Gold sure could use some of the squeeze that is pushing (Ag) silver prices
to nearly one-year highs.
While gold
prices start the
new year
tamely flirting
with $280 an
ounce, silver,
thanks to
delivery snafus
and tight
lending of the
metal, is rising
smartly. The
metal, which
has more
industrial uses
than gold, has
risen in recent
weeks to
almost $4.70
an ounce, an
11-month high,
from just
above $4.
"Silver will
trade back
down," says
Larry Edelson,
managing
editor of the
highly
regarded Safe
Money Report.
Silver futures
in New York
Friday
Because of
delivery problems and near-20 percent lease rates
that restrict lending of the metal, the spot price of
silver is higher than contracts for future delivery.
So-called squeezes - the professionals call it
backwardation -- happen rarely and usually
evaporate when supply starts moving again
overseas and in the United States.
"I'm a bear on silver but a bull on gold," says
Edelson, who had been reluctant to endorse
long-languishing gold.
Gold, says Edelson, will need to clear many hurdles
before it sheds its reputation as a losing investment.
Many technicians, the folks who study trading
patterns for commodity futures contracts, agree.
Amanda Sells, an independent consultant used by
Mitsui Global Precious Metals in London, says,
"Gold's upside potential will only increase to $328
on a clear and confirmed break of $292." Her
comments came in a year-end report issued by
Mitsui and its headline metals analyst, Andy Smith,
a London-based researcher who went positive on
gold in mid-2001 after shunning the metal for years.
Smith himself sees gold making strides this year as
gold producers move away from their practice of
selling their delivery of the metal forward to lock in
higher prices. Such hedging stimulates lending of
gold by central banks and others, thus diluting any
gold metal rallies.
The debate between those who hedge, like South
Africa's Anglogold (AU: news, chart, profile), and
those who do not, like North America's Newmont
Mining (NEM: news, chart, profile), will probably
take center stage this year in the gold industry, says
Robert Bishop, longtime editor of The Gold Mining
Stock Report.
Newmont Mining's battle against Anglogold isn't
just on the hedging fields. Newmont, outbidding
Anglogold, is close to winning a takeover effort for
Australia's largest producer, Normandy Mining
(AU:NDY: news, chart, profile), at a price tag of
$2.2 billion. The consolidation of gold mining
companies around the globe has pushed shares of
these producers higher. In Australia, where rumors
of gold bids are rampant, gold stocks this week
moved within points of an all-time high.
Still, the question for investors, and stymied
executives at gold mining companies, both hedgers
and straight producers, is entirely a $300 one. Is this
the year gold breaks the $300 mark and stays
there?
Edelson at The Safe Money
Report says yes.
"Gold's not there yet, but
it's getting closer," he said
Friday. The price of an
ounce trades at about $279
in New York and London.
"First signal, look for a close above $282. If gold
can do that, then a test of $300 would be sure to
follow. And after that, any close above $306, and
it's off to the races."
Such seemingly small gains for gold prices are
meaningful for gold producers, especially those that
are paid the spot price for the metal they pull from
the ground in places like North America, Indonesia,
Australia and South Africa. Non-hedgers such as
Newmont, South Africa's Gold Fields Ltd. (GOLD:
news, chart, profile) and Canada's Franco-Nevada
Mining (CA:FN: news, chart, profile) see their
operating margins rise a percentage point and
sometimes more with each $10 rise in gold's price.
Analysts say investors
should expect the share
price of a non-hedged gold
mining company to triple
the percentage gain in the
price of the metal. Of
course, that works in
reverse on the down side of
the slope.
Edelson, a former Europe-based commodities trader
whose job is to coach investors on the safest
possible investments for their hard-earned money,
sees several reasons why gold could go to $340 an
ounce or "possibly higher" this year.
One is an acceleration of debt crises around the
world. "Argentina isn't the only problem with debt,
not by a long shot," he says.
Another is global worries about central banks'
reinflation attempts. Banks such as the European
Central Bank and the Federal Reserve conceivably
could flood their economies with cash as they keep
lowering interest rates. The likely result would be
accelerating inflation, which is almost always a
positive development for gold, a commodity whose
net worth is burdened by no country's currency,
debt levels or politics.
"This is a biggie," says Edelson. "Look at how the
long bond market (in the United States and
elsewhere) has had its worst crash since 1996 on
reinflation concerns. Soon, that will spread, giving
gold a boost," he says.
Edelson sees investors slowly registering their
concerns with global politics, starting with
America's war on terrorism and spreading to South
American finances and things nuclear in India and
Pakistan. "The wars are far from over," says
Edelson.
As Smith in London points out, gold will need the
support of aggressive fund managers, ordinary
investors and those dastardly hedging gold miners
who promote the loose lending of the metal.
The tightly knit community of gold bugs, including
this writer, has its fingers, arms and legs crossed.
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