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Why gold stocks should go higher
So far in February, gold stocks are down about 12%. That gives investors a chance to get in before the next move up.
By Jim Jubak
Thanks, we needed that.
I'm breathing a sigh of relief at the sell-off in energy and gold stocks. In the last few weeks, enthusiasm for the two sectors had risen to such a level that I couldn't find anybody with anything bad to say about these stocks. Everyone wanted to buy. And, frankly, that had me worried.
I feel much better now that volatile small-cap oil-and-gas producer Ultra Petroleum (UPL, news, msgs) has fallen 14% from Jan. 31 to Feb. 10. And with heavy oil refiner and sector favorite Valero Energy (VLO, news, msgs) down nearly 19%. And with Canadian oil sands play Canadian Natural Resources (CNQ, news, msgs) down nearly 12%.
And now that gold stocks Newmont Mining (NEM, news, msgs), Glamis Gold (GLG, news, msgs) and Gold Corp. (GG, news, msgs) have all dropped about 11% in the same two-week period.
No, I'm not some kind of investing masochist. I personally own shares of Glamis Gold and Gold Corp., and I don't like the pain of an 11% loss any more than the next investor does.
Bring on the unconverted
But the simple truth is that stocks go up when doubting investors are converted into buyers. If everyone is a believer, there isn't a reservoir of potential buyers ready to increase demand for shares. You make more money investing in the trend when at least a sizeable minority of investors doubts the trend -- or worries that it's about to come to an end -- and resists buying into the trend even while other investors are making money.
As long as the fundamental trend is intact -- and I believe it is in the energy and gold sectors -- I'm happy to see signs of skepticism. And I get positively giddy when I see a story like "Commodity bubble's burst is good for stocks" from The Street.com.
Related news and commentary on MSN Money
Bring me your worriers, your doubters, your shorts with a need to cover. In today's column, I'm going to take a look at the trend ahead for gold stocks. Next column, I'll do the same for the energy sector. And in the third part of the series, I'll look at why the technology sector is having such a hard time putting a strong upward trend together.
The clich says that bull markets climb a wall of worry. And like many clichs, this one became a clich because it is so true. Let's take a look at the gold sector to see how it works for a sector that's trending upwards.
Gold's big run is almost over
Golds good for jewelry but a terrible investment right now. One ETF has engorged the market with investors, and the price is unlikely to rise much higher. Click here to read Middletons perspective on gold.
Back in October 2000, you could have bought shares of gold-industry leader Newmont Mining for $13 a share. Thanks to a round trip that had taken the stock from $15 in 1983 to $60 in 1994 and then back to $15 in 2000, volume had dried up. In 1990, for example, the stock traded less than 200,000 shares on most days, and a big spike in trading would take daily volume up to 700,000 or 800,000 shares. (You can set our charting tool to show trading volume in the bottom frame of any stock chart.) That's a miniscule volume of trading for a stock like Newmont Mining, with 84.5 million shares outstanding in 1990.
Volume had picked up by the time 1998 rolled around, with 1 million to 2 million shares often trading daily. Volume spiked after the August bottom, as 4 million-share days became frequent and spikes took volume close to 6 million shares a day. All that buying turned out to be premature, as earnings per share cratered in 1998, falling to 44 cents a share from $1.14 in 1997. The rally based on this higher volume petered out after the stock hit $30 in October 1998, and the stock began its descent toward the October 2000 lows near $13 a share.
This kind of misleading volume signal in 1998 is why I like to combine technical and fundamental analysis. At some point, the buyers buying on volume momentum have to give way to buyers buying on earnings momentum. Otherwise a stock's rally will stall. A huge drop in earnings at Newmont Mining in 1999 and 2000 scuppered this handoff and led to the stock's retreat.
As the stock rallied in 2001 -- finishing the year at $19 and change -- volume picked up, but it certainly didn't skyrocket. And the fundamentals were so strong that investors couldn't ignore this stock: Earnings had rebounded from a 6 cents-per-share loss in 2000 to a profit of 8 cents in 2001. But sales were still stagnant -- a trend, or lack of one, that would persist through 2002.
Why the gold bulls will win
By 2005 sales and earnings per share were up and -- best of all for investors riding the upward trend in Newmont -- trading volume was climbing along with the stock's price. You know the joke about stocks: They're the only thing people want to buy more of as the price goes up. Well, that was exactly the case with Newmont. By February 2006, average daily volume had risen to 7.5 million shares and the stock had hit a high of $63 a share.
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