How Summers learned that as treasury secretary he''d need to rig gold


By Thom Calandra
August 9, 2001

SAN FRANCISCO -- The weak American economy finally may
be paying off for gold investors. And bond investors.
And euro investors.

The price of the active New York gold futures contract
rose $5.50 to $276.20 an ounce Thursday, its highest
price since late June and just 40 cents off its best
price of the day. North American gold shares in turn
rose 5.6 percent as measured by the Amex Gold Bugs

Long-suffering gold prices, in a perverse way, may get
a lift from the weakening American economy, money
managers say.

A Federal Reserve survey's signs of weak manufacturing
across the United States, released earlier in the week,
had ripple effects across the globe Thursday. The long-
suffering euro, for instance, extended a rally against
the dollar. The European currency rose almost 1.5
percent to 0.8924 cents, its highest point since May 7,
before paring its gain.

"The beige book shows everything falling off a cliff in
this country," Alan Snyder, a San Francisco money
manager, said about the Fed survey. "Weak dollar,
strong gold." Snyder Capital Management has about 3
percent to 4 percent of the $2 billion it manages in
gold-mining stocks.

The Fed's beige book is already blamed for a mid-week
Nasdaq decline. Now, it could be demonstrating that the
faltering American economy no longer can prop up the
dollar. The euro, after flirting with but not touching
all-time lows at the end of June, has been rising
against the dollar for about a month.

Some investors view gold as a way to buy protection
against a falling dollar, which has been rising against
most world currencies for about 15 years. Snyder sees
gold, whose sub-$300 price still ranks it as one of the
world's worst investments in the past decade, as a
hedge against a full-blown currency crisis.

Economists in London, New York, and elsewhere credit
this week's bond rallies in Europe and the United
States in part to anecdotal signs of the weak U.S.
economy. The Fed's survey showed that a slowing of
manufacturing battered the economy in June and July.

Not helping the recovery addicts: Consumer credit
figures show a 1.2 percent contraction. Americans are
borrowing less for things they love most: cars, high-
tech refrigerators and home entertainment systems.

Ten-year bond yields in the U.S. and in Britain both
fell to their lowest points since early April. The 10-
year U.S. Treasury bond's yield at one point Thursday
fell as low as 4.956 percent before crossing the 5
percent level again. Two-year yields, meanwhile,
flirted with their lowest levels in two decades as
investors counted on yet another cut in official U.S.
interest rates this month by the Federal Reserve.

Investors, as measured by interest rate futures
contracts, expect the Federal Reserve to cut the fed
funds rate to 3.5 percent from 3.75 percent on Aug. 21.

All of this, theoretically, benefits gold, a metal
whose low price is forcing a wave of consolidation in
the gold-mining industry. Lower interest rates, for
example, make the short sale of gold by speculators and
the forward sale of the metal by mining companies less
lucrative and more risky.

A weaker dollar, at the same time, can attract
investment demand for the metal, if investors believe
gold is a haven during a financial crisis. Large
American companies are complaining to the Bush White
House and Treasury Secretary Paul O'Neill, a former
Alcoa Aluminum executive, that the strong dollar
damages their overseas sales. Contrarian fund managers
such as Snyder -- and John Maack, director of equities
for asset manager Crabbe Huson in Portland, Ore. -- see
signs that the dollar's decline will continue.

"The euro has held up in the past 11 months vis a vis
the dollar, and that says to me that we have probably
discounted most of the concerns about Europe," said
Maack, who manages contrarian and small-capitalization
mutual funds for Liberty Financial.

"There is a lot of concern about Argentina and Brazil,
but I don't see investors talking about it, and I am
perplexed about that one," said Maack. The money
manager does not necessarily believe gold's day in the
sun has arrived. "There is an argument for gold if you
believe in the euro, but the biggest problem is that
there have been (decades) of central-bank selling of

Still, some professionals believe that investors'
complacency about the debt and currency woes facing
Argentina and Brazil could come back to haunt markets
later this year.

Snyder in San Francisco said he has largely given up
viewing gold as protection against inflation, its
traditional role. After all, there is very little
acceleration of inflation in the world's developed
economies. "We have always viewed gold as an insurance
policy against a world currency crisis," he said. "The
dollar has been so incredibly strong for so long that
it has to break at some point."

Snyder said gold's 2 percent rally Thursday also may
have gotten a lift from short-sellers who may be wary
of the New York-traded futures contract's rise above
$270 or so.

A well-received Bank of England gold auction a month
ago also may be having a delayed effect, Snyder said.
The bank, in one of its regularly scheduled sales, sold
20 metric tons of gold at a price of $267.25 and ounce.
Bidders applied for 2.6 million ounces -- an over-
subscription rate of 4.1 times.

"That got the shorts worried -- the demand and the fact
that the price at the time was above the spot price the
night before," he said.

Not everyone is convinced Thursday's gold rally will
continue. "We may need to see one more washout before
the final bottom in gold comes," said Larry Edelson, a
former commodities trader and managing editor of
investment newsletter The Safe Money Report. The metal
touched a 20-year low of $254 an ounce in April.

Snyder says the beauty of gold investing is the
potential for explosive rallies. "A move like the one
today could easily grow into a $30 or $40 move," he

Snyder follows the Amex Gold Bugs Index which rose 5.6
percent Thursday. His gold holdings include tiny Golden
Star Resources (GSRSF), a Denver company that hopes to
expand its holdings in mineral-rich Ghana once it
raises the necessary capital.

Snyder also owns shares of Franco-Nevada Mining Ltd.
(FN.TO), which in turns holds a 19.9 percent stake in
Australia's miner Normandy Mining Ltd. (NMDMF).


Thom Calandra is Editor-in-Chief of CBS MarketWatch.