November 26th, 2005

Gold Stocks

Though not officially affiliated with IBD, Meetup.com has local groups in which both CANSLIM principles and individual stocks are discussed. I attended one of those meetings this week where the consensus expressed was that the market is somewhat overbought after its 5-week, 5.8% increase (as measured by the S&P 500 index) and is due for a breather.

One speaker reaffirmed that 50% of any stock’s move is dependent on the overall market, 30% its industry group and only 20% by factors specific to the company. If true, then the challenge for individual investors is:

  1. managing the portfolio in synch with the market,
  2. consistently shifting its weighting according to current industry sector rotations and,
  3. when an individual stock disappoints, cut losses quickly.

(Unfortunately, there always seems to be more said …i.e., rules… about buying rather than selling which, to me, is the more challenging decision.)

So which sectors and stocks appear, at least to me, now to have low relative risk yet high immediate return prospects as a depicted by their being poised to about break through extended resistance levels?

  • Gold
  • I first mentioned Gold in the October 11 posting (in the same posting, I also recommended Japanese stocks which have performed well according to expectation and, unfortunately, shorting construction and land stocks …. remind me never to venture into the land of shorting). Gold futures have increased almost 100% since hitting a low of $253.70 on August 15, 1999. More recently, as the chart below shows, gold futures have increase 53% since just July, 2002:

    In the November 21, 2005 Barron’s, John Hathaway, portfolio manager of the Tocqueville Gold Fund says: “People shouldn’t be surprised to see gold trade in the four digits.”

    A November 26 2005, New York Times article entitled “To See How Gold is Doing, Check the Rest of the Market” said:

    “Gold was a poor investment in the 1990’s but was an excellent store of value as
    the stock market was tumbling after the bubble burst in 2000….this is an era
    with an excess of capital available for investment. That explains low
    interest rates and rising prices for many investments, from stocks to gold.”

    Furthermore, the November 21 2005, Barron’s, Alan Abelson wrote:

    “….after dilly-dallying and shilly-shalling for the first seven months or so,
    the metal grew increasingly precious as the year wore on, really taking off in
    September and soaring to an 18-year high just last week….the action in gold is
    a pretty good barometer of economic woe in the world, whether prevalent or
    incubating….the recent rise in the price of the metal is not unconnected with
    our dicey financial condition, most obviously our huge trade and fiscal
    deficits….most of the time, gold tends to move counter to the dollr, since, as
    indicated, it’s supposed dto offer a hedge against currency debasement….the
    seeming anomaly of both the dollar and gold on the rise suggests to us one or
    the other has to give. Our hunch is that it’ll be the dollar….Gold,
    moreover, has a fairly acute sensitivity to inflation, and we think that, as the
    months go by, its premonitions on this score will be fully borne out, and not
    least because we anticipate another flare-up in oil before the snows melt.”

    On updating the chart included in the October 11 posting, you can see that the group has recently penetrated through the resistance level and looks to make further advances:

    Both as a group and individually, the charts of gold companies look similar to the charts of companies in the various Oil & Gas Groups 24 months ago … and we all know what happened to those stocks since then. Individual companies in the Gold group display “classical” extended consolidation patterns (e.g., channels, ascending triangles, double bottoms). There’s no guarantee, but the similarities are striking and, if history repeats, it may be a high return/low risk opportunity where many have already clearly broken out while others look like they shortly may:

    AAUK Anglo-American Gold
    ABX Barrick Gold
    AEM Agnico-Eagle Mines
    AU Anglogold-Ashanti
    BGO Berma Gold
    EGO El Dorado Gold
    GFI Gold Fields
    GG Goldcorp
    GLG Glamos Gold
    GOLD Randgold Resources
    IAG Iamgold
    KGC Kinross Gold
    NEM Newmont Mining
    PAAS Pan American Silver
    RGLD Royal Gold
    RIC Richmond Mines

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