Gold gain points to currency risk
'Strange' buying of metal may be sign of distress
By Thom Calandra, CBS.MarketWatch.com
Last Update: 3:08 PM ET Feb. 1, 2002
SAN FRANCISCO (CBS.MW) - As the world's economic leaders meet in New York, professionals wonder
whether gold's steady price rise this week is the first crack in the global currencies dam.
UBS Warburg's precious metals team
Friday said, "Gold remains strangely
supported despite the strength in the
U.S. dollar. Although there has been
news of good buying out of
bank-distressed Japan, the reported
quantities are not enough to explain
the precious metal's recent resilience.
We suspect that one or more large
buying programs have been executed
since the start of the year."
Gold's climb to almost $288 an ounce
Friday may not seem so hot to
stock-market investors. Yet the gain
from $278.50 just five days ago has
brought gold-mining shares in North
America to their highest point in eight
months, as measured by both the
HSBC North American Gold Index and
the Philadelphia Gold & Silver Index.
Both indexes on Friday continued to
rise. See HSBC gold share chart.
The metal's gain also is boosting
mining shares in Australia, Canada
and South Africa, where ailing
currencies against the dollar are
magnifying companies' operating profit
margins. The gains have been
strongest in Australia, where takeover
fever is sweeping small and large
mining companies. See Australia gold
mine index. In Toronto, the stock
market's gold mining companies as a
group have risen more than 50 percent
in the past 12 months. See Toronto
Stock Exchange gold share chart.
As for bullion itself, the gains in the
metal during a time of dollar strength,
usually a downer for gold, prompt the
question of who is buying -- and why.
Ken Landon, a Deutsche Banc analyst in Tokyo, explains a rising gold price almost always indicates
depreciating currencies, regardless of exchange rates. In the past 12 months, the yen, he says in a report,
has fallen 21 percent against gold. The euro has lost 15 percent of its value against gold. The dollar is off
by 6 percent.
Landon's report is making the rounds in Asia. His view is one that may come to haunt investors in coming
weeks. "The rising price of gold in all the major currencies indicates that investors have been losing
confidence in the monetary policies of Japan, Europe and the U.S., in that order of concern," he says.
A foreign exchange analyst, Landon says the Federal Reserve, whose policies are increasingly
inconsequential to consumers and investors, and American lawmakers are to blame, on this side of the
globe, anyway.
"It was the Fed's rate hikes that caused an inverted yield curve, which was an infallible signal of the
subsequent recession," Landon says about the central bankers' series of interest rate hikes that totaled
175 basis-points. The rising rates came to an end in mid-2000 as Federal Reserve governors tried to put
the brakes on a surging stock market. The interest-rate hikes were followed by 13 interest rate cuts at the
Federal Reserve.
The Deutsche Banc analyst also points to the Justice Department's campaign against Microsoft (MSFT:
news, chart, profile) and the U.S. Senate's majority of "anti-free market Democrats" as red flags for
investors, Finally, "Enron became a political issue in Washington, which increases the chance that the
government will mount a new regulatory assault against business." Landon says gold is the only refuge for
investors who seek to avoid currencies that are attached to economic and witch-hunt policies.
Gold rush in Japan
Reports that Japanese consumers are rushing to buy gold, first reported here more than a week ago,
might explain part of gold's recent gains. Japanese investors bought about 10 tons of gold bars and coins
in January, or double the monthly average from last year, according to the World Gold Council. The
Japanese, who have a history of hoarding metals such as platinum and gold, are wary of an end later this
year to full government guarantees on Japanese bank deposits. See more on this gold story.
Some precious metals analysts say that's no reason for gold's resilience. Such buying by consumers, they
say, is a mere blip in the daily flows of gold, which is also lent out by central banks and bullion banks eager
to earn a tiny interest rate on their holdings.
Andy Smith, a Mitsui Global Precious Metals analyst in London, tells me Friday it is almost always the
mining companies who are responsible for large purchases and sales of gold. Many gold mining
companies hedge their books by selling some of their production forward to lock in slightly higher prices,
thus creating a need to buy gold in the futures markets.
"The finger in the air should normally point to miners," says Smith, whose price-range forecast for gold this
year is $265 to $355 an ounce. See more on Smith. Smith said in the fourth quarter of last year alone, net
buying by just two large gold miners, South Africa's Anglogold Ltd. (AU: news, chart, profile) and Australia's
Normandy Mining (AU:NDY: news, chart, profile), amounted to more than 90 tons.
Smith is curious, like everyone else, about gold's stiff upper lip
this past week. The UBS Warburg folks, meanwhile, are
pragmatic. "The lack of selling ... confirms that the risks in gold
remain heavily weighted towards a move higher," they said
Friday.
As for the companies that pull metal from the ground, things are
very good these days.
Anglogold, the world's largest miner until Newmont Mining
(NEM: news, chart, profile), Normandy and Canada's
Franco-Nevada agreed to combine their companies in January,
just reported a 16 percent quarterly increase in net income to
$88 million. In rand, which is near an all-time low against the dollar, Anglogold's profits rose 45 percent for
the December quarter.
On Monday, South Africa's Gold Fields Ltd. (GOLD: news, chart, profile) will unveil quarterly profits. Gold
mining companies across the entire continent of Africa are enjoying swollen profits, thanks in large part to
their weak local currencies. Gold is largely denominated in dollars, and when exchanged for rand and other
ailing currencies, mining companies' income statements are looking golden. The Financial Times Africa
Gold Mines Index has gained more than 60 percent the past 12 months. See chart.
Robert Bishop, the longtime editor of Gold Mining Stock Report,
says he just returned this week from two Canada mining and
exploration conferences. Based in California, Bishop points to a
spate of financings for lesser-known gold miners, including a
$20 million (Canadian) cash infusion for Eldorado Gold Corp.
(CA:ELD: news, chart, profile) and a $27 million (Canadian) one
for Kinross Gold Corp. (CA:K: news, chart, profile).
"We're a long way from a runaway bull market, but it could not
be any clearer that there is a significant amount of money now
willing to bet that the gold price is going to continue its
advance," Bishop said Friday.
As for the mood of the gold industry, Bishop says most mining executives, whether pushing paper in
skyscrapers or scraping rock in dusty pits, still remember the spectacular failure of Canada's Bre-X in
1997. Bre-X's fraud brought steep losses, and heartbreak, to many investors and cast a cloud over the
mining business. "That was the year Bre-X's John Felderhof won Prospector of the Year, and his associate,
Michael de Guzman, spent most of the week (at a March 1997 mining conference) in Toronto strip joints,"
Bishop recalls.
"Felderhof had to return his award a few months later, and de Guzman, within 10 days of his visit to
Toronto, took flight from a helicopter over the Indonesian jungle," Bishop says, in a report to his clients. In
the wake of de Guzman's apparent suicide and Bre-X's collapse, "things haven't been quite the same
since," Bishop says. |
