Late to the gold rush
Bank's embracing of metal, miners seen as a plus
By Thom Calandra, CBS.MarketWatch.com
Last Update: 11:22 AM ET Jan 16, 2003
SAN FRANCISCO (CBS.MW) -- How important is Wall Street's fresh round of upgrades for the gold industry?
To many longtime gold investors, Wall Street's embracing of the metal, which in 2002 rose about $66 an ounce, or 24 percent, is par for the course: a sign that sales-driven analysts are late to the profits in any market rally.
Still, even the most cynical of observers acknowledges the importance of professional support for a metal that Main Street investors mostly shunned during the most recent boom years.
This week, Wall Street and London banks upgraded their gold price forecasts and their ratings on several mining stocks. All see higher prices for the metal, which is attempting to surpass $360 an ounce for the first time since early 1997. See: Gold gets respect on Wall Street.
"These reports are good trend indicators, but they are lagging indicators -- not coincidental ones," says James Turk, editor of Freemarket Gold and Money Report. "It indicates that the trend is well enough established for them to consider changing their estimates."
The fresh round of positive forecasts for gold and the mining companies -- from the likes of UBS Warburg, Deutsche Bank and J.P. Morgan Chase -- follows moves by investment banks to reduce clients' holdings of stocks. In December, Merrill Lynch's chief U.S. strategist, Richard Bernstein, reduced his recommended stock asset allocation to 45 percent from 50 percent.
As it stands, gold (the physical version of it, that is) often is absent from the traditional asset allocation lists of the world's largest investment banks. Institutions such as pension funds that want to buy physical gold on behalf of clients must overcome custodial challenges and a herd mentality that still favors paper investments, even with stock markets across the world approaching six-year lows.
There are early signs, though, that the paper chase is over. Goldman Sachs currently recommends a small portion of assets, about 5 percent, be staked to commodities. Several gold mining mutual funds, among them Gabelli Gold Fund (GOLDX), now own actual bullion, not just gold equities.
Profitable gold miners such as Goldcorp (GG) and Iamgold (IAG) are entertaining the notion of issuing dividends in gold or gold grams, through the services of payment systems such as GoldMoney.com.
Plus, in what could be a stunning development, several organizations, among them the World Gold Council, are developing plans for an exchange-traded fund for gold. Such a fund would trade like a stock on a major exchange and be backed by actual bullion. At present, there are no commodity-based exchange traded funds. See: Gold as a form of currency.
Of course, at the heart of professional support for gold is the lure of profits. Both gold and commodities in general, as measured by the Commodity Research Bureau Index, gained almost 25 percent in 2002.
As analyst Barry Cooper at CIBC World Markets in Toronto says, "Not since 1993 has there been a year with similar moves in bullion." In that year, bullion rose $56 an ounce, or 17 percent.
Wall Street banks are also licking their chops over the gains in gold mining equities. Most have doubled and tripled in the past 18 months. The highest fliers, such as Canada's Nevsun Resources (NSU), have risen 1,000 percent in two years' time. South Africa's Gold Fields (GFI), one of the top five gold producers worldwide, has seen its shares rise 300 percent since early 2001.
"You will continue to see these (investment bank) upgrades each time gold establishes a higher level and as this bull market in gold evolves," predicts Frank Giustra, a Canadian merchant banker and director of Endeavour Mining Capital Corp. (EDV).
"In the early stages of this bull market, the upgrades will come after the new trading range is established," says Giustra, who pegs the current price range for gold at $330 to $375 an ounce. "As this bull market matures, expect analysts to become bolder and actually anticipate higher gold prices with their mining company upgrades."
Naturally, the question investors are surely asking themselves, as gold's price continues to notch new highs, is: Invest in the metal or the mining stocks?
Cooper at CIBC World Markets says there have been only six spans in the past 30 years when holding bullion produce better gains than holding gold equities during periods when the gold price (38099902) was rising. The most significant was the 15 or so months in 1979 to '80, when gold rose 165 percent while the S&P Gold Index rose 106 percent.
Wall Street analysts are slowly, perhaps too slowly, beginning to understand the positive effect that a declining U.S. dollar has on the gold price. About four-fifths of gold production and consumption actually happen in currencies other than the dollar. A weakening dollar stimulates demand and depresses supply.
"When the U.S. dollar weakens, the price of gold in other currencies falls, making gold more affordable to consumers and less attractive for local-currency gold miners to produce," explains UBS Warburg's John Reade, one of several influential analysts who this week raised their 2003 gold price forecast. See: Gold gets respect on Wall Street.
John C. Doody, editor of Gold Stock Analyst, says that since May 2001, the euro currency has gained 25 percent against the dollar whole gold has gained 37 percent. "The metal has become a destination for some of the money gained from selling dollars," Doody tells me.
Late last year, China's central bank bought 3.2 million ounces of gold, increasing its gold reserves by 20 percent in the space of a month. "The U.S. has a $350 billion trade deficit with China, which has said publicly it is buying euros and gold. If the Chinese paid $325 an ounce for the 3.2 million ounces they bought, they spent $1 billion on the gold, just over 1 percent of the $88 billion per quarter represented by the annual U.S. trade deficit with that nation," says Doody.
The longtime gold mining analyst says Wall Street's upgraded views of mining companies and the metal are a plus, even with the investment banks missing the first stage of the gold rally. "These firms have a broader following than those of us in the business who have been saying gold is headed higher," he says. "Their upgrades are sure to bring more investment dollars to gold." |
