goldsnow,I just went back into 100% of my previous position
that I had sold Monday. ( If market goes down I will buy more ).
I think the last 3 days were a little profit taking.
I decided to back in because
-FOMC meetings show that 8 out of 9 members voted for tightening bias.
-Tightening labor markets are written all over the place
-I believe ( my opinion ) that the Fed does not want to raise rates
because of fears of liquidity. Thus inflation fears will continue to
push POG upwards.
-Europe and the US will raise rates for red hot economies.
However none of the two are willing to cut spending which is the only thing
that will stop the Governments from printing moneys and stopping Government
induced inflation which is what killed economies in the 70s and is about to repeat it
because of Government spending on entitlements ( social security and health care ).
Bought NEM,GOLD,PDG,ABX,AU,HM,DROOY.
I think current increases in the Naz & Dow are classical bear market traps,
all IMHO
back later
TA
------------------------------------------------------------
October 7, 1999
Heard on the Street
As Price of Gold Soars, Firms
Find 'Hedges' Can Be Thorny
By SUSAN PULLIAM and RANDALL SMITH
Staff Reporters of THE WALL STREET JOURNAL
Pity the poor gold bugs.
Investors in gold stocks ought to be celebrating the explosive rally in gold
prices that began last week when 15 European central banks announced
plans to cap gold sales. The news touched off a surge in gold prices to
$324.50 Wednesday, up 10 cents, from $255 an ounce before the rally
began last week.
But this week, some gold investors
have put away their party hats. After
a run-up in price last week when
gold prices jumped, gold stocks
took a hit on Tuesday and
Wednesday. The problem: Some
gold-producing companies made
financial bets to protect them against
further declines in gold prices, and
those bets cost them money when
gold prices shot up unexpectedly.
When gold prices spiked, some of
those hedging programs backfired,
triggering margin calls, or demands
for more collateral. One result: a scramble among some gold producers, as
they were forced to come up with gold or sustain losses in their hedging
accounts.
Wednesday, the Philadelphia Stock Exchange gold index closed at 81.64,
down more than 10% from its peak on Sept. 28, the day of the central
banks' announcement. Among those hardest hit was Ashanti Goldfields,
which has seen its shares plummet from a high of $10.125 on Sept. 28 to
$4.125 -- down $1.375, or 25%, Wednesday as word spread of a
liquidity crunch at the Ghanaian gold producer.
The affair is a reminder to investors of the risks of hedging. While hedging
programs by commodities producers can smooth out the companies'
earnings by locking in prices of future sales, they can also reduce the
producers' gains in the event of a favorable upward price move.
Meanwhile, trading desks were buzzing Wednesday with rumors about
Wall Street's dealers and their exposure to Ashanti and other producers as
trading partners on derivatives contracts. According to numbers provided
by Ashanti to its counterparties recently, the Wall Street firms with the
largest credit exposures to Ashanti are Goldman Sachs Group, $105
million; Societe Generale, $82 million; Credit Suisse First Boston, $62
million; UBS, $61 million; American International Group, $32 million; and
Chase Manhattan Bank, $25 million.
Traders said some of the dealers had structured their own side of the
transactions to reduce their net exposure. What is more, the size of the
dealers' exposures -- which has reached an estimated $500 million or
more for the 17 members -- fluctuates daily with the price of gold.
Officials of Ashanti said they had signed a standstill agreement Wednesday
with its dealers to stave off margin calls. On Tuesday, Ashanti confirmed
that it is in merger talks with Lonmin, a United Kingdom mining group.
Ironically, Ashanti's short-term cash squeeze comes at a time when its 23
million ounces of gold reserves have actually increased in value; the
hedging program only covered about 10.5 million ounces.
Some of the gold dealers blame the snafu on the European central banks'
recent imposition of restrictions on the growth of gold leasing that had
accompanied last week's announcement. The new leasing restrictions have
contributed to the tight supply conditions triggering the gold-price rally,
because sometimes gold-market participants who need to deliver the metal
count on the leasing market to obtain it.
Shares of Cambior, a Montreal producer, also took a nose dive
Wednesday, falling $1.1875, or 37%, to $2 on fears that the company
could be forced to buy large amounts of gold at the current high price to
cover a hedge that was arranged before gold's recent surge.
Cambior said Wednesday it had sold options on 921,000 ounces of gold,
while its production for the first half of the year was only about one-third
that amount. In a statement, Cambior said the counterparties to its hedging
contracts are international banks and other financial institutions, and the
company "will pursue discussions with such financial institutions concerning
the management of this situation."
Other big gold stocks took a beating Wednesday as well. Newmont
Mining fell to $27, down $1.875, or 6.5%; its high Tuesday was
$30.3125. Barrick Gold dropped to $21.5625 Wednesday, down 81.25
cents, from a high of $26 on Sept. 28.
The irony is, a big jump in the price of gold is supposed to be good for
gold stocks, not bad. "As gold investors, we have suffered long," says
Caesar Brian, who heads the gold fund at Gabelli & Co. "Now we have a
big pop, but we find out there is a dark underside to it," he says.
In general terms, producers are being stung by hedges. There were a
couple of ways producers were able to do that, including "forward"
contracts and options. As the price of gold has spiked, however, those
contracts have become liabilities, forcing producers to deliver gold at
higher prices, in some cases, and to meet margin calls in other instances,
where options losses are an issue.
The divergence of gold prices and gold stocks is even more interesting,
since it shows how aggressive producers had become recently in their
hedging programs. "The knee-jerk reaction was to buy the stocks," says
George Gero, senior vice president of investments at Prudential Securities.
"But on reflection, people are realizing that the producers were hedged at
lower levels and that they ought to think twice about their exposure," he
says.
In some cases, says Toronto-Dominion analyst David Neuhaus, producers
may not have had much of a choice, especially those that were financially
pressed as a result of the steep decline in gold prices, which hit a 20-year
low before the recent rally.
"Some of these producers were looking at problems because of very low
gold prices in the last several months. So there was pressure for lenders to
try to limit their downside through hedges," he says.
The question now is whether there is another shoe to drop. Mr. Neuhaus
says he believes gold stocks as a group are being unfairly punished. "These
stocks are not reflecting what they should at this gold price," he says. One
of the most aggressive users of hedging programs is Barrick Gold, one of
the world's largest gold producers. The company has long earned a
premium over the gold spot price by selling its gold forward in a unique
hedging program.
When Chairman Peter Munk started Barrick in 1983, "one of the founding
principles of the company was to be conservatively financed and minimize
the gold-price risk," spokesman Vince Borg said. Over the past 12 years,
Barrick says it has earned a total of about $1.5 billion in added revenue
from its hedging program, which is based on "spot deferred contracts."
Under such contracts, the producer borrows gold from central banks and
sells it in order to earn interest on the proceeds. The company profits the
difference between the central banks' "lease rates" and the interest earned.
Fortunately for Barrick, the spot price for gold over the past 12 years has
always been below the amount the company could earn by hedging.
And Barrick earlier this year locked in the lease rates it will pay over the
next few years at rates "substantially lower than where they are now," at
about 6% or 7% annually, said Barrick Chief Financial Officer Jamie
Sokalsky.
But now with gold soaring, the prospect that spot prices will rise above
Barrick's hedge price is increasing. Currently, Barrick says it has sold
forward about 13.3 million ounces of gold at an average price of about
$385 per ounce through 2001.
However, if the spot price does rise above $385, Mr. Sokalsky said
Barrick has the luxury of deferring its forward contracts for as long as 15
years and instead selling its gold production at the spot price. That means
the company can wait for spot prices to return to lower levels before
returning its borrowed gold to the central banks.
-- Mark Heinzl contributed to this article.
--------------------------------------------------------------
Placer Dome: Among the Best and
Brightest
individualinvestor.com
by Bob Hirschfeld 9/29/99
It looks like gold has regained its luster on Wall Street.
Over the past two days the price of gold racked up its
largest increase in 13 years, rising about 15% after
European central banks startled investors by promising to
restrict bullion sales and lending, two practices which have
sent gold prices to 20-year lows.
The new-found commitment removes the uncertainty of bank
sales from the gold bullion market, sent short sellers diving
for cover, and was well received in such bullion-rich countries
as South Africa and Canada.
Like this Article?
A major beneficiary of the move is Vancouver-based Placer
Dome (NYSE: PDG - Quotes, News, Boards), which
advanced a nifty 30%, closing Tuesday at $15.75.
Over the past four years, the world's fifth largest gold
producer sharply boosted output to 2.9 million ounces from
1.7 million, thereby increasing its leverage to the shiny stuff
during a time of languishing bullion prices. Over that span,
however, Placer shares took it on the chin, losing about 40%
of their value.
Though Placer Dome is the fourth most sensitive gold
producer to bullion prices among the North American
producers, the company is conservatively financed. Placer's
balance sheet offers investors a debt-to-capital ratio that, at
37%, is squarely in the middle of its large cap peers, despite
Placer's numerous recent acquisitions. In addition, Placer
also boasts $347 million of cash, second only to Barrick
Gold (NYSE: ABX - Quotes, News, Boards) in this respect.
Placer Dome handles the volatility of bullion prices by finding
ways to mine more cheaply. Its total cost of gold of $240 per
ounce is among the industry's lowest. According to Market
Guide, Placer's five-year average operating margin is 7%,
compared to negative 5% for the industry, and its five-year
average gross margin is 44%, versus 39%.
Despite the problems inherent in mining a commodity that
has lost value, the company's return on equity of 8% is
second only to American Barrick at 8.2%, and well ahead of
the 1.6% and negative 2.3% posted by large cap peers
Newmont Mining (NYSE: NEM - Quotes, News, Boards)
and Homestake (NYSE: HM - Quotes, News, Boards).
During its second quarter, Placer turned a profit of $0.05 per
share before unusual items, an achievement given that gold
prices were hovering near 20-year lows.
On September 22, Salomon Smith Barney gold analysts
Leanne Baker and John Hill wrote that Placer Dome is
positioned to outperform peers, given its leveraged
production profile, which features larger reserves and lower
costs. Cash costs, they wrote, are down to $149 in 1998
from $198 in 1994.
The improved profile relates to "hard nosed decisions" to
close high-cost mines and replace them with lower-cost
startups. According to analyst Hill, Placer Dome been the
most aggressive dealmaker, having bought some of the
richest ore bodies in the world, including Getchell Gold,
South Deep, a 50% joint venture in South Africa, and the
70%-owned Las Christinas mine in Venezuela. "All of these
ore bodies are absolutely world class," said Hill.
While noting that Placer Dome is valued in line with peers
Barrick, Newmont, and Homestake, given an Enterprise
Value-to-cash flow multiple of 13.3 times 1999 estimates
compared to an industry average 13.4, Baker and Hill find
plenty of room for upside in the shares. Their current $21
price target is based on Placer Dome's 20.7-year operating
life of current reserves (ahead of an 18.3-year peer average)
and assumes a $350 per ounce gold price.
That measure of reserves understates Placer's South African
reserves by 75%, which provides a valuation cushion, should
the company revalue its year-end gold reserves at a lower
price, a move that now appears highly unlikely.
Bottom Line:
We think the past week's rebound in gold is more than a
head fake. Given the substantial rise in gold lease rates the
past few months, plus the surprise decision by European
banks, which will cut supplies going forward, the bearish
complacency of the past years has been dealt a serious
blow. Placer Dome, with its diversified, low cost mines and
strong balance sheet, is an outstanding way to invest in the
commodity, though investors should keep in mind that the
abrupt moves in gold prices, both up and down, may at
times blur the price prints on shares.
These two links are the same:
individualinvestor.com
fnews.yahoo.com |
