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ROCKET SCHOOL OF ECONOMICS
Gold Bugs Beware!
by Professor von Braun
June 10th, 2002
The run up in gold stock prices
has been extraordinary given the fundamentals of this small group
of producers of the yellow metal. Certainly given the fact that
many of them have sold forward at prices below the current gold
price, the actual profitability of these companies must be suspect.
That's apart from the ridiculously high p/e ratios now being displayed
by some that are not sold forward. This rally looks like a mini
Nasdaq bubble and one can expect a substantial retracement at
some point in the not too distant future.
The bullish consensus on gold
in percentage terms is up in the high eighties, not a healthy
sign, nor is the fact that the number of new players entering
the gold market and buying gold stocks for the first time is relatively
high. In particular some mutual funds have been buying for the
first time and this begs the question, why now? Have they run
out of bubbles to invest in?
Then there are the newspaper
articles that have been appearing all over the world that tout
gold as the safe haven investment. But safe haven from what? Uncertainty
about paper currencies? Once again, when does the popular press
ever get it right?
Then there are the cries, perhaps
bleats is a better word, from certain quarters about Central Banks
being out of gold and we can expect the gold price to go to the
moon immediately, if not sooner.
It is an unfortunate fact that
the investing public rarely get it right when it comes to picking
trends, that's apart from the fact that bull markets do not begin
with such high levels of enthusiasm. The public is usually the
last to know and the last to get out. Even the stories about gold
buying by the Japanese that have been used as "evidence"
of the new gold boom have to be treated with suspicion. After
all, when did the Japanese investor ever get it right?
The Swiss Central Bank still
has a significant amount (900 tons) of gold to sell and then there
is the announcement by the head of the ECB that the Bundesbank
will sell gold and buy equities.
People tend to forget that the
bull market in gold stocks that followed the gold rally in 1980
began after the rally had peaked, not while it was underway. Where
were the intelligent investors then?
Turning paper currency into
gold at recent price levels ($270-$290) and taking delivery of the metal has been a very good strategy over the last couple of years, but getting over
excited about the current run up in gold prices and investing
ones life savings in gold stocks when the fundamentals are so
askew is not the best way to play the gold market.
So gold bugs beware, this is
a very messy market, built in part it seems on the remembrance
of past glories, being aided and abetted by old die hard investors
who lost when the previous "new" bull market in gold
(or was it the one before?) failed to gather enough momentum.
This one could well end the same way.
The Prof can be contacted by email
Copyright by Professor von Braun.
All Rights Reserved. Reprinted at USAGOLD