 Gold To Correct Soon?
Todd Stein & Steven McIntyre
The Texas Hedge Report
December 2, 2005
Snippet Courtesy of www.texashedge.com
It finally happened. Gold has
closed above the $500 level for the first time since 1987. The
yellow metal is clearly in phase II of its bull market as it
is slowly being accepted by investors as a legitimate asset class.
Other signs that gold has moved out of phase I is that those
who invest in the metal are no longer labeled as "cranks"
or "gloom & doomers." Two U.S. gold exchange traded
funds (tickers: GLD and IAU) were launched about one year ago
and have been quite successful as they have absorbed over eight
million ounces of bullion demand from both individual and institutional
investors.
So what are we to expect in
the months and years to come? First of all, the experts seem
almost certain that we will see some sort of pullback this winter.
And while the majority of investment advisors do not advocate
short term trading, those wanting to buy gold or mining stocks
at this time are instructed to hold off or at least dollar-cost-average
into the market. Not bad advice, as it seems to many that there
is just too much short-term bullishness out there. But is there?
Let us turn our attention to
a few quotes from highly respected analysts out there. Note that
these guys are not CNBC bubbleheads but, rather, investors who
have track records to back themselves up. Richard Bernstein,
chief U.S. strategist at Merrill Lynch recently said the spike
in gold prices is not based on fundamentals. "People have
to remember that the number one player in all commodities right
now is hedge funds," he said. "It's all speculation.
In gold, it's an inflation trade. Hedge funds are long gold and
short Treasury notes." Dennis Gartman, author of the Gartman
Letter, has been a strong advocate of gold ownership and
said that he "wouldn't be surprised to see gold back down
to US$400 or US$450 by the end of the year. The very fact that
this is making the front page of business sections should give
people a lot of caution."
We will not argue with these
assessments (except to note that very few of the large hedge
funds touch gold) but instead use their very existence to counter
the argument that gold is about to correct. You see, most of
the gold news we have been reading and seeing on television this
week has been NEGATIVE. Less than 24 hours ago, UBS (a major
investment bank) raised their gold price targets for the coming
months and years. Like most Wall Street research, UBS' comments
aren't worth much except that they demonstrate a continuing hostility
to gold. According to Bloomberg, "UBS raised its forecast
for average gold prices to $441 an ounce from $434 for this year;
to $520 from $455 for 2006; to $500 from $435 for 2007; and to
$450 from $340 for 2008 to 2012. The bank's long-term forecast
remains at $340 an ounce." That is a chicken upgrade if
ever we saw one. Compare this to any tech stock where the lemmings
on Wall Street will raise their long term target price to some
absurd nosebleed level as the price rises. Gold is still unloved
by Wall Street - which is good!
So while you should always
be wary of buying any asset at a multi-year top, please realize
that in gold's case, the multi-year bull market is likely not
even close to being complete. The time to sell is when you see
UBS coming out with price targets that double every year. Or
maybe when Jim Cramer hosts a show on CNBC called Mad Mining.
In all sincerity, we do not think that gold's long-term top is
in when the Dollar Index is making two year highs and the U.S.
trade deficit is pushing an unfathomable 7% of GDP.
Gold and its related stocks
and futures could always have a nauseating pullback of 20-40%
at any given moment (as can most asset classes we might point
out), but relying on Wall Street or other soothsayers and their
crystal ball to tell you how a chart looks or how a certain wave
formation is coming is absurd. As with stocks and bonds one must
focus on the fundamentals and invest for the long-term (3+ years
at a minimum). The fact remains that the dollar's fundamentals
continue to get worse by the day to the tune of about $2 billion
dollars (read Buffett's latest annual report if you want a refresher
on the topic) and that the allocation of assets into gold by
institutions, Asian central banks, and individuals is still negligible.
Only after both situations have changed (i.e. U.S. consumption
declines bring in balance the trade deficit and gold investment
is mainstream-popular like the early 80s) will the top be in
for gold. We suspect that when the time comes to sell gold there
will be sea of cheap equities to redeploy one's assets into.
More follows for subscribers...
December 2, 2005
Todd Stein & Steven McIntyre
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Texas Hedge Report
Todd Stein
& Steven McIntyre
email: admin@texashedge.com
For more information, go to http://www.texashedge.com.
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