A New Bull Phase
Has Begun
for the Entire
Natural-Resources Sector
by James Dines, The Dines Letter
Alto
comes from the Latin altus meaning
"high," as in the word altitude. Why, then, is alto the name for
the lowest female voice? Because formerly it described the highest male
voice, the countertenor. It was then expropriated to describe the lowest
female voice, what is properly called contralto.
Words
such as "high" and "low" are equally slippery when used
in investment decisions exactly because their meanings are comparably able
to switch polarity without warning. Valence is truly a function of Mass
Psychology rather than numerical logic, which is why we believe that trends
are more important than absolute levelsexcept at extremes.
Time
and again we have pounded home the theme that the precious metals were underpriced,
that so much gold had been sold short, so many gold miners had sold forward
in the futures markets, so much "carry trade" was vulnerable,
that a short-covering buying panic was becoming increasingly likely. And
all it took was central bankers deciding to inhibit their gold dumping for
the next five years to have started a self-feeding, old-fashioned, all-out
buying panic as each buyer pushing prices up forced hedge funds to increase
margin payments. Our guess is that margin calls are flying now, and prices
will move up until many of those who dared sell short have been wiped out.
The
reason it took guts to recommend gold in a climate so hostile to the metal
was that America's news establishment has transfigured from news to entertainment,
toward competing with tabloids. Deeper, this must reflect an underlying
change in the electorate's Mass Psychology. The negativity toward gold even
infected the central bankers, who have been scrambling over each other to
dump their nation's gold holdings on the open market, but even those dimly
dithering dolts had begun to figure out that pushing the price of gold lower
only depressed the price of their remaining gold holdings. More important,
the US Congress began to dig its heels in against any further gold sales.
Note carefully that the United States, the world's largest gold holder,
has not reported the sale of a single ounce, even as other central
bankers were exchanging solid gold for paper US dollarsa swap that will
be looked back on by history some day as classic folly.
Gold
markets were Oversold, underowned, ignored, vilified, deprecated, everything
but sodomized. On top of that, not only had the yellow metal been sold out,
but the future has been sold via forward sales, heavy short positions, and
even Newmont Mining, a traditional non-hedger and opponent of doing so,
this summer bought 2.85 million ounces of puts over the next two years at
270, equal to over one-third its next two years' production -- a classic
capitulation.
Nobody knows
for sure how much betting there has been on the downside but, given the
incredibly pessimistic Mass Psychology, we suspect that gold shorts were
far in excess of what could have been reasonably covered quickly. Indeed,
the very explosiveness of the gold rally, once it began, tends to confirm
our suspicion, and we doubt that everybody has covered even now. Which means
that there is still a large short position out, and further rises by gold
could produce margin calls that bring some "surprising" bankruptcies
out of the woodwork, like the ones exactly a year ago.One
of the reasons mining companies sold so much of their product forward was
that they were desperate for cash, what with over half the world's miners
selling their product at a loss. At recently low prices mining companies
began to cancel exploration & development budgets, closing down unprofitable
divisions, and moving toward hibernation, which means that even sharply
higher gold prices would not now bring an increase in gold production because
it already takes over five years to bring new mines on stream. So we
look for a continuation of the favorable supply/demand balance due to limited
production, now that central bankers have been muzzled.Gold
is priced in US dollars, so the stronger Japanese yen means that the price
of gold in terms of their currency has declined commensurately, and that
these higher gold prices will not be a deterrent to Japan's continued gold
buying. And they are large consumers of the metal.According
to DISAT, we believe that the entire Natural-Resources Sector has begun
a new bull phase, as we have been pointing out since the upturn began earlier
this year. So far, oil has led the way, with crude at a new high above $25
recently, but copper is coming on strong, as are zinc, lead, aluminum, nickel,
and many other commodities. The heading of our seventeenth Interim Warning
Bulletin of this year, as already noted on August 23, 1999, was "The
Coming Commodities Boom," a lucky shot, with the specific recommendations
reiterated in the subsequent TDL.According
to DIWPAT, the four precious metals move together, and the phenomenal Uptrends
by palladium and platinum have been leading the way higher. Gold has been
retarded by the threat of central bank sales, but now the group is moving
together more tightly. The way to make money with DIWPAT is to buy laggards
in newly-leading groups, which means that silver should soon burst
into the headlines, a "surprise from out of nowhere." Thanks
to TDLr MH in Toronto for having called to our attention an article in the
Sunday Telegraph suggesting that Martin Armstrong, who was recently
arrested on charges of a $1 billion bond fraud in Japan, had sold short
24 million ounces of golda massive 746 tonnesnow being investigated by US
authorities. Adding fuel to the fire as news that Microsoft's Bill Gates
had raised its stake in Pan American Silver (on Supervised List #3) to 10.3%
from 6%, at prices around $5. Our favorite silver investment in the world
has been Pan American Silver (PAAS), closely followed by Industrias
Penoles, the world's largest silver producer. We also like Silver
Standard (Nasdaq SSRIF).If
you had been planning on buying gold jewelry for the upcoming Holidays anyway,
it would be wise to buy immediately from a jeweler using "old inventory"
at lower gold prices, so that you would have a built-in gain to start with.
But we do not favor jewelry entirely as an investment because so much price
is involved in workmanship and other retail charges. The best way to buy
precious metals would be to place an equal amount of money into every stock
in Supervised List #3, plus our favorite gold stock of them all Franco-Nevada,
(TSE FN) the world's fifth-largest gold company with a market cap of $3.5
billion (Canadian). Franco has been very poorly promoted, and is not even
listed on the New York Stock Exchange, but their royalty and direct-interest
lands exceed 5 million acres and contain precious-metals resources of 22.4
million ounces. This gem will not be unknown for long, as mining-wise investors
"in the know" will gobble this one up first; indeed, it has already
leaped to challenge its previous all-time highs. Actually, the entire low-priced
mining Sector is poised to follow the blue-chip leaders, much as they did
in the mid 1970s, which is why our last IWB added Glamis Gold (GLG)
as a low-priced flyer.As
suspected in our last TDL, in the feature entitled "Changes in The
Wind," gold was due to rise, but it is more interesting to wonder what
the rise means and how long it might last. Since we expect the "Mother
of All Bull Markets" to end amidst what we have been calling "The
Coming Gold Crisis," we are understandably paying extra attention to
developments. However, since we do not see any signs of any imminent currency
problems, our guess is that gold has risen simply to discount the inflation
that we believe is clearly present to those who are not blind to it, and
the yellow metal is finally moving more in harmony with the other precious
metals (as per DIWPAT). Accordingly, we are not looking for the US dollar
to crash yet, still expecting it to be taken out last because of its huge
gold holdings at Fort Knox. We showed a chart of Teck Corp on August 27,
1999, and an update in our recent issue of The Dines Letter reveals the
subsequent Upside Breakout, another lucky shot. In addition to this copper
and gold producer we like Noranda (NOR.TO), Lihir (LIHIR),
Southwestern Gold (SWG), and Goldcorp (GA), but these are
not recommendations because we have no room for them in our Supervised Lists,
and they will not be followed up. However, we do recommend that all money
managers maintain at least 19% of portfolios in precious metals, consisting
of an equal amount in each of the eleven golds that we recommend in our
newsletter.Ostensibly,
gold has just proved that the best way to get praise is to die!Editor's
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