Cramer Bullish on Gold: A Contrarian's Worst Nightmare? By Ben Abelson
05 May 2006 at 04:50 PM GMT-04:00
NEW YORK (ResourceInvestor.com) -- In the traditionally contrarian-minded
gold-bug investment universe, CNBCs Jim Cramer is about
as far as most people get from an investment guru. Widely
reviled as the most public face of so-called TOUT TV,
gold bugs and bearish investors are fond of bashing Cramers
picks and brash style throughout contrarian blogs and websites.
So, it probably came as a surprise to a few precious metals
investors when Cramer declared gold one of the 10 Strongest
Bull Markets in his April 20 Real Money
column on TheStreet.com.
In the item, Cramer noted:
Looking for the bull markets? Let's just recount the
strongest so you know where the hunting is best.
1. Gold, plain and simple. Cheapest: still Goldcorp. Most
speculative with biggest payoff: Crystallex -- yeah, it's
in bed with Chavez, but he needs to put people to work and
gold mines do it better than anyone else. Worst: Newmont.
It's running out of gold and seeing higher finding costs,
but you know what? It's the worst house in a great neighbourhood.
Most precious metals investors, this correspondent included,
are entirely more comfortable buying shares when others have
their heads in the sand during a classic stealth bull
market in other words. Given Cramers bullishness, should
precious metals investors be running scared?
A couple years ago, Jim Cramer wouldnt touch precious
metals stocks. Last year, he actually chewed out an investor
who called into CNBCs Mad Money show to
discuss Silver Standard [Nasdaq:SSRI; TSX:SSO].
(To paraphrase his comment, it was literally something along
the lines of: Unless you think theres going to
be a nuclear holocaust, why would you buy a silver stock?)
But even before his all out gold bullishness, Cramers
been pushing select precious metals stocks for several months.
Goldcorp [NYSE:GG; TSX:G] has been one of his favourites.
While Goldcorp is a best of breed and can certainly stand
on its own merits, Cramers recurring touts since late
last year have no doubt played some role in helping the companys
stock outperform its peers.
Cramer Moves Northgate Through the Roof
Just days ago, investors caught an eye of what a Cramer tout
could do to a small-cap miner. After a strong first quarter
earnings report, in a live report on CNBC, Cramer said Northgate
Minerals [AMEX:NXG; TSX:NGX] was wrongly downgraded at several
firms after reporting a dynamite quarter. His
verbatim advice to those analysts: Get a life. Copper
and gold is the play for today.
Prior to this statement, Northgate had been trading at around
$4.20, after going as low as $4.04 on the day. After Cramers
tout, the stock instantly gapped up to $4.36, and closed at
$4.49, just a penny off the days high. An investor who
bought at the days low would have seen an almost 10%
gain, thanks solely to Cramers power to move markets.
Thats not to say that Northgate isnt a great
company. In fact, I was all but begging investors to buy it
over the past year - near its low of 92 cents last May, and
again in late November when the stock traded at $1.62.
But, with Northgate recently hitting $4.69 - a 400% plus
gain since last years lows smart investors might
think the time for easy money is past. Not Cramer, who also
on May 4 responded to an investor inquiry during CNBCs
Mad Money by saying, That company [Northgate]
is both gold and copper. ... It's a way station at 4 1/2 toward
nirvana at 5 1/2.
Dont get me wrong: Im a long-term Northgate shareholder,
and think the companys got great long-term potential.
But given the stocks spectacular run Ive suggested
readers take partial profits at this stage, with an eye to
replace their shares at lower values. Risk management, after
all, is the name of the game.
Just tell that to Jim Cramer.
Reconcile Yourself to Investing in the
With gold appearing on the front pages of major business
papers, and being highlighted on CNBC, natural contrarians
are starting to wonder. While its true that gold is
no longer in its stealth bull market phase, this doesnt
mean that its time to run for the exits. Sure, judicious
profit taking is always a good idea, but just because golds
spending some time in the spotlight doesnt mean the
bull run is over.
Yes, the gold market is starting to get popular on Wall Street
but its still nothing but a strange curiosity
on Main Street. In short, were very far from a mania
phase where shorts are running for cover and your neighbour
day-trades the Roodeport Rocket (or DRD Gold, [Nasdaq:DROOY],
as its more formally known). That turn of events will
take much, much longer.
When the price of gold takes a 20% nose dive over the course
of a couple weeks (an all but assured occurrence at some point
in the next three to six months), many newbies will be easily
shaken out of the market, and newfound bullish pundits will
But, as we all know, bull markets unfold in fits and starts
and calls for the end of days will always
start substantially early. When copper was trading in the
$1.25/lb. range in the spring of 2004, there was a substantial
bear market that severely took down many base metal producers.
Rio Tinto [NYSE:RTP] was slapped down more than 25% to trade
under $90, while BHP Billiton [NYSE:BHP] got knocked to a
split-adjusted $15 per share. Many pundits claimed it was
the end of the then three-year commodity run.
I think we all know what happened next: the base metals came
back, the shorts got steam rolled and coppers now trading
in what could be fairly described as speculative blow-off
territory of $3.50 a pound.
(While gold has had a run since then, its gains are nothing
close to those in zinc, copper, nickel, etc.)
While I wouldnt be a buyer of pure copper companies
at these levels, the past two years of trading in mining majors
- Rio Tinto today trades at $244 and BHP Billiton is above
$48 - are a prime example of just how long the naysayers will
get their calls wrong.
In the early-1990s, Wall Street was already very bullish
on technology companies, even as early investors in the sector
started to get worried. (Those that were still in the game
after the crash of 1987, that is.) A contrarian minded investor
who sold out completely amid that climate of newfound bullishness
missed out on the biggest gains later on in the decade.
Or, another great example: when was the first time you read
about the possibility of a housing bubble? 2002? 2003? While
it finally looks like housing has turned the corner, and the
stocks home builders are slumping, it took more than three
years from the first worries for us to get there. Those who
stayed bullish, even if they prudently took profits along
the way, profited handsomely.
The price action in the oil market is another great one to
look at. Energy investments were already getting plenty of
air time when oil first topped $50 per barrel. But those early
adopters who bailed at that point missed out on a lot of profits.
By now, youre probably getting the point. Markets will
run in either direction farther and longer than
most people ever expect them to. Just because TOUT TV is on
your side for the moment, dont start running scared.
Its more likely than not that once gold is off the front
page, the talking heads will turn their backs for another
Using Public Sentiment to Find a Top
Its a common adage among contrarians that everyone
is bullish at a top. While this doesnt always hold true,
its definitely fair to say that there will be substantially
more public appeal for gold when its time to sell for
A perfect case in point: I recently attended a welcome
weekend for one the nations top ten business schools.
At this event I had the opportunity to socialize with the
very bright incoming students and alumni, many of whom have
existing careers and strong experience in the investment and
capital markets. When conversations shifted to peoples
interests, I invariably noted that I was an active investor
in and commentator on the precious metals markets.
Every single individuals reaction, without fail, was
to twist their face into a look of disbelief, bordering on
It wont be until those same individuals respond with
interest, and start asking me for stock picks, that we get
closer to being on the wrong side of the trade.
We all know that its all but impossible to call an
exact top in any market. But until the topic of your next
cocktail party turns to gold stocks, its a fair bet
that weve got room to run. Until that day, be sure to
take profits on your strong gains, buy more stock when valuations
are low (such as a Gold/XAU ratio nearing 5, one of my favourite
metrics) and keep your investment discipline steady.
And, of course, to help yourself sleep at night - dont
put all your money in gold, for goodness sake.