The Goldenbar Report
Humor me while I briefly deviate this morning:
A little sensitive are we James? People are sure doing a good job convincing me that it might actually be a top - by their overreactions to my comments lately.
All I said was that we should scale back aggressive gold stock positions... and a whirlwind of anger comes at me from my own camp. Well, I guess I'd be afraid of a sell recommendation from Bugos too if I were running a junior mining company.
In case you're confused Tan Range's outspoken Chair, Jim Sinclair, chose to critique my cautious position on gold shares at his website this weekend claiming that this time is different, that unlike any other time in history, gold shares would not just survive a broad market panic, they would thwart it by continuing to run higher in its midst!
Refer to my article "Gold Shares Too Hot For Dow Tumble" and Sinclair's piece "Saturday, December 06, 2003, 8:02:00 PM EST Trojan Horse Alert" at his website at jsmineset (but you must scroll down to find it; I couldn't find a direct link).
Anyone in the position of offering investment advice is naive to suggest that any sector is immune from panic at any time.
To add insult to injury (to himself), Sinclair's criticism centered on the proposition that gold shares could only fall during a collapse in the broad market if we all believed they would, and acted on those beliefs.
The self-fulfilling prophecy principle is a familiar circularity in most Keynesianspeak. It's garbage. It's the line of attack the opponents of free markets tend to take on when they want to blame gold bulls for causing interest rates to go up. It's fitting that the title of his piece was Trojan horse alert. Indeed.
He said that in his "experience, there is simply no reason for gold shares to drop along with general equity shares in a major market decline as stated" in my article. Then he rambled on about some mixed up version of economic cycles that were different before 1971 than they were after, putting me in Prechter's camp at the same time to boot!
Outrageous. Well, here's reason enough for me:
I'm merely mentioning it to entertain you and because it's topical.
If it was anyone but Sinclair I wouldn't have given it a second thought because I think our readers are too knowledgeable for me to drag them through the basics of market behavior.
But Jim Sinclair is a maverick in a sense. There are very few mining 'executives' that run their own newsletter for instance. Fewer still who throw around investment advice in the public domain that many independent analysts would be too litigation-shy to suggest themselves. Thus in the sense of pushing for new boundaries, Sinclair is a Maverick, and I respect it.
But he reminds me of the sports car whizzing by at twice the speed limit on an interstate highway. You know you could tail him and not risk getting the ticket; because he's your decoy. Don't worry if you don't know what I mean. Mining promoters the world over do.
I genuinely envy people that can wear both hats in this business (analyst and financier). But few can survive this road due to its many pitfalls, or conflicts - which is part of the reason I admire those who succeed at it.
While we're sparring, however, I'll admit that one of the reasons I've shied away from Tan Range's shares is that I think Jim is likely to draw the ire of regulators and unhappy investors one day if per chance he should be wrong. He's not leaving much room for error with his bold prognostications.
I wouldn't believe that if he didn't tend to lash out with off the wall personal remarks, and pretend to be an expert whose advice should be followed, and whose advice basically comes down to never selling any gold stocks - all while he's an insider???! He's making himself a target. No thanks Jim. I sincerely enjoy your show from a distance.
Another reason I've shied away is that he writes too much frankly - I can't recommend companies whose chieftain has nothing better to do than write a newsletter. I'd say the same thing about GE if Jeff Immelt appeared on CNBC every day for half the day.
At any rate, I can offer only a limited counter of his argument because there really wasn't a coherent one, except that this time is presumably different than what is implied in the above charts, or even simple reference to mass psychology 101 for that matter.
A panic is a panic. People sell everything. I've seen it. I've been the guy who had to take the orders from mad crowds selling things they shouldn't be selling, but do anyway. Only a martyr is gonna' take the position that his sector would be immune from it, particularly if it has been a momentum leader.
My call has absolutely nothing to do with whether a panic is misguided. I'm not saying gold bulls are misguided by buying gold shares after all, and whether they are misguided in selling them in a panic is besides the point.
The 1974 market panic was different from 1987 in many respects. One is that the former represented the final capitulation of a broad equity bull market that began after WWII and ended in 1968 by most accounts. On the other hand, 1987 was only the midpoint of a major bull cycle in the broad market.
Furthermore, the market panic in the former period (1974) occurred during a bull market in gold that had already begun a few years hence (it began in the late fifties for gold 'shares', but gold itself didn't trade freely until after '71; black market data is too difficult to use or obtain).
But there was no bull market for gold in the eighties, only a bear market rally, or attempt to engender a new bull.
So the periods are different in that during the seventies' financial crisis gold was in a bull market while the Dow wasn't, and in the eighties it was opposite. Thus we have a sample of both sides of the monetary cycle - there are only two sides to a coin Jim (uh, I mean cycle).
Further, gold shares also collapsed during the 1929 panic.
It wasn't until FDR abandoned the gold standard that gold equities raced higher during what most people incorrectly still interpret as a deflationary period - despite the fact that the CRB bottomed in 1933 then went straight up until after the Second World War.
No shares are safe in a broad market panic - especially when they've drawn most of the momentum in the prior bull phase. This is why when clients asked us whether gold shares would fall in 2001 and 2002 in the midst of a Dow buckle, for example, I went through great pains to explain why it would be different then - i.e. why they would not!
The reason was that in past cycles, gold shares practically always participated in the final phase of the general bull market - at least I couldn't find an instance where it wasn't true. But in 2001, they were at decade lows.
They didn't participate in the 1999 blowoff in the Nasdaq. It was one of the facts that made us exceptionally bullish on gold shares at the time, and we did in fact conclude then that gold shares were somewhat impermeable to a sharp market plunge.
So we suggested overweighting the sector.
Since then, the HUI has gained an astounding 300%! And what concerns me is the Dow is back up to near its 2002 highs - only 15% below its all time bull market high. It concerns me because I think it's a mistake for the Dow to be up here, and when people figure it out, look out below.
Yes, that's absolutely bullish for gold.
But while the inverse relationship between gold and the Dow is theoretically sound, in practice it isn't a full 100% correlation. The reason is a matter of timing. Investors that buy gold shares often do so because they anticipate a broad market plunge before it comes. That means until it comes gold shares and the Dow could rise together, which is what's been happening in my opinion.
The fact that the gold sector has rallied so atypically alongside the rest of the market that even the press has picked up on it suggests at least that this expectation already has been long under consideration in my view. Ergo, not only are gold shares susceptible to a panic generally because they've drawn so much upside momentum, but there will be the temptation to sell the news regardless.
Nothing goes straight up. I'm as bullish as Jim is about gold's long term future - perhaps more on some counts - and this includes gold shares. I don't for one minute mean to say that gold shares won't be much higher in two years time. However, I see short term risk at the moment. I could be wrong. I have been from time to time. But not for any reason Sinclair could possibly conjure up.
Jim's a wild-eyed promoter still stuck in the sixties.
Indeed, when he offered $50,000 for solid evidence that a gold manipulation cartel exists I had to restrain myself. $50,000 wouldn't have been worth the risk in the seventies. How much would it take for someone like Sandford Weil (ex-Citigroup co-chairman) to come forward? Who does Jim expect to attract with that sum, Weil's shoe shiner?
I'm not shooting down the concept here. In fact I've got an even better idea.
Think about the money that could be made writing a book about proof that a banking cartel manipulates the price of gold. That's where to start.
What Jim should do instead of seeking out something to rant at every day is try and subject this concept to the free market auction process. Consider a venture whose objective would be to publish said proof for publishing revenues. This way as people buy shares in the venture they're effectively pooling their growing resources - effectively to pay someone off, hire a writer, as well as other costs naturally.
Maybe someone would come forward for a cool $1 million (or more) today where they wouldn't for fifty grand, and we'd actually be getting somewhere for real. And when the book is published the venture could pay out a big fat dividend to all its stockholders.
You wanna' be a big boy Jim you gotta roll bigger dice than $50,000!
Anyway, don't take it wrong. I have nothing against Jim. I'm just poking some fun. In fact, I have a warm spot for bold, eccentric demagogues. I just wouldn't look to him to warn me about a gold stock correction. Not merely because he's the Chairman of a junior mining deal (a little bias no?), but obviously because it doesn't sound like he ever expects a correction, ever.
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