Where there's gold there's fire
(ie: we don't need no stinkin dollar collapse - allthough it would sure as hell help (VBG))~
GOLD: Just above 22-year low, is it ready for bounce?
By Thom Calandra, FT MarketWatch.com
Last Update: 5:11 AM ET May 2, 2001
LONDON (FTMW) - Some professional investors are questioning the traditional belief that gold - and gold mining shares - can only rise as the U.S. dollar declines or as inflation accelerates.
John Hathaway, who manages the $20 million Tocqueville Gold Fund from New York City (TGLDX: news, msgs, alerts) , says "a protracted bear market in stocks and financial assets" will sway investors into the metal.
Larry Edelson, managing editor of The Safe Money Report in Florida and a former commodities trader, sees a weakening relationship between dollar strength and gold weakness.
"I believe a split is coming in the normal relationship between the two," says Edelson. "In other words, a strong dollar does not necessarily mean lower gold prices. If the dollar continues to remain strong or get even stronger, it's a darn good sign there are big problems elsewhere in the world, problems that could easily light a fire under gold."
On Wall Street, analysts such as those at Salomon Smith Barney point to steadily rising demand for the metal in jewelry. Scientific developments also may boost industrial demand for the metal. Gold is a highly conductive and soft metal that may find uses in catalytic converters and in wiring for electronic writing pads and other embedded computing devices.
Gold use in electronics rose 15 percent to 106 tons last year, Gold Fields Mineral Services said in an April report. The deficit between physical supplies and growing consumer demand for cheap bullion could be as high as 25 percent, some mining analysts estimate.
Yet repeated central bank sales of gold across Europe, coupled with tame inflation, have battered prices. Gold sells for about $265 an ounce, not far from its lowest point in 22 years, $252 set in August 1999. The metal's price has ranged from $252.80 to $326.25 in the past year.
Most economists are unwilling to break the link between the strong dollar and gold. Gold, while it sometimes changes hands in euros, yen, South African rand and the Australian dollar, is largely denominated in dollars. The dollar, and dollar-denominated securities, traditionally have provided investors with a feeling of comfort and with valuable liquidity during times of crisis.
In the same way, many modern investors have placed their belief in the Federal Reserve, which modulates interest rates and is responsible for managing the U.S. economy. In the 30 years since U.S. President Richard Nixon effectively ended the use of gold as a money standard, the price of gold has only occasionally risen in reaction to Federal Reserve actions, most notably in 1980 and 1981. Gold prices back then rose above $800 an ounce amid soaring U.S. interest rates and runaway inflation.
Gold in those hills
A few investors, like the fund manager Hathaway, now say the no-holds-barred belief in both the dollar and the Federal Reserve's ability to keep the American economy healthy is at a testing point.
"Since the Latin American crises of the early 1980s, the Federal Reserve's response to market difficulties has been to bail out anyone who has made a bad investment," Hathaway tells investors in a letter to his fund's investors.
"Now the Fed's bailout strategy has gone too far," says Hathaway, whose gold mutual fund is up 5 percent since launch in June 1998. "No longer are the potential losers from bad investments confined to lenders to foreign countries, bankrupt hedge funds or bad banks. It is now the American public, which has been suckered into pouring its life savings into a dangerously overvalued stock market."
Jude T. Wanniski, president of political consultancy Polyconomics Inc., says central banks will move back to using gold as an economic indicator. "It was Karl Marx who actually impressed that on me when he proclaimed that 'Gold is the commodity money par excellence.' It is as good as it gets," says Wanniski, who airs his beliefs at www.polyconomics.com. "The world is not going to give it up, no matter what Milton Friedman, the monetarist, or Yale's James Tobin, the Keynesian, say about it."
Edelson in Florida notes that gold mining shares as measured by the Philadelphia Gold and Silver Index (XAU: news, msgs, alerts) and the CBOE Gold Index (GOX: news, msgs, alerts) are a fraction below their highest point since mid-May of last year.
Most gold miners, such as Newmont Mining (NEM: news, msgs, alerts) , have seen their quarterly profits turn into losses as gold prices stay stuck in a $260 to $300-an ounce range. Yet gold mining shares, curiously, are rising.
Newmont's chief executive, Wayne Murdy, told shareholders this week that his company, the largest North American gold producer, has no intention of increasing the amount of gold it forward-sells, or hedges via the use of derivatives. Such hedging, while providing extra income for miners, is seen as a powerful drag on gold prices.
Edelson says the divergence between a flat gold price and rising gold mining shares is an indication that the metal may break away from its traditional links with the dollar and inflation.
"The ideal situation right now would be for mining shares to hold their own, and gold make a stab at a new low. That would set up a divergence that would signal a major bottom in my view," Edelson says.
"As for inflation -- while I do believe it's coming on a worldwide basis as central banks try to reflate out of the trillions that have been lost in stocks -- it too is not needed to get gold going," he says.
One group intends to air its beliefs about governments' role in gold markets at a South Africa conference next week. The Gold Anti-Trust Action Committee, based in Texas, says it "will reveal proof of the suppression of the gold price by the U.S. and German governments and bullion banks." The conference is scheduled for May 10 in Durban, South Africa.
Thom Calandra is Editor-in-Chief of CBS MarketWatch and FTMarketWatch.com.
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