government wants to avoid under all circumstances. Therefore gold and gold shares are pretty much capped and there is no chance of making money in it until a normal market returns. Would it then be better to get out of gold shares for the time being?"
A valid concern, this. Let's examine each concern one at a time. "Does the government/Federal Reserve Board treat gold as a currency and intervene when necessary as a matter of national security? Would they resort to manipulation in order to attempt to "cap" the gold price and/or stabilize stock prices?" Sure they would, this has been their game all along. The name of the game is control, whether it be currency exchange controls, stock market stabilization, commodity price fixing or gold price capping. This has been true as long as commodities have been publicly traded and as long as currencies (including gold) has been in common use. But as we've seen in the past 3-4 years, the business of controlling prices by manipulation doesn't always work and frequently backfires. See 1998 for the Asian market meltdown and currency collapse, the U.S. stock market mini-crash, and the commodities price slide. That was also the year that the entire global economic system nearly collapsed with Long Term Capital Management (LTCM) serving as the catalyst.
Back in the late '90s, few believed that the mighty NASDAQ could ever crash, yet look how far it's fallen in just three short years-a near total retracement of its Roaring Nineties advance. Was the government or the Fed able to stop this crash? For years it was commonly believed that gold prices could never rise much above $300/oz. for very long without the Feds intervening to cap the price and keep it below $300. But look how far gold has come in the past couple of years - making it almost to $400/oz. Was the
government or the Fed able to cap palladium prices, which rose from about $100 to almost $1100 in just four years? Were they able to prevent the enormous spike in natural gas prices in 2001? Or the outrageous rise in wheat prices (another market the government has always tried to control) in 1996? No.
Regardless of how hard they try, no earthly government or established money power can ultimately beat back the forces of nature, try as they may. You can build a sea wall to protect against high tides and strong waves but no feat of human engineering can stop a hurricane or a tsunami. The forces of supply and demand are just as strong as the forces of nature, and "tho' hand join in hand" neither force can be reckoned with by human influence or manipulation. The same holds true for gold market prices and stock prices: the governments of the world can try to cap the one and support the other, but the cycles all turn up strongly, or turn down hard, nothing can stop the inevitable price trend that follows.
"Would it then be better to get out of gold shares for the time being?" is the next question asked. If by "getting out" you mean lightening up on your longs in the face of price corrections, or selling with the intent of buying back at lower levels (i.e., "buy the dips"), then yes. That is a matter of trading strategy that each individual gold stock trader must carefully consider himself. But since this is a confirmed gold bull market, it would not make sense to completely undo a trading position established back when
gold was trading under $300/oz, for then a trader would lose his position, and this is a fundamental trading error in a long-pull bull market. Short-term trades can always be made, whether long or short, as market circumstances dictate. But core trading positions should only be sold after the most exhaustive analysis of the market situation and only if the overwhelming verdict of the market is that the bull market has ended. To date, this has not happened in the gold market.
February 10, 2003
Clif Droke is the editor of the weekly Bear Market Report, a combined forecast and analysis of U.S. stocks and indices and international precious metals stocks, and is the author of numerous books on finance and investing, including most recently "Gold Stock Trader's Almanac 2003." Visit his web site for free samples of his analysis at www.clifdroke.com
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