Enron scandal, big losses put Morgan''s judgment in question


Gold gain points to currency risk
'Strange' buying of metal may be sign of distress

By Thom Calandra
Friday, February 1, 2002

SAN FRANCISCO -- As the world's economic leaders
meet in New York, professionals wonder whether gold's
steady price rise this week is the first crack in the global
currencies dam.

In a daily note, UBS Warburg's precious metals team
said Friday, "Gold remains strangely supported despite
the strength in the U.S. dollar. Although there has been
news of good buying out of bank-distressed Japan, the
reported quantities are not enough to explain the
precious metal's recent resilience. We suspect that
one or more large buying programs have been
executed since the start of the year."

Gold's climb to $284 an ounce may not seem so hot
to stock-market investors. Yet the gain from $278.50
just five days ago has brought gold-mining shares in
North America to their highest point in eight months,
as measured by both the HSBC North American Gold
Index and the Philadelphia Gold & Silver Index. Both
indexes on Friday continued to rise.

The metal's $5.50 gain, through Friday morning, also
is boosting mining shares in Australia, Canada, and
South Africa, where ailing currencies against the dollar
are magnifying companies' operating profit margins.
The gains have been strongest in Australia, where
takeover fever is sweeping small and large mining
companies. In Toronto, the stock market's gold mining
companies as a group have risen more than 50 percent
in the past 12 months.

As for bullion itself, the gains in the metal during a time
of dollar strength, usually a downer for gold, prompt the
question of who is buying -- and why.

Ken Landon, a Deutsche Banc analyst in Tokyo,
explains that a rising gold price almost always indicates
depreciating currencies, regardless of exchange rates.
In the past 12 months, the yen, he says in a report, has
fallen 21 percent against gold. The euro has lost 15
percent of its value against gold. The dollar is off by
6 percent.

Landon's report is making the rounds in Asia. His
view is one that may come to haunt investors in
coming weeks. "The rising price of gold in all the
major currencies indicates that investors have been
losing confidence in the monetary policies of Japan,
Europe, and the United States, in that order of
concern," he says.

A foreign exchange analyst, Landon says the
Federal Reserve, whose policies are increasingly
inconsequential to consumers and investors, and
American lawmakers are to blame, on this side of
the globe, anyway.

"It was the Fed's rate hikes that caused an inverted
yield curve, which was an infallible signal of the
subsequent recession," Landon says about the
central bankers' series of interest rate hikes that
totaled 175 basis-points. The rising rates came to
an end in mid-2000 as Federal Reserve governors
tried to put the brakes on a surging stock market.
The interest-rate hikes were followed by 13 interest
rate cuts at the Federal Reserve.

The Deutsche Banc analyst also points to the Justice
Department's campaign against Microsoft and the U.S.
Senate's majority of "anti-free market Democrats" as
red flags for investors, Finally, "Enron became a
political issue in Washington, which increases the
chance that the government will mount a new regulatory
assault against business." Landon says gold is the
only refuge for investors who seek to avoid currencies
that are attached to economic and witch-hunt policies.

Gold rush in Japan

Reports that Japanese consumers are rushing to buy
gold, first reported here more than a week ago, might
explain part of gold's recent gains. Japanese investors
bought about 10 tons of gold bars and coins in January,
or double the monthly average from last year, according
to the World Gold Council. The Japanese, who have a
history of hoarding metals such as platinum and gold, are
wary of an end later this year to full government
guarantees on Japanese bank deposits.

Some precious metals analysts say that's no reason
for gold's resilience. Such buying by consumers, they
say, is a mere blip in the daily flows of gold, which is
also lent out by central banks and bullion banks eager
to earn a tiny interest rate on their holdings.

Andy Smith, a Mitsui Global Precious Metals analyst
in London, tells me today it is almost always the mining
companies who are responsible for large purchases
and sales of gold. Many gold mining companies hedge
their books by selling some of their production forward
to lock in slightly higher prices, thus creating a need to
buy gold in the futures markets.

"The finger in the air should normally point to miners,"
says Smith, whose price-range forecast for gold this
year is $265 to $355 an ounce.

Smith said in the fourth quarter of last year alone, net
buying by just two large gold miners, South Africa's
Anglogold Ltd. and Australia's Normandy Mining ,
amounted to more than 90 tons. That was close to
the 110 tons of gold that futures speculators were
net short on the COMEX exchange in New York.

Smith is curious, like everyone, about gold's stiff
upper lip this past week. "Miners buying, speculators
selling -- I think they call this unstable equilibrium,"
he says from London. Hard to think of a flimsier
foundation for any price rally than miners, long
40,000 tons of reserves underground, adding to
their long position."

The UBS Warburg folks are pragmatic. "The lack
of selling ... confirms that the risks in gold remain
heavily weighted towards a move higher," they said

As for the companies that pull metal from the ground,
things are very good these days.

Anglogold, the world's largest miner until Newmont
Mining, Normandy, and Canada's Franco-Nevada
agreed to combine their companies in January,
just reported a 16 percent quarterly increase in net
income to $88 million. In rand, which is near an
all-time low against the dollar, Anglogold's profits
rose 45 percent for the December quarter.

On Monday, South Africa's Gold Fields Ltd. will
unveil quarterly profits. Gold mining companies
across the entire continent of Africa are enjoying
swollen profits, thanks in large part to their weak
local currencies. Gold is largely denominated in
dollars, and when exchanged for rand and other
ailing currencies, mining companies' income
statements are looking golden. The Financial
Times Africa Gold Mines Index has gained more
than 60 percent the past 12 months.

Robert Bishop, the longtime editor of Gold Mining
Stock Report, says he just returned this week from
two Canada mining and exploration conferences.
Based in California, Bishop points to a spate of
financings for lesser-known gold miners, including
a $20 million (Canadian) cash infusion for Eldorado
Gold Corp. and a $27 million (Canadian) one for
Kinross Gold Corp.

"We're a long way from a runaway bull market, but it
could not be any clearer that there is a significant
amount of money now willing to bet that the gold
price is going to continue its advance," Bishop
said today.

As for the mood of the gold industry, Bishop says
most mining executives, whether pushing paper
in skyscrapers or scraping rock in dusty pits, still
remember the spectacular failure of Canada's
Bre-X in 1997. Bre-X's fraud brought steep losses,
and heartbreak, to many investors and cast a
cloud over the mining business. "That was the
year Bre-X's John Felderhof won Prospector of
the Year, and his associate, Michael de
Guzman, spent most of the week (at a March 1997
mining conference) in Toronto strip joints," Bishop

"Felderhof had to return his award a few months
later, and de Guzman, within 10 days of his visit to
Toronto, took flight from a helicopter over the
Indonesian jungle," Bishop says, in a report to his
clients. In the wake of de Guzman's apparent
suicide and Bre-X's collapse, "things haven't
been quite the same since," Bishop says.