A deeper look at gold's amazing rally
By Thom Calandra, CBS MarketWatch
Last Update: 10:31 AM ET Sep 28, 1999More StockWatch
Commentary New!
SAN FRANCISCO (CBS.MW) -- Gold bugs and skeptics are asking the same question: Can the precious metal's brief rally last?
On Tuesday, the metal (GC=Z9: news, msgs) rose to $305 an ounce in New York. The active gold contract hasn't been that high since Oct. 16 of last year. For much of this year, the price of gold kept printing fresh 20-year lows, both in London and in New York.
The metal's slump -- before this week -- came even as demand for the precious metal, which is used in jewelry and in electronics, rose smartly across Asia. Gold demand worldwide rose about 16 percent in this year's second quarter, according to the World Gold Council.
James Dines, a California newsletter writer, saw gold's spurt coming more than a month ago. I know. At the time, I was meeting with him over a bagel, discussing the dissipating worth of paper currencies and the widening U.S. trade deficit.
Dines of The Dines Letter calls himself "the original gold bug." ÿ He's been following the metal since 1960. Since then, of course, he has traveled many courses: he's been hot on Internet stocks for at least 18 months.
"Gold," he says now, "was deeply oversold. Everyone was negative on it. A rally was inevitable." Investors at some point will not tolerate owning currencies backed by worthless paper, says Dines.
"There will be pullbacks. It's not going to go up $25 a day," Dines said Tuesday. "But technically, the group was dirt cheap." Indeed, it may be years before investors see another 21 percent gain in the major U.S. gold stock indexes. The Philadelphia Gold and Silver Index rose 21 percent Monday.
Thanks to 15 of the world's central bankers who say they'll hold off on selling the metal for at least five years, gold is flirting with $300 an ounce. The European central banks account for about two-thirds of the world's so-called gold reserves, which sit in vaults as backing for paper currencies and other securities.
The metal, even at the $300 price, is tattered. In January 1997, the metal sold for $420 an ounce. Before the successful Bank Of England gold auction last Tuesday (the trigger to this rally), gold sold for less than $250 an ounce.
For gold mining companies, the greater gold price, if it lasts, means greater profits. Companies such as Newmont Mining (NEM: news, msgs), which do not forward-hedge the prices at which they sell gold, have the most to gain from the rally. Every $10 an ounce of gold's rally is $10 that goes into Newmont's coffers.
Salomon Smith Barney, Lehman Bros., Goldman Sachs and Merrill Lynch are upgrading a brace of North American gold mining shares this week, among them Newmont Mining, Barrick Gold and Placer Done (PDG: news, msgs), among others. On the CBOE Gold Index ($GOX: news, msgs), shares such as Battle Mountain Gold (BMG: news, msgs) rose 60 percent in a day. Even Ashanti Gold (ASL: news, msgs), a large Ghana gold producer whose profits have fallen sharply, saw swift gains for its stock.
This is almost as good as the Internet stocks.
Dines says his "Wolfpack Theory" says that all precious metals, including gold, silver, platinum and palladium, rise together. Silver prices (SI=Z9: news, msgs) Tuesday were up 5 percent.
The Philadelphia Gold and Silver Index ($XAU: news, msgs) in the eyes of economists and seers suddenly has become an important barometer of the overall financial markets. Traditionally, technicians see gold indexes as running contrary to the overall stock market.
Gold, for instance, usually thrives when there is fiscal turmoil (although the metal hardly budged in price during the horrendous summer of 1998). This time, technicians say that if gold stocks continue to climb -- as financial stocks fall -- investors can expect rocky times ahead for U.S. securities in general. (See chart above.)
Here's my two cents: investors have been shifting their attention to natural resources stocks all year. And why not? At some point, cheap is cheap. Aluminum producers are merging. Copper companies are merging. Steel prices are rising. Oil prices have doubled in a very short period of time.
In the old days (1980 or so), analysts used to look at the nominal relationship between the price of gold and the Dow Jones Industrial Average ($DJ: news, msgs). Just for fun. The Dow's 30-stock average, which presently includes no gold shares, sold for about one times the price of gold, which briefly rose above $800 an ounce back then. (The Dow back then sold for about 800 or so.) Nowadays, the Dow sells for about 35 times the price of an ounce of gold.
That's what you call the escalating value of paper. As in stocks.
As for the best gold performers the past three months, our round-up shows some little-known companies leading the pack: MK Gold's stock price (MKAU: news, msgs) (MKAU-BB: news, msgs) has risen 150 percent in three months. The tiny company's stock trades on the Nasdaq bulletin boards. Kinross Gold (KGC: news, msgs) shares (it's a $1 billion company) are up 65 percent. And Anglogold (AU: news, msgs), the South African company ($7 billion company), is enjoying a sharp price rise this year as well.
Dines's favorite gold stock: Franco-Nevada, which trades on the Toronto Stock Exchange. The company receives royalties from mines in exchange for cash loans and other services.
"The world's currency system is a fraud. It's a printing press, and one currency after another is going to get picked off, whether it's Brazil or Russia or all of Asia," Dines says. "I don't see it yet, but it will happen, maybe as soon as the confidence in the U.S. dollar is shaken. I hope I don't live to see the day."
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