April 7, 2000. Can money be made with the current market volatility? Only in out-of-favor gold stocks. This group has been in decline for 4 years. In fact, the gold shares are trading at their lowest prices in history. Four years ago, in the first quarter 1996, the group was at its peak. Since then, the stocks have declined 60% to 99%. I follow Placer Dome (PDG) and Newmont Mining (NEM). Placer Dome is at 8, down from 31 four years ago. Newmont Mining is at 22, down from 61 four years ago. The reasons to have gold shares are the small outstanding float (number of shares available to trade) with the group trading well below the four-year trend line, and early spring seasonal influences that can cause sudden sharp rallies. Almost every year, gold sees a rally beginning in late March to mid-April which is good for a 20% to 50% bounce in prices. The rally is usually short-lived and ends in May which could take PDG up to 9 1/2 with an upper target of 12 in a few weeks. With the overall market and technology stocks in particular starting to exhibit extreme price moves, gold shares also act as a powerful portfolio hedge against volatility, since the movement of gold shares over time has been independent of the movement of the overall stock market (zero correlation, very low R-square). Now is a low risk time for gold shares. Even if the group does not rally, the most profitable producers, Placer Dome and Newmont Mining, are earning money and paying dividends. This cannot be said for any dot.com stock. Indeed, both have managed to show earnings increases in the past 4 years by lowering their cost of production faster than sales prices have declined. Placer Dome will not stay at 8 for long. I like the April 7 1/2 call option on Placer, which I will add to the MODEL PORTFOLIO at 3/4. Ten (10) contracts at 3/4 has a price of $750. Expires in 2 weeks. Symbol PDGDU.
Copyright Notice, all pages Copyrightę2000-2 and are made available as a service to the global Internet community.
Pages may not be reproduced or sold in any medium without explicit, written permission from Steve Zito.