Fear powers gold rally; inflation, too
uniontrib.com
By Don Bauder
The San Diego Union-Tribune
May 29, 2002
<<Proving that the markets are gripped by the heebie-jeebies (as if any proof were needed), gold keeps driving upward relentlessly.
Yesterday, gold futures contracts for June delivery settled above $324, the highest since March 2000, up $3.40 on the day. Gold is up 17 percent this year.
"Gold is the only bull market driven by mass fear instead of mass greed," says James Dines of Belvedere's The Dines Letter.
Richard Russell of La Jolla's Dow Theory Letters ticks off the reasons gold is rising steadily. "There has been excessive money supply creation by the Fed (Federal Reserve) to cover deficits," he says. This will prove inflationary. Also, "there is decreasing world gold production."
The flow of money out of U.S. markets helps gold, he says. The process is inflationary, and inflation is gold's friend.
For years, the world's central banks have been selling gold to keep its price down. "Their problem is that they sold gold at lower prices," and hence look foolish, he says.
There are extremely heavy short positions (bets on a price decline) in gold. Some shorting comes from gold producers themselves, who sell gold in futures contracts, in effect shorting their own product. So the rally is in part a short-covering affair – that is, the shorts scurrying to buy to close out their short positions.
There is a primary bull market in gold, and it could go a long way, says Russell.
Kennedy Gammage of La Jolla's Richland Report says, "Everybody wonders what the equilibrium price will be, where the panic buying starts."
There are plenty of calamities waiting to happen. The largest banks have $30 trillion worth of derivatives tied to gold. (Derivatives are highly complex financial instruments that derive their value from another instrument.)
"If you get a daisy chain, a tsunami, some anomaly, you could have another Long Term Capital Management (a hedge fund that had to be rescued by a Fed-arranged bailout in 1998) on your hands. Central banks are terrified that an event could bring down the financial system of the Western world," says Gammage.
Brian MacArthur of UBS Warburg says "certain gold companies have branded themselves as anti-hedging. Producer hedging has not been a threat to gold supply for the past two years."
Also, he believes "the threat that central banks would dump thousands of tons of gold into the market has receded."
There is a rise in investor interest in gold from Japan, North America and Europe, says MacArthur. He has raised his earnings forecasts on Barrick, Newmont and Placer Gold stocks, and likes Newmont the best.
Should you buy gold bullion, coins or stocks? Russell would not buy bullion, because the metal must be tested rigorously when you sell it, but he would buy coins. Right now, the South African Krugerrand is most favorably priced.
He also likes gold/silver stocks such as Newmont, Agnico Eagle, Goldfield and Durban Deep.
Gammage would not buy the companies that are hedging the metal, or effectively shorting it, such as Newmont, Barrick, Anglogold and Placer Dome. Newmont got into hedging through an acquisition, and Gammage would buy the stock as soon as it gets rid of its hedge book.
He likes GoldCorp, Durban Deep, Kinross Gold, Harmony Gold, Pan American Silver and Central Fund of Canada, a trust that has 99 percent of its assets in gold and silver.
"Gold stocks have outperformed all other groups so far this year, and nearly every gold is in an uptrend," says Dines. He likes Placer Dome in particular, saying that it has lagged other golds in the run-up for no cogent reason. He thinks the company might be bought.
He also likes the convertible bond of Battle Mountain.
Alan M. Newman, editor of the Great Neck, N.Y.-based Crosscurrents newsletter, says the rise in gold, gold shares and other commodities is an indication the Federal Reserve is pumping up money to avoid deflation.
Newman is "still enthusiastic about the prospect for gold shares," but he thinks the move has come too far, too fast. So he would close out half his recommended positions in Meridian Gold and Goldcorp.>> |
