- When gold stocks rise sharply as a group on extremely
heavy volume, it's almost always a sign of trouble ahead for the overall
stock market.
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- Analysts say the 7.5 percent advance for U.S.-traded
gold shares this week -- the sector's largest increase since May 2000 --
points to renewed interest in the metal. It's also a sign investors accept
the possibility that the stock market, and the few industries still holding
onto gains this year, could come crashing down in coming days or weeks.
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- Gold's price, subdued until this week, is up almost 20
percent from 12 months ago. The spot price on Wednesday morning in New
York was $315 an ounce, down $1.40 after an almost a gain of $4 the previous
day. Trading activity in top gold mining companies like Newmont Mining
(NEM), Gold Fields Ltd. (GFI), and Barrick Gold (ABX) is regularly exceeding
the stocks' three-month volume averages.
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- Analysts and newsletter writers say the metal and corresponding
shares have the winners at a time when the stock market and the U.S. dollar
are the losers. What is new is the belief that the metal's gains, and those
of gold mining companies, are telltale signs of an impending stock-market
meltdown.
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- "What the market seems to be saying is that we've
seen the end of Wall Street's oversold relief rally, and the resumption
of gold's bull trend," said Bob Bishop, the longtime editor of Gold
Mining Stock Report (www.goldminingstockreport.com). "I'm guessing
that (the July 5) lows in many gold stocks are likely to be the lows for
some time, principally because of the amount of bad news that appears to
be baked in the cake of the broader market and the U.S. dollar. That's
good for gold, and bad for U.S. stocks and the dollar."
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- Gold shares Wednesday morning were down a little more
than 1 percent, as measured by the XAU (XAU) index of major miners.
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- Barry Cooper, gold mining analyst at CIBC World Markets
in Toronto, is convinced gold's gains will proceed lockstep with the fall
of the dollar against other major currencies, such as the euro. The euro
is flirting with the $1 level for the first time since January 2000.
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- The rise of gold mining shares "suggests the broader
markets are not that healthy, but most people could have surmised that,"
says Cooper. "The equities have been leaders to bullion for the past
while so I would expect we will see some further strength coming."
One of Cooper's top gold stocks, Canada's Goldcorp. (GG), staged a 9 percent
gain in a single day this week.
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- Joseph Duarte, a Dallas fund manager and author of "Successful
Energy Sector Investing," says the mining companies' stellar stock-market
gains this year bode poorly for other industries. "Gold is the refuge
du jour, because there isn't any place else to run. Hospitals, HMOs, drugs,
banks, oil -- everything that is 'safe' is getting clobbered," Duarte
said Wednesday.
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- Homebuilder stocks were one of the few industries holding
onto substantial gains this year. No more. "Look at the charts of
the home builders, especially Toll Brothers (TOL) and Ryland Group (RYL).
These stocks are clearly under heavy selling pressure, suggesting that
even these invincible stocks are being abandoned. That may well be the
sign that indeed capitulation is either here or just around the corner,
as when people are truly getting scared."
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- Not everyone expects a surge for gold this summer, traditionally
a weak season for jewelry sales. James Turk, founder of payment system
GoldMoney.com and a longtime precious metals newsletter editor, sees a
trading range of $300 to $320 an ounce for gold "in the next 2-3 months,
then gold makes another attempt to hurdle $325 in September or October."
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- Mike Darda, an economist at Polyconomics Inc. in Parsippany,
N.J., sees a "slight upward bias" for dollar-gold prices, "but
not a bias that will cause the price to rise by leaps and bounds. We'd
need an attack on Iraq for that -- and we still think that prospect remains
remote." Polyconomics sees gold prices moved most by the supply and
demand for currency and bank reserves, which are influenced in turn by
tax policy expectations and geopolitical developments.
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- "For gold to fall hard, we would need to see a turn
in U.S. fiscal policy (i.e., a cut in the capital-gains tax) or another
big downshift in global political risk," Darda says. John C. Doody,
editor of Gold Stock Analyst (www.goldstockanalyst.com) expects that gold
mining shares will continue to reflect gains in the metal. The "rule
of thumb is a 1 percent change in gold price yields a 3 percent change
in stock price," says Doody. "This is because the price increase
adds directly to the bottom line, or takes from it if the price falls.
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- Witness the recent $15-an-ounce slide, or 5 percent,
that saw most stocks off 15 percent to 20 percent."
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- Higher gold prices provide gold miners with more cash
flow from their annual production. Investors in turn are more willing to
pay a higher price for a miner's reserves, generally 10 times annual production
for the best companies. "The price increase," he says, "makes
all the reserves more profitable and may make marginal ounces profitable
now, which weren't economic at a lower price."
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