Gold Stocks Up As Investors Move Out Of Cash, Bonds:
Wednesday, May 16, 2001 01:09 PM ET
By Hollister H. Hovey
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--The Federal Reserve's interest rate cut along with its open door attitude towards further reductions put a nice luster on gold stocks Wednesday.
With the 3-month treasury bill yielding 3.57% to 3.65%, real interest rates -- the current short term interest rate minus the inflation rate -- are trending towards zero or negative territory, crimping gains on bond or cash investments, Meridian Gold Inc. (MDG, news, msgs) spokesman Wayne Hubert said.
That means investors look to gold, which shines in low or negative real interest rate environments.
"If the Fed cuts more, as anticipated, (real interest rates) could reach zero or even negative," John Tumazos, metals analyst at Sanford C. Bernstein said.
Whenever real interest rates have inched into negative territory, the TSE Gold Index has tripled, Hubert said.
With the TSE Gold Index that high, demand outstrips mine supply, driving up gold prices, he said. That means more money for mining concerns.
With gold prices directly hinged to the strength of the dollar, its important to watch other international currencies.
"We have seen significant demand for gold which has been consistently higher than supply...over the last 10 years," Igor Levental, vice president, investor relations of Homestake Mining, said. "The recent weakness in the price of gold (in the U.S.) is due to the strength of the U.S. dollar...I would imagine that if there's a weakness in the exchange rate that would be extremely positive."
"An interest rate cut would lower returns to investors who hold dollars or dollar bonds," Tumazos said.
Both Levental and Bear Stearns managing director Michael Dudas agree that the companies that will most benefit from a weak dollar have leverage to the price of gold.
Homestake and Newmont are virtually unhedged to the price of gold, Dudas said, and both are working to cut costs.
The gold mining group has been shining for Dudas for awhile, and lower interest rates only improve the picture.
"The added liquidity to the market place the central banks are providing should continue to support commodity prices like gold," Dudas said. "With a slowing U.S. economy and higher liquidity has people thinking more...about these companies -- a group that's been relatively ignored. And quietly the shares have performed well year-to-date."
-Hollister H. Hovey; Dow Jones Newswires |
