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Wall Street History
https://www.gofundme.com/s3h2w8
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07/05/2002
Gold Update
Years ago, when I was hanging my hat at PIMCO Funds, we
marketed a precious metals offering that was sub-advised by Van
Eck, one of the world’s true experts in the mining sector. The
Van Eck organization (formally Van Eck Global these days) is
one I have been familiar with for twenty years and they are truly
a first class group.
Well, it’s been a while since I did a piece on gold, and, in need of
a little holiday break, I sought permission from my friends at
Van Eck to reprint a commentary they just produced for the
investment community. The opinions expressed herein are
strictly their own and, in the interest of full disclosure, I do not
personally own any positions in the metals sector, either
individually or through a fund.
But first, just a few historical notes.
Gold’s epic rally during the inflationary 1970s from the $35 level
(1968) culminated in a price of around $850, January 1980. At
this time, the market value of all gold issues exceeded the $1.4
trillion total market cap for all other U.S. stocks, and,
coincidentally, the Dow Jones was also around the 850 level.
Of course the situation would reverse over the next twenty years,
with the Dow peaking at 11722 on 1/14/00, while gold slid to
about $290 at that time. Particularly since 1982, however, this
was also a period of declining inflation rates. So what does
gold’s solid move in 2002, thus far, tell us about the future, if
anything? Sorry, no answers here from yours truly. But for an
opinion from a real expert, the following are the comments of
Joe Foster, portfolio manager for Van Eck.
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The first half of the year ended with some curious excitement in
the gold market. On Friday (June 28), gold drifted lower,
looking to close down about three dollars at the $317 level on the
nearest (August) Comex futures. At seven minutes prior to the
close, the gold price plummeted to $310.50, then recovered
somewhat in the final five minutes to close at $313.90, down
$5.70 for the day. The late selling was not on unusually large
volume, but an aggressive sell order caused bullion to drop
through several stop levels when many traders were caught off-
guard, thinking more of fireworks than of buying gold. This
action is reminiscent of June 4, when gold was driven lower in
the thinly traded aftermarket, following a day when bullion
touched the critical $330 per ounce level. It seems that bull
moves in gold are made on sound fundamentals – political
unrest, corporate scandal and/or a declining dollar – whereas
bears seem to pound the market when it is most vulnerable, when
market participants are trying to relax and enjoy life.
The gold market correction is now a month old, as bullion has
declined 4.9% from its $330 intraday high. The XAU Gold
Index was down 15.2% in June. Meanwhile, in the first half,
bullion was up 12.7%, while the XAU was up 31.3%. The
disparity in performance between the hedged and non-hedged
producers in the XAU is remarkable. The American Stock
Exchange Gold Bugs Index includes only companies that do not
hedge their gold production beyond 1.5 years. It is up 94.7% in
the first half. The message is clear, most investors want more
leverage to bullion in a bull market.
the gold market was in need of a cooling off period.
Valuations on gold shares had risen to high levels in a relatively
short period. Valuation measures, such as price/cash flow and
price / NAV, were approaching levels last seen at the peak of the
market in 1996. The highs reached then were at the tail end of a
three-year bull market, whereas the current bull move is only 15
months young. The sector has attracted more fresh equity in the
past year than in the prior four years combined. Perhaps the
summer months will be a good time to relax by the pool, forget
the frenzied pace, and recharge some batteries.
Finally, the U.S. dollar and gold have moved in the same
downward direction in June for the first time this year. This is a
break from the normal inverse movement. The dollar first began
to decline in January, falling along a gentle slope until mid-June,
when it began to slide precipitously. These movements suggest
that the dollar has been oversold and that the decline in the June
gold price perhaps presages a summer bounce in the dollar.
Ultimately, though, the still-growing current account deficit, along
with the decline in foreign investment in the U.S., indicate that
the dollar has not yet reached a bottom.
[Source for some of my opening remarks, Peter Bernstein’s “The
Power of Gold.”]
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Wall Street History returns next week. It’s time to review, again,
some of the reasons, now historical ones, for the collapse in the
equity markets since spring 2000.
Brian Trumbore
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