Hi Tom,
canaccord.com
Monday, January 19, 1998 Analysts' Breaking News
RECOMMENDATIONS
* Industry Update-Mining (L. Strauss)
NEWS
* Mining-The Gold Price
Last week, gold staged a substantial rally from US$278.90/oz. on
Monday to US$290.00/oz. by Friday, based on the London PM gold fix.
Many factors contributed to the rally, including bottom fishing in the
Asian markets, a decline in the US dollar against several key
currencies, reduced Australian producer hedging, strong gold demand in
India, and an heightened sensitivity of being short gold in a weak
market.
We will review each of these factors, and when finished, it should
become clear why we do not view the current rally in gold as the
beginning of a major bull move.ÿ Rather, the recent strength in gold
appears to underscore the risk of being short in an extremely
depressed market, and it may signal less willingness by funds to
maintain excessively large short positions in the intermediate term,
in our view.
In the intermediate term, which we estimate may coincide generally
with the March-May period, gold could stage a rally to the
US$300-325/oz. area, ahead of an expected announcement in May by the
European Central Bank (ECB) on its policies towards gold.ÿ For now,
however, it appears to be a bit premature to believe that the current
rally will be sustained as an announcement by the ECB does not appear
likely in the near term.
The other major factor that we believe could lift gold higher is a
sustained decline in the US dollar, something that we do not
anticipate during the next several months.ÿ The recent weakness in the
US dollar is largely a reflection of the strong bounce seen in the
Asian markets, which we believe occurred in response to positive
comments by International Monetary Fund (IMF) managing director Michel
Camdessus on the implementation of the recent South Korean and
Indonesian aid packages.ÿ These markets were excessively depressed,
providing an opportunity for funds seeking high quality investments
that were caught in the recent downdrafts.ÿ In order to implement
these investments, dealers liquidated US dollars in favour of Asian
and other currencies so that assets in these countries could be
purchased.ÿ We view this as an event that may cause the US dollar to
correct periodically over the next several months, but this selling is
not likely to cause the dollar to move sharply lower.
We believe the US dollar is likely to remain buoyant because the US
economy remains strong after leading the global economic thrust
through most of the 1990s.ÿ As such, a decline in the US dollar, which
could lead to an increase in US exports, would likely be viewed
unfavourably by European, Asian, and other countries since an increase
of US exports would come at their expense.ÿ In addition, we believe
the ECB would want a strong US dollar since it is likely to be one of
the key currencies backing the new Euro, if it is implemented on
January 1, 1999 as expected.
If the US dollar remains buoyant, it would generally be viewed as
negative for gold since gold is priced in US dollars, and would
therefore be more expensive for international consumers.ÿ In addition,
international holders of gold would have more incentive to sell the
metal, which is exactly what is happening in South Korea and SE Asia.
Moreover, a strong US dollar would tend to increase producer hedging
of gold, particularly in Australia, which leads to another reason why
gold was higher last week.
The Australian dollar rallied to US$0.6685/A$1.00 by Friday of last
week, after beginning the week near US$0.64/A$1.00, basis the March
Chicago Mercantile Exchange (CME) contract.ÿ This rally reduced one of
the factors that had limited gold rallies in recent months, namely
Australian producer hedging.ÿ The higher Australian dollar by week end
reduced the incentive Australian producers had to sell forward future
production.
A third reason gold rallied was strong buying in India amid concerns
that the rupee could come under severe pressure because of the
country's close economic ties to the weak Asian markets.ÿ As such,
Indian's are buying gold as a safe-haven asset that could rise in
rupee terms if the rupee falls.
It should be noted that the selling of gold in SE Asia and South Korea
made perfect sense, and that gold acted as an excellent storehouse of
value in times of economic and political turmoil.ÿ Gold's storehouse
characteristics work best when it is purchased when conditions are
calm.ÿ When crashes occur like those seen recently, gold should
provide a counterbalance, which is exactly what it did as it rallied
sharply for people in these countries.ÿ Indians should benefit in a
similar manner by a rise in the price of gold in rupee terms if the
rupee is devalued.ÿ This should provide an excellent lesson for
European bankers that have expressed a desire to limit gold's role as
a backer of Europe's currency.
A final, quick note on gold's near- and long-term prospects:ÿ as
mentioned above, we do not believe the current rally in gold is likely
to be sustained.ÿ As such, a setback and test of the lows may occur in
coming weeks.ÿ However, over the long term, we do not believe the ECB
is likely to announce a plan that would send gold reeling even lower.
We have many reasons to hold this view, among the following:
Central banks own the majority of the world's gold, and the European's
own in excess of 40% of the central bank total.ÿ The question would
then arise, would the European central bank want to effectively
devalue" an asset of which they are a major holder?ÿ We think not.
Would the ECB want to be put into the situation of being the primary
supplier of gold to the market?ÿ We think not, but if it implements
policies that are viewed as excessively bearish, it would create just
such a situation since many producers would likely be forced to close
mines.
If gold continues to decline precipitously, many third-world nations
that the International Monetary Fund (IMF) is attempting to support
would be hurt.ÿ These countries include South Africa and other African
nations, Peru, Chile and other South American nations, Indonesia,
Papua New Guinea, and others.
Note on Pegasus (PGU : TSE : $0.11)
In other news, Pegasus filed for chapter 11 bankruptcy protection in
Reno, Nevada, to facilitate the reorganization of the Company's
businesses and the restructuring of approximately US$183.0M of
long-term debt and revolving credit, US$14.0M in trade debt, and
US$16.0M in foreign currency losses.ÿ In addition, the American Stock
Exchange (AMEX) announced that it would delist PGU shares as the
Company no longer satisfies the Exchange's continued listing
guidelines.ÿ Pegasus is not appealing this determination.ÿ We continue
to rate PGU shares a SELL with a C$0.00 price target.
Larry Strauss (416) 869-3092 |
