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Posted 2/2/2004
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An insider's take on insider selling
Investors may see trouble in recent sales at Newmont Mining, but remember that insiders sell for a lot of reasons. Also: where gold and metals prices might be headed.
By Bill Fleckenstein
Recently, Newmont Mining (NEM, news, msgs), my pick-to-click in gold-stock land, issued two announcements. The first one, from a week ago Friday, reported the filing of a shelf registration that I don't find to be a very big deal. It's what mining companies do when they want the ability to sell stock should something worthwhile come along. With a certain "shelf life" built into these shelf registrations, they have to be refiled from time to time.
But if that news item came and went uneventfully, the second one -- December's announcement of insider selling by Newmont officers -- has drawn considerable attention. Since insider selling often arouses criticism, despite the fact that it's not a one-size-fits-all negative practice, I think Newmont's example provides a good launch pad for the topic of insider selling at large.
In the case of Newmont, as well as precious-metals stocks generically, insider sales are to be expected, given how long it's been since these shares have gone wild. The sales that I did find noteworthy came from the two brains behind Newmont, Seymour Schulich and Pierre Lassonde.
Seymour unloaded a million-plus shares, or about a fifth of his holdings, earlier this month, right near the highs. Pierre sold a chunk as well. I don't find these sales especially worrisome, though folks not close to the situation will probably use the sum of those sales to justify a negative view of gold securities.
My sterling-silver ringside seat
Likewise in the silver-stock arena, as the price of Pan American Silver (PAAS, news, msgs) has risen and the price of silver has risen, there have been quite a number of insiders selling Pan American shares. I know that company as well as anyone there does; I have been on the board for seven years. As I have seen those sales, they haven't particularly bothered me. I am very bullish on silver. I expect to see the price of silver quite a bit higher, and I am content to hold my stock.
Therefore, personally, I have not been a seller, and, as I described recently, the stock I sold for my fund was purely a function of downsizing the fund. In this situation, I know as much as all the other sellers, and I have chosen not to sell. Whether that will prove to be a good decision remains to be seen.
In the case of Newmont, I cannot pretend to know the stock as well as Seymour, Pierre and the other insiders. But I think the analogy is similar. I perhaps am more bullish on gold than they are. Or perhaps they have so much of their net worth in it that they felt it was time to sell. Let's not forget that since they sold Franco-Nevada Mining to Newmont, its stock price has tripled, and who knows what their personal agendas are?
The price of gold, an inexact prescience
However, as smart and as wealthy as they are, they don't know where the price of gold is going, any more than I do. Why someone should own gold, and how high it may go, is, as my friend Jim Grant says, an essay question, not a math question. I think anyone might have the ability to answer that essay question just as well, and possibly better, than somebody who happens to be able to stare down a mineshaft.
Turning to the technology-stock sector, where insider selling has sometimes prompted my criticism and bolstered my rationale for being short, let me address the issue of this "inconsistency." It was raised by a reader of my daily column, who suggested that if Intel (INTC, news, msgs) CEO Craig Barrett had sold shares like Newmont insiders, wouldn't I be jumping up and down and shorting the stock?
To respond: I am like everyone else. I never like to see insiders sell stocks that I am long. In the past, when I've noted insider selling in chunky quantities, this was often because I was short a stock for a particular reason, and I believed that management wasn't telling the true story (as I understood it).
Alarm-bell insider selling
In almost every case where I've noted chunky insider selling, that particular insider had been out crowing about certain things in his business, whereas Newmont insiders did not preface their sales with fanfare. So, I hope that further illuminates my viewpoint on why I wasn't especially unnerved by the Newmont selling, and why I sometimes note insider selling in stocks that I might be short.
One further note on Newmont: My hunch is that some of its luster has been removed by the upcoming launch of the exchange-traded fund for gold. (The stock is off 14% since the first of the year after a 70% rise in 2003.) Large institutions that would be buyers of Newmont stock are perhaps taking some money off the table to put toward this ETF. I'm not sure that's the case, but it occurs to me that this might be part of what's going on.
As for the ETF itself, there just does not seem to be any information about when it's coming or why it's been delayed. Once the fund has launched, I expect it will be very bullish for the price of gold, and that Newmont will likely respond positively.
A bullish development for gold could also lie in a potentially tectonic statement made last week by Japanese Finance Minister Sadakazu Tanigaki -- though it was overshadowed by turmoil over the Fed's interest-rate announcement. (I'll have more to say about the impact of this announcement on gold prices below.)
Tanigaki's comments have longer-term implications for currencies, metals, and perhaps even fixed income, so I would like to share them with readers, via the following from Bloomberg: Japan needs to "carefully" consider diversifying its official reserves to include more holdings of gold. "That would be necessary for the purposes of diversifying assets," Tanigaki said at the fiscal and finance committee of the lower house of parliament in Tokyo. He was responding to a question by Jin Matsubara of the opposition Democratic Party of Japan, regarding why most of Japan's official reserves are in foreign currencies and U.S. Treasuries, rather than other assets, including gold. . . . "There is debate among international monetary authorities about gold's role in foreign reserves," Tanigaki said. "Boosting holdings of gold would affect the gold market and so should be carefully considered."
If Japan buys, it could spark a flood of buying
This story made the rounds, as one might imagine. Some folks were quick to say that Tanigaki was misinterpreted, while others were quick to do calculations about Japan's tiny sliver of reserves held in gold. I tend to believe that where there is smoke, there is fire, but this is, of course, just conjecture. According to my sources in the metals market, the Japanese have not been doing anything yet. But if they do, a trickle will soon become the functional equivalent of the biblical flood that required Noah to build an ark, including not just the Bank of Japan but also Japanese citizens, the Bank of China and Chinese citizens.
Those of us who've long held Alan Greenspan's actions in disdain have continually scratched our heads about why the Bank of Japan, the Bank of China and others persist in lapping up dollars and mispriced Treasurys, rather than exchanging their surplus dollars for gold, which would not put pressure on the foreign exchange rate. Apparently, some brighter lights in Asia have begun to figure this out.
The gold correction has arrived
Meanwhile, in the wake of the Fed's communiqu, violent downside moves roiled the currencies, precious metals and precious-metals stocks last Thursday. During the rout, I took the opportunity to purchase some gold for myself when it fell below $400. This large correction in the metals is one that I have been worried about and sort of anticipating, though I did not know what would precipitate it.
I have a hunch that in the next short space of time, a tremendous buying opportunity will have presented itself. Certainly, should Japan raise its gold holdings, the implications for precious metals would be wildly bullish. Folks would want to scoop up as much gold as they thought they could stomach, then close their eyes and not check on the price except maybe once a month for a couple of years, because that would be one powerful trend in place.
Bill Fleckenstein is president of Fleckenstein Capital, which manages a hedge fund based in Seattle. He also writes a daily Market Rap column on his Fleckensteincapital.com site. His investment positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy, sell or hold any security. At the time of publication, he was long Newmont Mining and Pan American Silver. The views and opinions expressed in Bill Fleckenstein's columns are his own and not necessarily those of MSN Money.
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