Gold market attracts bigger money
Experts see flows into large, small companies, funds
By Thom Calandra, CBS.MarketWatch.com
Last Update: 12:19 PM ET May 20, 2002
SAN FRANCISCO (CBS.MW) - When the saints come marching in, you want to be in their number.
The gold market, surging Monday, is luring large investors stymied by low or negative returns in their core stock-market holdings. Managers of $100 million or more are establishing hundreds of new positions in Placer Dome Gold (PDG: news, chart, profile), Anglogold (AU: news, chart, profile), Gold Fields (GFI: news, chart, profile) and Newmont Mining (NEM: news, chart, profile), the world's largest gold producer,
As of March 30, 83 investment firms alone had bought shares of Newmont Mining for the first time, according to Securities and Exchange Commission filings. The managers bought a total of 14.2 million shares, or 6 percent of the Newmont total held by financial institutions and money managers, according to a survey by 13Fpro. The new Newmont holders include Oz Management, which runs the Covered Call Fund, a strategy that benefits by writing call options on stocks that are rising.
"Performance attracts money," said Robert Bishop, editor of Gold Mining Stock Report. Bishop said large investors, such as fund managers and pension funds, are finding it hard to ignore the scorecard: North American gold mining stocks up 30 percent since Jan. 2, bullion itself up 16 percent, Nasdaq 100 down 18 percent.
Bishop, who has been tracking large and small gold, silver and diamond miners for more than 25 years at his California-based service, says he noticed a subtle change in the way investors treated shares of Newmont Mining when the company reported a mixed quarter last week.
Newmont of Denver estimated operating profits for the year, based on the current gold price of $312 or so an ounce, would amount to between 40 and 50 cents a share. That was 10 percent to 20 percent below what Wall Street and Toronto analysts were forecasting for the company, which earlier this year completed a three-way merger with Australia's Normandy Mining and Canada's Franco-Nevada.
"Yet the stock had almost no profit taking," said Bishop, who acknowledges the company's estimated operating cash flow for this year, about $2 a share, makes the almost-$30 stock look expensive. "I think a lot of folks want to own Newmont because they believe gold is going far higher." Some 4.4 million Newmont shares now change hands each day on the New York Stock Exchange, an average that is almost double levels from six months ago.
Bishop says the financial world is getting its first demonstration of a sustained gold rally in an Internet-ready age. He pointed to a sharp, two-day rally, on record-breaking share volumes, of Central Fund of Canada (CEF: news, chart, profile), a $110 million closed-end fund that stores gold and silver in its vaults. The fund, an electronic proxy for gold, 11 trading days ago surged in price, bringing its premium to the net asset value of its holdings to almost 25 percent from 6 percent.
Central Fund shares, traded on the AMEX in New York, still hold that premium, with the shares closing in on their May 7 high of $4.65 a share. The fund's rise, with spot gold and silver trading in a steady but narrow price band, shows "people want to own gold as soon as they can," Bishop said.
Bill Murphy, the publisher of gold magazine LeMetropoleCafe.com on the Web, deserves credit for getting the gold story before an online audience, said Bishop. "He stuck with gold through a long bear market and put it in front of a loyal and growing audience," said Bishop.
Murphy, a onetime commodities trader and a former professional football player for the Boston Patriots, runs subscription LeMetropoleCafe.com from Dallas. Some on Wall Street dismiss as a fanatic for the long-languishing metal. Murphy, who wears a hat as chairman of the Gold Antitrust Action Committee, asserts that central banks, Wall Street investment banks and the U.S. Treasury depressed the price of gold through much of the 1990s in a bid to moderate commodity inflation and interest rates.
There is no denying Murphy's influence. "I know it sounds extreme, but Bill put gold on the map for a lot of folks out there," says Bishop.
Murphy's LeMetropoleCafe.com has 3.500 subscribers who pay $149. Another 7,000 are on his mailing list. In Murphy's camp, or sharing at least some of his beliefs about a rigged gold market, are scores of longtime mining investment newsletter editors and natural-resource fund managers. These include John Hathaway at Tocqueville Gold Fund (up 65 percent this year) in Manhattan, Adrian Day at Global Strategic Asset Management in Maryland, Lawrence Roulston of Resource Opportunities in Canada, Ian McAvity at Deliberations on World Markets in Canada and former Central Intelligence Agency economist Mark Skousen at Forecasts & Strategies in Irvington, N.Y.
I asked Murphy, who was on his way to a London presentation before metals analysts, where he is advising his LeMetropoleCafe.com audience to put their money these days: actual gold or gold coins, large producers such as Newmont, gold futures contracts, long-term stock market options on gold mining companies, silver or the smallest, most risky gold producers and exploration companies?
Murphy, who sees $1,000-an-ounce and higher prices for gold, and a powerful silver rally as well, advocated all of them. But clearly, he sees the smallest producers providing the biggest returns in coming months.
"My No. 1 gold choice is the smaller gold producer and the quality exploration companies," Murphy said Monday. "As is normally the case in a gold bull market, many have not matched the performance of the senior gold producers."
Murphy cited growing demand figures for gold, whose price has been stirred in perhaps equal parts by a reduction of producer hedging, Nasdaq's relentless slide, declining miner production of the metal, the dollar's recent weakness against the yen and euro and concerns about terrorist strikes against the United States.
"Very few in the investment/gold world realize the magnitude of the gold move that is upon us," he said. "What a nightmare for the shorts. They are trapped. There are gold loans and swaps of around 15,000 tonnes, an annual supply/demand deficit of 1,700 tonnes and mine supply at 2,500 tonnes that is going lower in the years to come, no matter what the gold price does. There is going to be a mad scramble to find new gold supply."
Murphy's top pick is Golden Star Rescources (GSRSF: news, chart, profile), a small, Denver-based gold company. "They just reported record profits, have building gold production in Ghana and superb exploration finds in the Guyana Shield waiting to be developed. It once traded $21 per share in 1996," Murphy said. "I expect that to be exceeded in the years to come."
Golden Stars Resources, traded in Canada (CA:GSC: news, chart, profile) and over the counter, was unchanged Monday morning at $1.30 a share. Gold mining shares as measured by the XAU (XAU: news, chart, profile) were up 2.2 percent to its highest point since Oct. 6, 1999. The AMEX Gold Bugs Index of largely unhedged producers of gold was up 6 percent to an all-time high. Spot gold's price rose $2.30 to $312.90 an ounce, highest since May 8. Central Fund of Canada rose 1 cent to $4.56.
Update: By 12:15 ET, gold's spot price had risen $3.50 to $314.10, its highest point since February 2000. Analysts said gold's price could surpass $320 in coming days. Among small producers, shares South Africa's Randgold Exploration (RANGY: news, chart, profile) were up 15 percent by midday Monday.
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Thom Calandra's StockWatch appears each trading day. He owns bullion and shares of Nevsun Resources and Almaden Minerals.
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