A letter to send to Congress with James Turk''s latest findings


By Thom Calandra, Editor
January 14, 2002

SAN FRANCISCO -- Rarely will mainline investment sources,
like the Wall Street brokerage houses, deliver nirvana in the
form of an undiscovered idea, company or trend.

This is especially true of shunned investments, like gold.
John Hathaway, manager of the tiny Tocqueville Gold Fund
(TGLDX) advises investors, when it comes to
anti-establishment gold, to "not rely on conventional financial
media and brokerage house commentary." Hathaway, who
thinks gold prices have the potential to rise five-fold or more,
says, "In this area, such brokerage commentary is even
more misleading and ill-informed than usual."

Hathaway's comments appear in "Investing Rules," a British
collection of advice from 150 professionals. The money
manager is one of a small but growing group of professionals
who are perplexed (thwarted, frustrated, enraged, depressed)
by gold's inability to cross the $300-per-ounce level and stay

Still, there are hopeful signs for gold. The metal gained about
$8 last week to almost $290 an ounce, sending some gold
companies' shares into a tizzy. Gold stocks, especially
those of unhedged producers that refrain from forward sales
of the metal, move by a multiple of three and more to each
1 percent that gold prices rise on commodity markets.

At the heart of gold's recent strength, however fleeting, is
the takeover battle between North America's Newmont
Mining (NEM) and South Africa's Anglogold Ltd. (AU) for
the right to take over Normandy Mining, Australia's largest
gold producer, for about $2.3 billion. It is a battle pitting
Anglogold of South Africa, a derivatives junkie and the
world's largest gold miner, against Denver-based
Newmont, which abhors the practice of using complex
derivatives and selling its gold production forward.

Some say Newmont, which at this time looks like it will
prevail over Anglogold, will reduce or somehow
eliminate 8 million or so ounces of forward gold sales
that are on Normandy's books. Forward sales, through
the use of derivative contracts and borrowed gold, help
hedging miners achieve slightly higher prices for their
gold. But the forward sales, while temporarily massaging
the earnings statements of hedged producers such as
Anglogold, also encourage loose lending of the metal
by central banks and institutions, thus putting a lid on
the gold price.

Taking one or more hedgers out of action theoretically
will sop up excess supplies, allowing gold futures
contracts to progress toward that $300 barrier. Earlier
this month, John Roque, a charting technician at
investment house Arnhold & S. Bleichroeder in New
York, called gold the "most unloved, despised,
laughed at, repulsive and flesh-crawling financial
instrument known to mankind." Then he forecast the
metal would reach $340 an ounce this year.

Gold's next test is later this week, when the Bank of
England conducts an auction of the metal in its
seemingly never-ending program to reduce British
gold reserves at fire-sale prices. The auction
Wednesday actually will be the next to last. "It is
hard to see gold rallying further until the auction is out
of the way," UBS Warburg in London said Monday
morning in its daily commentary.

Still, the gold auction over there in London has a
capacity for surprising even the most miserly. Of 15
auctions thus far, average demand for the bank's
gold on the block has been 3.6 times available supply.
The high point, 8 to 1, came in September 1999, when
gold changed hands at $255 an ounce. One metals
analyst tells me if this week's auction comes in close
to $290 an ounce, it will be the second-best price for
the three-year-long Bank of England series.

Among the gold shares Monday, Newmont's stock
on the New York Stock Exchange had breached the
$20 level for only the second day since Dec. 18.
Investors were betting the company would succeed
in buying Normandy (NDY).

Other non-hedging producers, among them South
Africa's Harmony Gold Mining (HGMCY) and the
world's largest we-sell-it-as-we-mine-it digger, Gold
Fields Ltd. (GOLD), are now trading in the stock market
for their highest levels since the brief gold rally that
came and went in October 1999. This could be a
sign that investors are beginning to distinguish
between the gold producers who stick to their
business of mining without financial shenanigans
and their hedging, Judas-priest cousins. In the past
six months, Harmony, Gold Fields, and another
unhedged producer, Meridian Gold (MDG), have
exceeded the share gains made by hedged
producers such as Anglogold and Barrick Gold
(ABX) by wide margins, as much as 40 percentage

The stock market gauge most looked at by North
American investors, the Philadelphia Gold and Silver
Index (XAU), is dancing with its highest point since
September. That index has hedged and non-hedged
producers in it. Martin Pring at the International Institute
for Economic Research says the price of gold, at
$287.40, and gold equities, near 59 on the XAU, are
now above their 12-month moving averages.

Pring told me Monday both the metal and the gold
shares face short-term resistance, which is a technical
term for "trouble ahead." Once the XAU clears 60 or so
and gold clears $295, both the metal and the companies
that mine it could experience a primary bull market, he

Pring sees gold's recent rally as a lead indicator for
rising prices for industrial materials, such as steel, copper,
metal scraps and so on. "Gold has always served well
as a lead indicator for commodity inflation," he said.
"I think we are at the point in the cycle where gold can
put on a good rally."

In this corner, the gold auction in London looms large.
Demand for the metal on the block will be important, but
this time around, price will be even more essential to the
gold rally. At $288 or so an ounce, demand of 3-to-1 would
be enough to flip the gold price above the $290 level.
Gold stocks, regardless of the outcome, almost certainly
will continue to exceed the returns of the overall U.S. stock
market, as they have for the past six and 12 months.