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Gold Hits a Two-Year High and Starts to Make Some Friends
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(May 10, 2002) Gold prices continue to hold higher ground, closing today at $311, capping gold’s sixth week of trading above the $300 level. New price levels and the fact that gold stocks having out-performed all other equities sectors since the start of the year has made the financial press take notice. Gold hasn’t made the cover of Time magazine yet, but the attitude towards it is definitely improving.
Even the New York Times got into the act on Sunday, April 28th, with an article in their Business section entitled “The Price of Gold is Shining. Hedging of Gold is Not.” In the article, Jonathon Feurbringer contrasts the stock performance of gold miners such as Barrick Gold with unhedged producers such as Newmont mining. Although Barrick outperformed Newmont in a sagging gold market, making money off their hedged gold positions while Newmont posted quarter after quarter of losses, now that gold prices have made a positive turn, Newmont is up 57.4% this year while Barrick up less than half that at 27.8%.

The Times article goes on to make the case that gold hedging is increasingly a thing of the past among mining companies. Not only is hedging unprofitable in a rising gold market, but as investor sentiment brightens for gold, investors shun the companies that have profited primarily from trading gold on the short side. As always, a bull market in gold creates a new cast of investor favorites.

“Gold Stays Close to Two-Year High” headlines London's Financial Times of April 27th. Adrienne Roberts’ column cites improving fundamentals for gold, and notes that “In previous years a spike would have been followed by a fall, but gold’s recent rises have been more sustained.”

“Gold Reaches Two-Year Highs on Dollar Weakness, Mideast” was the Wall Street Journal headline to Gavin Maguire’s Commodities Report of April 29th. In this column, Maguire cites new buying by large speculative funds looking for an alternative to the recent poor performance of equities. He quotes Charles Nedross of PeakTrading.com in Chicago: “I like what we’ve been seeing – higher highs and higher lows – so I think we’re in good shape to test higher. I don’t see too much (resistance) between $314 and $325, so the rise from $314 could be pretty quick.”

The following Monday, May 6, the WSJ once again headlined their Commodities Report column with gold: “Gold Futures Surge on Buying Related to Dollar, Stock Drop.” This column cited many reasons for the new investment money coming into gold beyond just the “war premium” engendered by the volatility in the Middle East. Taking a look at the new investor psychology in gold, our friend Leonard Kaplan of Prospector Asset Management is quoted by the WSJ echoing a point we made in our article of February 9, 2002 ("Gold’s Perfect Storm on the Horizon,” available in our Archives):

“Back when gold, was $260-$270 per ounce, you couldn’t give it away. Now, more and more people want to ride this train, and I think that trend will also continue…Most Western world or U.S. investors are momentum investors, not value investors. They don’t seem to care if something is comparatively cheap, they just want to know if it’s going higher.”

Kaplan goes on to assert, “We’re in a bull market here, and we’re definitely going higher.”

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Barron’s of May 6, 2002, featured an interview with Price Headley, the technician and proprietor of BigTrends.com. Barron’s often features an analyst or technician in the equities area, and this issue was no exception, with a 4-page interview of Headley. Headley is no cheerleader for stocks, and as a technician and ‘momentum guy,’ he shares insights the likes of which you won’t hear from your typical stock-pumper.

In this interview conducted by Sandra Ward, Headley names three gold miners as his favorite stocks right now: Gold Fields, Agnico-Eagles Mines, and Newmont Mining. The whole interview bears reading, if nothing else than just for the refreshing take he has on the market. He doesn’t think the time is right for most equities, and Sandra Ward asks him:

Q. Any glimmers of bullishness anywhere?

Headley: “The area that has been the strongest is gold. It is probably going to surprise people and move quite a bit further to the upside. One of the key levels to watch is $300 an ounce on bullion. If it holds above $300, there’s potential for a real explosion up. We would expect it to move to 350 in the next six months in that case and then up between 380 and 400 over the next 12 to 18 months.”

“It won’t take a whole lot of money moving out of the stock market and into gold stocks to create a huge move in the gold market. The whole market is so small. You can compare the market cap of GE to the whole gold market. If we get even a trickle out of some of the big-cap names and into gold, that could lead to a doubling or more of a lot of these gold stocks.”

Q. How long, then, does this trend last?

Headley: “Right now we are seeing a lot of skepticism, so the up trend will continue. There will be points along the way where people get too exuberant and happy about gold stocks and they will dip back down, but I think a multiyear bull market in gold isn’t unlikely given the trading range we see in the stock market and given our expectations that the stock market will retest its lows.”

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The fact is, gold is starting to make sense to people for the first time in two decades. The U.S stock market seems to have peaked out two years ago, federal spending in the U.S. is ballooning while federal tax revenues are down, and the precarious strength of the dollar depends upon an inflow of $1.5 billion per day from foreign sources. All in all, not a bright picture for the rather tired-looking dollar. And conversely, these are strong demand factors for gold.

Looking at the supply side of the equation, low gold prices over the past few years have discouraged gold exploration, which naturally means less gold will be mined over the next few years. Yet gold demand outstrips mine production and scrap recovery by some 25,000,000 ounces every year. When you factor in growing investor demand, you see that something’s gotta give. That something is price.

And as the case for gold (and its price) strengthens, you’ll be reading about it more and more in the popular press.

Anybody for starting a pool? What’s your prediction on when we see gold shine on the cover of “Time?”

 

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