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MARKETS >> MARKET FEATURES Gold Bugs Light Up as They Forecast a Short
By Aaron L. Task
5/7/99 3:30 PM ET
Protocols of the Elders of Zion. Bigfoot. Area 51. Perhaps claims of
manipulation in the gold market deserve to be in the same category:
compelling to some, but lacking relevance to most and rationality to
The Gold ConspiracyThere's Gold in Them There Black Helicopters
Certainly there are plenty of arguments to explain why the idea of
collusion in the gold market is a crock. But that doesn't absolve
prudent investors from understanding what is happening there, and what's
happening is gold stocks were on the rise until today's debacle.
Yesterday, the Philadelphia Stock Exchange Gold & Silver Index rose
3.8%, capping a 44.6% rise since April 5. In the same period, the S&P
500 gained 0.8%.
The XAU's advance came to a screeching halt today after the Bank of
England announced its intention to sell up to 125 tons, or almost 60% of
its reserves, by March 2000. The gold and silver index was off 11.5%
today as the price of gold shed $7.40, or 2.6%, to $283.20 an ounce.
Still, the XAU's jump came without a concurrent increase in the price of
gold. After hitting a 20-year-low average of $294 an ounce last year,
gold has been mired between $275 and $295 an ounce in 1999.
The Bank of England's announcement today had conspiracy hounds howling,
but even if you don't think nefarious forces are keeping gold's price
down, beware the reasons it could revive.
"Gold left to its own devices would have moved solidly through $300 in
response to a rise in oil and chaos in the Balkans," says Don Coxe,
chairman of Harris Investment Management and Jones Heward Investments,
both of Chicago. "The fact it hasn't is a case where I believe the
people involved are trying to prevent it from giving an inflation
signal. It's not a conspiracy, but I'd say it's pretty well
Coxe notes nearly every major player in the gold market -- from central
banks to producers -- is short the metal. "There are no bulls in gold,"
he says. "Yet the alternatives to gold, the only three currencies in the
world that matter -- the U.S. dollar, yen and euro -- don't look like
strong currencies. This should be the time for a move in gold."
The investment chief says that many economists who are dismissive of the
potentially inflationary implications of rising oil prices point to
gold's lassitude as proof. Yet many of the same economists say "gold
doesn't matter," Coxe observes with a chuckle. "When you have a paradox
on this scale, it will have to be resolved [and] I have a feeling it
will be resolved in higher gold prices."
Gold stocks do not fit the criteria of Coxe's large-cap value funds, but
they're the lifeblood of the Tocqueville Gold fund. The roughly $13
million fund was up 28.4% through yesterday since its inception June 30,
1998, according to John Hathaway, senior portfolio manager.
Big positions in the fund include Harmony Gold (HGMCY:Nasdaq ADR);
Getchell Gold (GGO:NYSE), which is being acquired by Placer Dome (PDG
:NYSE); Homestake Mining (HM:NYSE); Newmont Mining (NEM:NYSE); and South
African producers AngloGold (AU:NYSE ADR) and Gold Fields (GLDFY:Nasdaq
"I personally don't think there is overt collusion in gold," Hathaway
says, noting he has no affiliation whatsoever with the Gold Antitrust
Action Committee. But, he adds, "I think the posture of the market is
very wrong-footed. The mining companies that have sold forward, the
bullion dealers that may be short, all are going to be [holding] bad
assets. Like when the yen carry trade went sour, the market is simply
not liquid enough. When gold goes through various chart points, it's
going to go through at $100, $200 clips, not a dollar a day. These guys
are going to be trapped."
The Mother of All Short Squeezes
If gold prices ever ramp in a sustainable way, it will almost certainly
be a boon for precious-metals stocks. But a sharp increase in gold
prices would engender great pain to those short the metal, a group that
is believed to include most hedge funds active in commodities, as well
as bullion banks such as Morgan Stanley Dean Witter (MWD:NYSE), J.P.
Morgan (JPM:NYSE), Deutsche Bank, Credit Suisse First Boston and,
through affiliates, Citigroup (C:NYSE) and Goldman Sachs (GS:NYSE).
"Any slight move aside from normal organic buying and we think it's
going to be one of the biggest short squeezes in the history of the
market," says Ronny Kraft, CEO of Gotham Capital Management. "We're
getting set up for something really disastrous. The fact people are
totally oblivious is par for the course."
Kraft says "regression models" show a more than 80% correlation between
the past 150 days and the market tops of 1929, 1987 and 1973. He
believes a move in gold could trigger a massive selloff in equities as
players short gold sell their stocks to cover those positions. "I'm not
some crazy doomsday prophet," the hedge fund manager says earnestly. "I
want to be a bull, but the charts are telling me I can't."
Other market watchers don't see quite so Draconian a scenario.
"That's like saying a butterfly flapping its wings in Tokyo started El
Nino," says George Milling-Stanley, manager of gold market analysis at
World Gold Council. "I don't think we're going to hurt the stock market.
I think the stock market might precipitate a move in the gold market vs.
Finally, Tocqueville's Hathaway says: "My point is, the story is so
strong, you don't need to postulate a market crash to say gold is
interesting. You have to know people are essentially trapped in bearish
positions, but they don't know it yet."
Unless, of course, they know something we don't.