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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, CNBC’s 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 Cramer’s 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 Cramer’s bullishness, should precious metals investors be running scared?

On TheStreet.com

A couple years ago, Jim Cramer wouldn’t touch precious metals stocks. Last year, he actually chewed out an investor who called into CNBC’s “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 there’s going to be a nuclear holocaust, why would you buy a silver stock?)

But even before his all out gold bullishness, Cramer’s 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, Cramer’s recurring touts since late last year have no doubt played some role in helping the company’s 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 Cramer’s tout, the stock instantly gapped up to $4.36, and closed at $4.49, just a penny off the day’s high. An investor who bought at the day’s low would have seen an almost 10% gain, thanks solely to Cramer’s power to move markets.

That’s not to say that Northgate isn’t 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 year’s 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 CNBC’s “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.”

Don’t get me wrong: I’m a long-term Northgate shareholder, and think the company’s got great long-term potential. But given the stock’s spectacular run I’ve 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 Public Eye

With gold appearing on the front pages of major business papers, and being highlighted on CNBC, natural contrarians are starting to wonder. While it’s true that gold is no longer in its stealth bull market phase, this doesn’t mean that it’s time to run for the exits. Sure, judicious profit taking is always a good idea, but just because gold’s spending some time in the spotlight doesn’t mean the bull run is over.

Yes, the gold market is starting to get popular on Wall Street – but it’s still nothing but a strange curiosity on Main Street. In short, we’re 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 it’s 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 fold easily.

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 copper’s 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 wouldn’t 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, you’re 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, don’t start running scared. It’s more likely than not that once gold is off the front page, the talking heads will turn their backs for another year.

Using Public Sentiment to Find a Top

It’s a common adage among contrarians that everyone is bullish at a top. While this doesn’t always hold true, it’s definitely fair to say that there will be substantially more public appeal for gold when it’s time to sell for good.

A perfect case in point: I recently attended a ‘welcome weekend’ for one the nation’s 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 people’s interests, I invariably noted that I was an active investor in and commentator on the precious metals markets.

Every single individual’s reaction, without fail, was to twist their face into a look of disbelief, bordering on horror.

It won’t 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 it’s all but impossible to call an exact top in any market. But until the topic of your next cocktail party turns to gold stocks, it’s a fair bet that we’ve 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 - don’t put all your money in gold, for goodness’ sake.

Resource Investor

Resource Investor - Commentary - Cramer Bullish on Gold: A Contrarian's Worst Nightmare?

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