gold bottom? NY Times article...-g-
April 30, 2000
PORTFOLIOS, ETC.
Gold Believers Put Rationality to Test
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By JONATHAN FUERBRINGER
hen people look for irrational investors these days, the first place they turn is the dot-com world. But the hurly-burly carnival ring of the stock market is not the only place where irrationality is king.
In the far away world of commodities lurk some investors who are also experts at praying for good things to happen. And they have been doing it longer than the dot-com world has been around.
Yes, I am talking about the investors who buy gold-mining stocks. Despite repeated disappointments, these investors still believe gold will rally, giving the earnings -- and the stock price -- of some gold-mining companies a boost.
The companies poised to take advantage of the coming gold rally -- whenever that may be -- are those that do not hedge by using attractive gold leasing rates to lock in gold prices that are well above their current levels. So the fortunes of companies that do not hedge ride directly on the price of gold. And that is the way most gold investors -- and some producers -- want it.
Just check out Newmont Mining and Barrick Gold. Newmont is a nonhedger, while Barrick hedges. Both have flinched recently but still stick to their basic strategies. (Newmont took on some hedges just before the London spot price of gold reached a 20-year low of $252.80 last July. Under pressure from shareholders who wanted more "true believer" exposure to a gold rally, Barrick reduced some of its hedges in February.)
In theory, the hedger should be doing better now. Although gold touched $325.50 in October and $312.70 in February, it is down to $275.05, 15.5 percent off the October peak. Barrick has locked in a price of $360 an ounce this year. Newmont goes at the market rate.
But Newmont's stock is doing far better than Barrick's. Newmont is off 21.2 percent since its October peak, while Barrick is down 30.3 percent from its peak in late September.
"People buy gold stocks because they believe in gold," said Chris Thompson, the chairman of Gold Fields Ltd. of South Africa, the third-biggest gold producer and a leader in the battle against hedging.
But Randall Oliphant, the president of Barrick, finds it difficult to understand. "It doesn't make sense to us and I can't explain it," he said Friday, after Barrick reported earnings of 18 cents a share, matching Wall Street forecasts.
The true believers have had their faith buoyed -- then challenged -- twice recently. European central banks agreed in September to cap their gold sales and limit their lending of gold, reversing two actions that had added downward pressure on the gold price. Gold surged 20 percent on the news.
Ronald C. Cambre, chairman of Newmont, another leader of the true believers -- that is, the nonhedgers -- said this about last fall's rally: "It confirms our belief that gold's supply-demand fundamentals would support a higher gold price once the opportunity for unprecedented speculative short selling was removed." In other words, gold was only being held down by evil speculators.
But that rally did not hold. By January, gold was at $290. Then the true believers had another victory. They convinced some major gold producers that hedging was, sinfully, undermining the price of gold. So in February several gold producers cut back on hedging and the price of gold spiked up again.
Now that rally has fizzled. And on Thursday, when Newmont announced first-quarter earnings of 4 cents a share, well below the 11-cent estimate compiled by IBES International, Cambre had trouble explaining why gold has performed poorly, given the boost from the new restraint in hedging.
"I cannot say I am pleased today with the resulting impact it has had," he said in a telephone conference call with analysts. But Bruce D. Hansen, Newmont's chief financial officer, made clear in a subsequent interview that Newmont's faith has not been shaken.
"It's not maybe or if, it's when," he said of the next gold rally. "We do think it is going to go up. It's always a question of when." |
