Two fundamental factors driving gold.
1) Gold carry forwards have lost luster with short term rates down near lease rates
2) Physical metal demand in Asia.....The little guys in Japan have a ton of dough in their matteress
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Copyright 2002 Nationwide News Pty Limited
The Gold Coast Bulletin
February 18, 2002, Monday
SECTION: MONEY; Pg. 18
LENGTH: 622 words
HEADLINE: Gold fever cools
BYLINE: Tom Flower
BODY:
Is the latest blood-rush for the gold sector sustainable, or is it another mirage? Many analysts are taking a cautious approach to investments in the precious yellow metal. Tom Flower reports.
THE jump in the world gold price to $US307 an ounce has caused bullion bulls to drive Australian gold shares to a five-year peak. At its recent level of 1262.5, the ASX gold sector index stands at almost twice last year's low point of 661.4, reached on April 11. Gold Coast analysts contacted last week remain distinctly cautious about the likely duration and intensity of the share price boom.
Wilson HTM, for example, is yet to be convinced that recent gold bullion price rises are sustainable into the next US economic recovery.
"Technical analysts say that gold could either go to $US320 an ounce or to $US290 an ounce. They are right - it could go up or down," was the dry comment from the firm's analyst, Shaun Minahan.
There are arguments for and against rising gold prices, says Mr Minahan.
On the positive side, major gold miners are substantially lowering the amount of production that is price hedged. This allows more of their production to be sold at the spot gold price.
Physical demand for gold has improved, buoyed by strong Asian buying. In Japan, fears that a large bank may go to the wall have seen rich and not so-rich Japanese buying gold in big quantities.
Also, the short-term outlook for the US dollar is for lower values, pushing gold prices up, says Mr Minahan.
On the negative side, he points to the major reserves of gold held by the world's central banks, especially in
the US.
When the US economy returns to growth, will the value of the US dollar rise again, causing the gold price to fall?
Mr Minahan suggests that instead of focusing on gold price movements, investors should look to gold producers with profitable production growth, quality management, low cash costs, increasing efficiencies and sustain-able reserves.
Stocks with these qualities are Gympie Gold, Oxiana, Goldfields, Croesus and North Flinders Mines, he says.
JBWere says the gold sector is now trading at a premium, meaning that some gold stocks are above what the firm considers to be fair values.
"The last time the sector traded at such a premium was September 1999, when the gold price rose above $US300," says the firm's gold analyst, Ian Preston.
"It was short-lived. As a result, we are cautious."
Mr Preston says the gold price does seem to be in a firm, but modest, uptrend.
"Although the sector as a whole is overvalued, if the gold price continues to climb, we do not discount that one can successfully trade gold companies," he says.
"However, we highlight that one is doing so without a margin of safety."
Mr Preston says Normandy Mining and Lihir Gold have the best leverage to a rising gold price, because of the amount of unhedged production.
Newcrest Mining has a complex hedge book which may pose a risk to short-term earnings, but has the best growth opportunities in the sector, he says.
Chris Brown, senior resources analyst with ABN Amro Morgans, says nobody knows whether the gold price will drop to, say, $US295 and then recover, or fall to $US285 and languish.
Some clients have already taken profits, while others remain long on gold shares, he says.
"We think clients should maintain an interest in the sector and, if there is a pullback, reinvest some of the profits they have made. For the long term, it is hard to go past Lihir Gold, which is in a position to substantially increase gold output.
"Clients who want to invest in dividend-paying gold companies to balance their portfolios should consider Sons of Gwalia, Equigold and Gympie Gold."
LOAD-DATE: February 18, 2002 |
