Nothing really notable to mention regarding the action today so I want to talk about gold again.
It's dejavu all over again! This afternoon I was watching BNN and there was a segment with a fund manager by the name of Schwartz from Baskin Financial Management discussing stocks he likes and doesn't like. As I listened to him I was saying to myself "this guy probably underperforms the market". I said this not because of the stocks themselves he liked or didn't like but because of the reasons why he liked/disliked the stocks. The reasons he gave were things like "the company has a strong balance sheet, they had a great quarter, and they have a great product" or any other reasons relating to things that are probably already well known and obvious to other guys like himself....a recipe for mediocrity at best.
The segment then turned to Schwartz taking calls from viewers. One of the viewers asked about gold and I couldn't believe the response this guy gave. He said that he wasn't really sure why Gold has been doing so well as of late (i.e. he thinks this latest move appears unjustified) but he's long gold anyways via Barrick because he doesn't want to be left behind if gold goes to $1500 like so many analysts are calling for. When I heard this I laughed and shook my head. This folks, is called herding - one of psychological traps investors are prone too even the so called "pros".
I saw similar herding back in the fall of 2000 about 9 years from today. Back when I was an assistant to an advisor fresh out of school it was my job to analyze all of the mutual funds available to the advisor. I noticed that pretty much all of the Canadian equity funds (even including some of the value funds!) had Nortel as their top holding by leaps and bounds. I said to myself how the fuck could these "experts" with their CFAs and MBAs in good conscience have Nortel as their number 1 holding? Surely, they must have known it was grossly overvalued or did they too get caught up in the tech "new era" euphoria? I think it was a bit of both. Anyhow, we all know how that story ended. We are seeing a similar thing happen here with the gold sector. It is now a "must have" holding although I'll admit that the feeling isn't as intense as the desire to hold Nortel back then given that this stock alone make up 1/3 of the ENTIRE Canadian Index!
As I suspected and made mention recently, we have come full circle when it comes to gold. In a recent post I said coming into this decade most investors, especially institutional ones, wouldn't touch gold with a 10 foot poll when gold was about $260 trading well below the average cost of production and central bankers were tripping over themselves to sell their gold reserves. Only the hard core gold bugs who have been permabullish on gold since the late 70's were willing buyers of gold stocks.
In late 2000 I called Kinross gold asking for information from investor relations and I was able to actually speak to the president of the company! I asked him what his thoughts were. He said the company was in preservation mode and although he felt the stock was quite cheap he was too afraid to do a buyback because it would be in his words "like pissing against the wind" lol! That folks is what a long term 20 year secular bear market bottom looks like. My timing on turning bullish on gold in early 2001 couldn't have been better....it was impeccable. My mistake was selling too soon....waaaay too soon. I've been agnostic about gold for a few years now except late this summer when I turned bullish suspecting a breakout above $1K appeared immanent. I am no longer bullish...you can consider me agnostic again ready to turn long term bearish as calls for $1500, $2000 and other outrageous predictions are abound and guys like Schwartz, who 10 years ago probably didn't want a thing to do with gold, feel compelled to remain long gold stocks even though he admitted that the latest move in gold appears bubbly. These are symptoms of a long term top that warrants watching. But you need to respect that a bull run or bubble run or whatever you want to call it, can last longer than you can remain solvent especially when the asset in question keeps making new fresh all time highs. Better to wait for clear signs that the tide is about to turn otherwise you could get run over and that's what I'm doing here with gold stocks....I'm watching them with a close bearish eye.
A few words regarding Natural gas... Last time I mentioned it about a month ago, I believed it looked ready for an upside breakout....and it did break out shortly after but the breakout subsequently failed and it has been sliding pretty badly since. I'll discuss gas more tomorrow and what my good friend Schwartz had to say about it.
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