By Thom Calandra, CBS.MarketWatch.com Last Update: 3:15 AM ET Feb. 9, 2002
SAN FRANCISCO (CBS.MW) -- Adrian Day, a Maryland money manager who has specialized in gold mining companies for 30 years, swore to himself years ago he would bite his tongue if he ever caught himself saying, "This time it's different." Yet there Day was, watching from his Annapolis office as the spot price of gold this week pierced the $300 level for only the fourth time in four years. "What really is different this time is the previous runs were provoked by a single instance, like Placer Dome buying back its hedge book," says Day, president of Global Strategic Management, which has $60 million under management. "This is not a short, sharp rally. It has been a nice slow trend up since January 2001, and it has not been provoked by one incident."
Gold's longtime believers are hoping the metal's rally this time around will be different. Some, like mutual fund manager John Hathaway, predict gold will surpass $1,000 an ounce in coming years. Others, like Pierre Lassonde, soon-to-be president of industry leader Newmont Mining (NEM: news, chart, profile), see gold mining stocks, already the best-performing sector in most of the world's stock markets, doubling again as gold goes to $350 an ounce. See Lassonde interview.
Normally, investors turn to the safety of U.S. bonds when they're seeking refuge from the kind of fiscal distress that is storming across Japan, Argentina and threatening Washington. However, a growing number of economists and currency specialists expect gold, not Treasury securities, to benefit this time.
Japan, which holds about 12 percent of the supply of U.S. debt, is facing what may become its biggest fiscal challenge ever.
"The meltdown of a G-7 economy is rare," says Carl Weinberg, chief economist of High Frequency Economics in Valhalla, N.Y. "Things like the big oil shocks of the '70s caused a flight to gold, and that was an unprecedented event."
This time, say gold's optimists, who remember fondly when gold was last at $400 (January 1996) and $800 (January 1980), it really is different. "If you look at the popular press, every article you read on gold is that gold is no longer money, that it is finished," says Lassonde, a co-founder of Canada's Franco-Nevada Mining (CA:FN: news, chart, profile), one of two gold producers that will merge to form the world's largest gold miner, Newmont, later this month.
"In the past two months, I have started to see more positive articles on gold," Lassonde says from his Toronto office. "As gold breaks the $300 barrier and goes to $325, that will drive the bull market in gold."
Petty or pretty?
For those unfamiliar with the world of gold and gold-mining stocks, the metal's slow grind to $300 an ounce from $265 one year ago must seem petty. Yet the small gain has propelled gold share indexes to five-year highs in Australia and record highs in South Africa, where a wave of mergers and weak local currencies are boosting the mining industry's prospects.
Gold fever? In Japan, gold prices are up 25 percent against the ailing yen in the past 12 months. Japanese consumers have quadrupled their hoarding of gold ahead of this spring's limit on government-guaranteed bank deposits.
An ounce of gold is now worth 600 Australian dollars. Australia's newspapers are starting to complain that foreigners have commandeered the nation's gold industry, with almost two-thirds ownership after Denver-based Newmont's $2.5 billion purchase of Australia's crown jewel, Normandy Mining. See Australia gold mining index.
The Financial Times Africa Gold Mines Index, meanwhile, has gained about 65 percent the past 12 months. Close to 50 money managers, a modern record, this week listened in on a quarterly update from South Africa's second-largest gold miner, Gold Fields Ltd. (GOLD: news, chart, profile), which raked in $67 million in its December quarter. That was triple what Gold Fields earned the previous three months. See Africa gold-mining chart.
Even in America, where most investors turn up their noses at gold and prefer to dabble in technology stocks, gold's gains have boosted the metals industry's mutual funds by 46 percent in 12 months vs. a 17 percent loss for the average diversified U.S. equity fund. See related story.
Economists and analysts, in the United States and abroad, are mostly pointing to fiscal distress as a reason for gold's climb. After all, jewelry and designer demand for gold, which accounts for about 75 percent of the metal's use, fell last year.
"Gold is the best leading indicator of monetary conditions," says currency analyst Kenneth Landon at Deutsche Banc in Tokyo. "It is also one of the least understood factors. That's what makes it so fascinating and potentially profitable for people who truly understand gold's significance."
Gold: an obsession
Newmont's Lassonde, who has been in the mining business for three decades, believes gold's rally this week above $300 will usher in a long bull market in the metal. In some cases, however, the belief among other gold bugs is a swaggering one that comes from a decade or more of frustration.
"Has a bull market in gold shares begun? Is the Pope Catholic?" notes Bill Bonner of The Daily Reckoning, one of dozens of investment newsletters that are promoting bullion's rise. His comments came just as the spot price of gold this week closed above $300 for the first time since February 2000. That was back when mining company Placer Dome (PDG: news, chart, profile) asserted it would reduce the amount of gold it sold forward in a controversial practice known as hedging.
Alas, "when another gold company, Barrick (ABX: news, chart, profile), said they weren't buying back their hedge book, the market fell back," recalls Day, the fund manager. Gold quickly dropped below $300.
This time, large gold mining companies are more likely to reduce forward sales, which gets them a higher price for the metal but also encourages loose lending of gold by central banks and other entities. At least, that's what the gold aficionados believe.
South Africa's Anglogold (AU: news, chart, profile), the largest of the notorious hedgers, and other companies almost certainly could lose an appetite for selling their product forward. "We believe a protracted bull market will lead to more buybacks, thereby reducing the amount of gold which needs to be borrowed," Barclays Capital precious metals analyst Matthew Schwab said from London. See related story.
If gold prices threaten to rise further, a hedger could find the extra few dollars an ounce it receives by selling into future little more than pile of beans compared to the spot price of the metal. Besides, as money manager Hathway of the Tocqueville Gold Fund (TGLDX: news, chart, profile) points out, falling interest rates around the globe mean miners are no longer guaranteed a nice return when they take the cash from their forward sales and put it in an interest-bearing piece of paper.
Even scarier, hedging, which involves fancy financial footwork and the use of futures and sometimes derivatives contracts, could upset shareholders as the witch hunt for accounting irregularities sweeps Wall Street and Washington.
"The premium for safety is high again," says Hathaway, whose musings on the subject of gold come in the form of inches-thick manuscripts that he sends to shareholders of his fund, which like most gold mutual funds is up by almost a third since Jan. 2. "The new blood sport will be pointing fingers at companies who abuse pro forma earnings and other accounting methods."
Most Americans, and investors around the globe, don't own gold as an investment. Those who do own gold via mining stocks, not the actual metal as is preferred by consumers in Japan and India. For ordinary folks, the burning question about gold isn't about hedging or fiscal distress or even declining production of the metal in the top-three producing regions: Australia, North America and South Africa.
No, for most ordinary folks, the big question is: When will gold make it to the front page of the local newspaper? "It hasn't made the cover of Time magazine yet," says Lassonde in Toronto, where he and other top Newmont Mining executives will preside over the production of 5 million-plus ounces of gold a year, more than any company in the world. See our metals report.
In the U.S. stock market, major gold mining companies trade for as much as 10 to 12 times pre-tax cash flow. That seems expensive, but as Caesar Bryan of the Gabelli Gold Fund (GOLDX: news, chart, profile) explains, "Gold shares provide you the earnings and the dividends and the cash flow. But there is another thing, and that is the option value of the gold (miners) have in the ground. That is why they trade at high multiples."
Still crazy, after all these years
Investors in the U.S. stock market are willing to pay the highest prices for shares of the world's largest gold mining companies since February 2000. The Philadelphia Gold and Silver Index (XAU: news, chart, profile) that represents shares of Newmont, Barrick, Placer Dome, Anglogold and others approached 70 at week's end. Anything above that could spark a mania for gold shares, the metal's believers say.
"After all these years, it's not hard to imagine that gold stocks could become a lot like Internet companies were a few years ago," said Robert Bishop, the longtime editor of Gold Mining Stock Report who has been analyzing gold mining companies for more than two decades. "Of course, I say that with my fingers crossed."
Bishop points out that each $10 move in the price of gold magnifies operating margins for gold companies. Many miners, thanks to improved techniques, haul the metal from the ground at a cash cost far less than $200 per ounce. Companies such as Gold Fields and Harmony Mining (HGMCY: news, chart, profile) of South Africa, because they refuse to hedge their production, easily could see their share prices double if gold were to rise another $30 an ounce. Six-month gains for shares of Gold Fields have far outpaced those of its hedged competitor and neighbor, Anglogold. See comparison chart.
Like many of his colleagues in the industry, Bishop is headed to Capetown in South Africa next week to attend a yearly mining conference that could provide evidence of mining consolidation and further gains for gold. Attendance is up 30 percent from a year ago, conference organizer Sandy Lawrence, president of International Investment Conferences, says. "I think this is where you will see the new bull market in gold starting to take off," Lawrence says.
The spot price of gold rose as high as $307.80 Friday in New York. A London fix of the metal's price at $305.10 was the first setting above $305 in two years. In Tokyo, as rumors swirled about a possible government freeze on bank deposits, December's gold contract hit its highest price, in yen, since August 1998.
If the rally continues, gold's believers may soon be calling themselves the next investment craze. Bill Murphy, the former Boston Patriots football player who founded what may be the world's most rabidly fanatic gold Web site, www.LeMetropoleCafe.com, this week was flashing the message, "Gold headed for $600 an ounce."
Murphy, a former Wall Street specialist in commodity futures for Shearson Hayden Stone and Drexel Burnham, also chairs the Gold Anti-Trust Action Committee (www.Gata.org). GATA is a Delaware corporation that believes the U.S. Treasury, New York Federal Reserve Bank and some of Wall Street's largest banks, including Goldman Sachs (GS: news, chart, profile), conspired to keep the price of gold depressed in the late 1990s as a way of manipulating economic signals. Some economists use gold as an advance indicator of commodity inflation, the enemy of the world's central banks.
"My guess is we will not see gold at $300 bid for very long. It could go $350 to $400 bid in a week as the short-sellers panic," Murphy told me confidently from his Texas office. "That will shine the light on GATA big time."
Lassonde at the merging Newmont/Franco-Nevada/Normandy, while well aware of the gold-conspiracy crowd, prefers to put the metal in a more clinical light. Lassonde says gold is unfettered by any company or nation's liabilities, unlike a Nasdaq-traded stock or a government's Treasury bonds. "The ultimate definition of a gold market is when gold is rising in all currencies," he says. "And that is happening now."
Thom Calandra is editor-in-chief and a co-founder of CBS MarketWatch. He has covered the gold market for news organizations since 1988.