CFTC urged to investigate gold price fixing

By Brian Louis
Staff Reporter
TheStreet.com

August 17, 2000

a href=http://www.thestreet.com/_yahoo/markets/marketfeatures/1041923.htmlhttp:...

One of the stock market's laughingstocks is poising
itself for a powerful rally, and the risk of tossing a
bit of money into this sector doesn't appear to be too
high for some market pros.

That's right; the gold bugs are biting.

While you're doubled over with laughter at the prospect
of putting even a dime to work in gold stocks, consider
that a handful of analysts think the maligned sector
could be ready to climb. Excuse the fact, if you can,
that the belief is based mostly on the fact that the
strong negativity and indifference the market is
showing toward gold stocks mean things almost have to
get better.

To contrarian investors, who believe strong sentiment
in one direction is a signal that a cycle is ending and
a stock or sector will soon reverse course, the
loathing for gold stocks is bullish.

While few expect gold stocks to become a stock leader,
or think that people should bet heavily on the sector,
the group could still provide a decent opportunity for
investors to make some money.

One of the key signs they've found is in the bullish
consensus on gold, which stood at 16 percent Monday,
just a bit higher than the 12-month low of 13 percent,
notes Richard Ishida, president of Market Vane.

Jay Shartsis, options strategist at R.F. Lafferty in
New York, notes that the 13 percent bullish consensus
mark on gold preceded a short rally in the sector last
year. quot;The pessimism is interesting,quot; Shartsis says,
adding that the risk in buying these stocks is very
low.

Another sentiment reading that rekindles the gold bug
in Shartsis is the put/call ratio on the Philadelphia
Stock Exchange Gold/Silver Index, or XAU, which
measures the number of puts traded against the calls
traded. Typically, traders see a high put/call ratio as
a bullish sign because it means investors have gotten
very negative on a sector.

The XAU put/call ratio, which has spent about the last
year around the 40-50 level, on Tuesday was around 140,
showing that 14 puts traded for every one call, notes
Shartsis. Even compared with the overall equity
put/call ratio during market swoons -- that measure hit
77 during one of those awful April days -- that number
is astounding in its pessimism.

That level, however, still isn't as high as the 190
reading that it hit before the aforementioned 1999
rally, Shartsis says.

The first signs of a bounce may have started on Friday,
a day when, Shartsis says, he bought some Newmont
Mining. The XAU on Friday popped 4.5 percent to close
at 52.99. On Monday, after trading lower, the XAU
managed to close the session higher, up fractionally to
53.02. Tuesday saw a 2.75 percent gain, and the XAU
finished the day at 54.48.

The XAU is trading a little higher than its 52-week
intraday bottom, which it hit on Aug. 3, when it
cratered at 49.55.

In a research note Monday, Bear Stearns analyst Michael
S. Dudas noted that the XAU has found support at 50, a
level not seen since Aug. 31, 1998, shortly preceding a
dramatic rally over the following six weeks. quot;We find
current investor sentiment quite similar to that July-
August 1998 time frame when the world was accelerating
into a commodity deflationary spiral,quot; he writes.

Even the addition of Phelps Dodge, the copper mining
giant, into the XAU is being seen as a positive because
it tosses another dirt-bomb at the gold and silver
companies.

The move quot;provides anecdotal evidence of a sentiment
washout within the group, in our view,quot; Dudas writes.
quot;Phelps mines gold and silver only as a byproduct of
copper mining and derives less than 1 percent of sales
from precious metals.quot;

Dudas writes that he believes North American gold
stocks are oversold and quot;the shares have overly
discounted investor apathy, summer weakness in overall
commodity prices and recent gold price performance,quot;
which has held the low end of rather narrow $270-$290
per ounce range. He says it's an encouraging view given
the ample liquidity, reduced commodity exchange
activity, increased official reserve flows, and
diminished pricing view among investors.

Neither Dudas nor the other gold watchers expect mining
stocks to replace Cisco as market leaders, but they do
see the potential for a good short-term pop.

All things considered, that'll be just fine.