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THOM CALANDRA'S STOCKWATCH
Metal poised for further gains
Several factors supporting gold's rally, say some
By Thom Calandra, FT MarketWatch.com
Last Update: 9:51 AM ET May 20, 2001
LONDON (FTMW) - Gold traders, in the words of former commodities trader Larry Edelson, "have the nose of a bloodhound, and for them, the scent of inflation is better than sex."
Edelson's zeal for the precious metal's small rally this week has been beaten back countless times. Yet hopes are rising for the faithful few who believe gold is as cheap as the dirt ground it is pulled from. Gold's June futures contract in New York trading Friday rose 5 percent, or $14, to $287.80 an ounce, the best one-day rise in 15 months.
Most analysts expect prices in Asia and Europe to rise early Monday, followed by gains in Comex-traded futures later in the day.
While no one reason is behind the price spurt, gold traders and fund managers insist the best is yet to come for the metal, which investors have shoved aside in the past 10 years.
"This is a moment of truth for the metal and (gold) shares," said John Hathaway, who manages the $20 million Tocqueville Gold Fund from New York City (TGLDX: news, msgs, alerts).
Gold's rally has pushed the indexes that measure gold mining stocks to their highest points since February 2000. Indeed, some of the companies that are in the Philadelphia Gold and Silver Index and the CBOE Gold Index have enjoyed powerful rallies this year. Newmont Mining (NEM: news, msgs, alerts) , a North American company that does not hedge its gold production by borrowing or selling the metal forward, has seen its shares rise by two-thirds since February.
Analysts say falling interest rates in the U.S., Europe and Japan will boost economic growth at a time when many countries are seeing their inflation rates creep higher.
"We have what could turn out to be a major breakout," said Edelson, who followed his career arbitraging gold and other commodities in the 1980s by becoming a newsletter writer and editor. "Money supply growth in the U.S. is going crazy, and an unprecedented five rate cuts in as many months is very inflationary."
Basic mining and paper industry stocks have performed well this year for the same reason. In Europe, basic resources stocks, led by Anglo American Plc (UK:AAL: news, alerts) , are the best performing industry group this year, up 10 percent.
Lower interest rates are seen as a benign backdrop for commodities companies in general, which have reduced their operating costs and begun to find merger partners. The U.S. Federal Reserve this year has official interest rates at 4 percent, a seven-year low and only 1 percentage point above the pace of American inflation. The European Central Bank surprised investors earlier this month when it cut interest rates for the first time in two years.
Gold may benefit from other factors as well:
The U.S. trade deficit for March had its largest gain in nine years, leading some to forecast a weaker dollar as consumers borrow money to buy imported goods and services. Currency investors also fear that the Bush administration favors a weaker dollar. A relentless rise in the dollar has kept many investors huddled in paper securities such as bonds and stocks and away from physical assets such as gold.
Gold auctions by central banks are increasingly well received. The Bank of England auction earlier this month was more than three times subscribed.
Mining companies are reducing the amount of gold they forward-sell, a practice that locks in a higher price for them but also releases gold supplies into the marketplace. As a group, gold miners did not take on any new hedging positions, said Gold Fields Mineral Services in London.
On Wall Street, analysts such as those at Salomon Smith Barney point to steadily rising demand for the metal in jewelry. Scientific developments also may boost industrial demand for the metal. Gold is a highly conductive and soft metal that may find uses in catalytic converters and in wiring for electronic writing pads and other embedded computing devices.
Gold use in electronics rose 15 percent to 106 tons last year, Gold Fields Mineral Services said in an April report. Meanwhile, the deficit between physical supplies and growing consumer demand for cheap bullion could be as high as 25 percent, some mining analysts estimate.
Gold traders says the next level to watch is $294 an ounce for the spot-price of the metal. "A close above that level, and $338 is the next target," says Edelson, managing editor of The Safe Money Report in Florida. "After that, you're looking at $400, easy."
Most gold believers are keeping their fingers crossed. Gold mutual funds in the U.S. have been the leading industry performer this year.
Hathaway, whose small fund is up 21 percent this year, said "prospects for a breakout are excellent given the low level of real interest rates and the prospect of more rate cuts."
One thing is certain. Even at $287.80 an ounce, gold investors are breathing a sigh of relief. The metal touched a 20-year low of $254 an ounce in April.
Thom Calandra is Editor-in-Chief of CBS MarketWatch and FTMarketWatch.com. |
