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WARNING: Gold Stocks Topping -Richard Spohr, SATC

WARNING:
Gold Stocks Topping -Richard Spohr, SATC

Jan 08, 2004

Instead of gold or silver coins or physical bullion, many investors opt for gold mining stocks because they normally yield higher percentage increases at the beginning of a new bull market. However, investing in precious metal stocks also carries more risk, especially as a bull market matures.

The first chart, in my humble opinion, shows a clear "head and shoulders" top. This fits into my overall theory that gold stocks have always led the physical market and that the gold stock sector is about to turn violently lower. This means that the physical gold market will start it's next leg up, which should be much larger than the first leg from $250 to $420.

The second chart (below) is one of the most widely held gold stocks; Goldcorp, Inc. It also offers a clear look at a head and shoulders top. For those of you not familiar, a head and shoulders pattern is perhaps the strongest chart pattern known. The percentages are near 85% for a change in direction following a head and shoulders. Incidently, the bull market now taking place in physical gold was started with an inverse head and shoulders formation.

On December 18th I advised clients that Gold Shares may be topping. The impetus was a massive sale of Goldcorp stock by the company's glittering CEO, Robert McEwen.

The sale was about 40% of McEwen's stake in Goldcorp, some 5.5M shares at prices over $16 a share. McEwen exercised options for most of the sale with strike prices around $5 a share, which generated $28.4M in proceeds to Goldcorp, a point the company stressed to make a positive out of a negative.

Only in a Ponzi scheme is cash flow from option exercising a notable income source. The spin didn't help, the stock promptly slipped when the news broke. McEwen still has about 8.5M shares of Goldcorp. The sale netted McEwen about $70M.

Why is this sale significant and what could be wrong at Goldcorp - the trendiest stock in the gold mining area?

Lots of insiders sell stock. Dumping 40% of your holdings in one fell swoop is not just selling some stock, its getting out. There are times when selling is excusable (though not a positive). Sometimes a company has been around for decades and heirs or company founders sell out, years after they have given up active management of the company.

More suspicious is how this big sale contradicts the Goldcorp message.

This sale means one or more of the following:
1) Goldcorp stock is simply overvalued.
2) Gold in general is due for a fall, which will take Goldcorp and other mining shares down with it.
3) Goldcorp has problems beyond simple overvaluation, possibly something sinister is going on behind the scenes.

To understand what's wrong with Goldcorp you have to understand gold.

As most investors are probably aware, gold have been hot in recent years. Today, it's hard to watch financial TV or read the paper without constant updates about how gold is reacting. Terrorism fears? Check gold prices. Falling dollar? Look how gold is doing. Inflation worries? Gold update please.

Funny how times have changed. Four years ago, in the hey day of the stock market bubble, the only time gold was mentioned was to remind us what an awful investment it was. It of course took off from there and all the featured investments of the day tanked. What's really remarkable is how a derided investment goes from black sheep to legitimate investment class simply because it runs up in price.

And they wonder why people buy high and sell low - media coverage all but assures it!

Few probably realize what a small world gold really is. The entire market cap of all gold mining companies is less than half that of Pfizer (PFE). Total gold production (gold mined and sold) each year is worth less than a weeks worth of global oil production.

Now lets take a look at the most widely held of all gold stocks, Newmont Mining Corp (NEM). Since March of 2003, NEM has risen from just under $25 per share to $50. NEM has formed a "double top" on the chart, and now looks ready to fall into the $34 range which would be a .618 retracement.

In conclusion, it is my opinion that a major top has been put into the gold stocks. The "smart money," or insiders are clearly selling here. The next leg of this market will be in the physical Gold and Silver.

One more point on the gold stock sector; when the overall market falls, gold shares tend to follow. Perhaps the greatest example of this took place in 1987 when the aforementioned Newmont crashed right along with the overall stock market. Newmont shares fell from $80 to $20. During this same time period, the physical Gold market rose from $375 to $500 per oz. for a 35% increase. Intrestingly enough, during the 120 days following the stock market crash, while physical Gold rose 35%, the Certified Coin market or "Investment Grade" coins rose anywhere from 100% to 400%, outpacing Gold bullion 3-10 fold.

Needless to say, past history in no way assures future profits. I have no crystal ball. I do however believe that those who do not learn from history are doomed to repeat it.

The bottom line: All investing comes down to risk vs. reward. Simply put, the risk clearly appears to be lower in the physical market and the reward seems to be many times greater. There is a reason that folks like Warren Buffet, Richard Russell, James Grant, Tom Calandra and a host of others believe in holding physical Gold and Silver.

Think about it long and hard.

P.S. Read my article "HEDGING YOUR FINANCIAL FUTURE" in THE NEW GOLD RUSH, PT. II.


FURTHER READING:
THE INSANITY CONTINUES
12/17/03 -Richard Spohr, SATC -- Call the markets whatever you like - a Ponzi Scheme, a Crooked Casino, a Manipulated Mess, an Irrational Financial Orgy...This appears to be a 'pump and dump' scheme that is stuck on the 'pump' phase.
STOCKS: 1999 REVISITED 11/21/03 -Richard Spohr, SATC -- Stock valuations...at their 'greatest' P/E ratio madness since 1999. Back then, I felt sorry for the impending financial doom they were about to experience. Well...not this time!
DISCLAIMER: All of the information in this story is believed to be true, however errors are possible.
Past performance is no guarantee of future performance. All investments have risk. -SATC

Next Feature Article: THE GREAT GOLD DEBATE -Editor

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