Insight magazine examines the gold price suppression scheme


Gold's floodgates open, finally
Above $300, metal's rally to spark mania, some say

By Thom Calandra
Saturday, February 9, 2002

SAN FRANCISCO (CBS.MW) -- Adrian Day, a Maryland
money manager who has specialized in gold mining
companies for 30 years, swore to himself years ago he
would bite his tongue if he ever caught himself saying,
"This time it's different."

Yet there Day was, watching from his Annapolis office
as the spot price of gold this week pierced the $300 level
for only the fourth time in four years. "What really is
different this time is the previous runs were provoked
by a single instance, like Placer Dome buying back its
hedge book," says Day, president of Global Strategic
Management, which has $60 million under management.
"This is not a short, sharp rally. It has been a nice slow
trend up since January 2001, and it has not been
provoked by one incident."

Gold's longtime believers are hoping the metal's rally
this time around will be different. Some, like mutual fund
manager John Hathaway, predict gold will surpass
$1,000 an ounce in coming years. Others, like Pierre
Lassonde, the soon-to-be Newmont Mining, see gold
mining stocks, already the best-performing sector in
most of the world's stock markets, doubling again as
gold goes to $350 an ounce.

Normally, investors turn to the safety of U.S. bonds
when they're seeking refuge from the kind of fiscal
distress that is storming across Japan, Argentina,
and threatening Washington. However, a growing
number of economists and currency specialists
expect gold, not Treasury securities, to benefit this

Japan, which holds about 12 percent of the supply
of U.S. debt, is facing what may become its biggest
fiscal challenge ever.

"The meltdown of a G-7 economy is rare," says
Carl Weinberg, chief economist of High Frequency
Economics in Valhalla, N.Y. "Things like the big oil
shocks of the '70s caused a flight to gold, and that
was an unprecedented event."

This time, say gold's optimists, who remember
fondly when gold was last at $400 (January 1996)
and $800 (January 1980), it really is different. "If you
look at the popular press, every article you read
on gold is that gold is no longer money, that it is
finished," says Lassonde, a co-founder of Canada's
Franco-Nevada Mining, one of two gold producers
that will merge to form the world's largest gold miner,
Newmont, later this month.

"In the past two months, I have started to see more
positive articles on gold," Lassonde says from his
Toronto office. "As gold breaks the $300 barrier and
goes to $325, that will drive the bull market in gold."

For those unfamiliar with the world of gold and
gold-mining stocks, the metal's slow grind to $300
an ounce from $265 one year ago must seem petty.
Yet the small gain has propelled gold share indexes
to five-year highs in Australia and record highs in
South Africa, where a wave of mergers and weak
local currencies are boosting the mining industry's

Gold fever? In Japan, gold prices are up 25
percent against the ailing yen in the past 12
months. Japanese consumers have quadrupled
their hoarding of gold ahead of this spring's limit on
government-guaranteed bank deposits.

An ounce of gold is now worth 600 Australian dollars.
Australia's newspapers are starting to complain that
foreigners have commandeered the nation's gold
industry, with almost two-thirds ownership after
Denver-based Newmont's $2.5 billion purchase of
Australia's crown jewel, Normandy Mining.

The Financial Times Africa Gold Mines Index,
meanwhile, has gained about 65 percent the past
12 months. Close to 50 money managers, a modern
record, this week listened in on a quarterly update
from South Africa's second-largest gold miner, Gold
Fields Ltd., which raked in $67 million in its December
quarter. That was triple what Gold Fields earned the
previous three months.

Even in America, where most investors turn up their
noses at gold and prefer to dabble in technology
stocks, gold's gains have boosted the metals
industry's mutual funds by 46 percent in 12 months
vs. a 17 percent loss for the average diversified U.S.
equity fund.

Economists and analysts, in the United States and
abroad, are mostly pointing to fiscal distress as a
reason for gold's climb. After all, jewelry and
designer demand for gold, which accounts for about
75 percent of the metal's use, fell last year.

"Gold is the best leading indicator of monetary
conditions," says currency analyst Kenneth Landon
at Deutsche Banc in Tokyo. "It is also one of the
least understood factors. That's what makes it so
fascinating and potentially profitable for people
who truly understand gold's significance."

Newmont's Lassonde, who has been in the mining
business for three decades, believes gold's rally
this week above $300 will usher in a long bull
market in the metal. In some cases, however, the
belief among other gold bugs is a swaggering one
that comes from a decade or more of frustration.

"Has a bull market in gold shares begun? Is the
pope Catholic?" notes Bill Bonner of The Daily
Reckoning, one of dozens of investment newsletters
that are promoting bullion's rise. His comments
came just as the spot price of gold this week
closed above $300 for the first time since February
2000. That was back when mining company Placer
Dome asserted it would reduce the amount of gold
it sold forward in a controversial practice known as

Alas, "when another gold company, Barrick, said
they weren't buying back their hedge book, the
market fell back," recalls Day, the fund manager. Gold
quickly dropped below $300.

This time, large gold mining companies are more
likely to reduce forward sales, which gets them a
higher price for the metal but also encourages loose
lending of gold by central banks and other entities.
At least, that's what the gold aficionados believe.

South Africa's Anglogold, the largest of the notorious
hedgers, and other companies almost certainly
could lose an appetite for selling their product
forward. "We believe a protracted bull market will
lead to more buybacks, thereby reducing the
amount of gold which needs to be borrowed,"
Barclays Capital precious metals analyst Matthew
Schwab said from London.

If gold prices threaten to rise further, a hedger could
find the extra few dollars an ounce it receives by
selling into future little more than pile of beans
compared to the spot price of the metal. Besides,
as money manager Hathway of the Tocqueville
Gold Fund points out, falling interest rates around
the globe mean miners are no longer guaranteed
a nice return when they take the cash from their
forward sales and put it in an interest-bearing
piece of paper.

Even scarier, hedging, which involves fancy
financial footwork and the use of futures and
sometimes derivatives contracts, could upset
shareholders as the witch hunt for accounting
irregularities sweeps Wall Street and Washington.

"The premium for safety is high again," says
Hathaway, whose musings on the subject of
gold come in the form of inches-thick manuscripts
that he sends to shareholders of his fund, which
like most gold mutual funds is up by almost a third
since Jan. 2. "The new blood sport will be pointing
fingers at companies who abuse pro-forma
earnings and other accounting methods."

Most Americans, and investors around the
globe, don't own gold as an investment. Those
who do own gold via mining stocks, not the actual
metal as is preferred by consumers in Japan and
India. For ordinary folks, the burning question
about gold isn't about hedging or fiscal distress
or even declining production of the metal in the
top-three producing regions: Australia, North
America, and South Africa.

No, for most ordinary folks, the big question is:
When will gold make it to the front page of the
local newspaper? "It hasn't made the cover of
Time magazine yet," says Lassonde in Toronto,
where he and other top Newmont Mining
executives will preside over the production of
5 million-plus ounces of gold a year, more than
any company in the world.

In the U.S. stock market, major gold mining
companies trade for as much as 10 to 12 times
pre-tax cash flow. That seems expensive, but
as Caesar Bryan of the Gabelli Gold Fund
explains, "Gold shares provide you the earnings
and the dividends and the cash flow. But there is
another thing, and that is the option value of the
gold (miners) have in the ground. That is why
they trade at high multiples."

Still crazy, after all these years

Investors in the U.S. stock market are willing to
pay the highest prices for shares of the world's
largest gold mining companies since February
2000. The Philadelphia Gold and Silver Index
that represents shares of Newmont, Barrick,
Placer Dome, Anglogold and others approached
70 at week's end. Anything above that could
spark a mania for gold shares, the metal's
believers say.

"After all these years, it's not hard to imagine
that gold stocks could become a lot like Internet
companies were a few years ago," said Robert
Bishop, the longtime editor of Gold Mining Stock
Report, who has been analyzing gold mining
companies for more than two decades. "Of
course, I say that with my fingers crossed."

Bishop points out that each $10 move in the
price of gold magnifies operating margins for
gold companies. Many miners, thanks to
improved techniques, haul the metal from
the ground at a cash cost far less than $200
per ounce. Companies such as Gold Fields
and Harmony Mining of South Africa, because
they refuse to hedge their production, easily
could see their share prices double if gold
were to rise another $30 an ounce. Six-month
gains for shares of Gold Fields have far
outpaced those of its hedged competitor and
neighbor, Anglogold.

Like many of his colleagues in the industry,
Bishop is headed to Capetown in South Africa
next week to attend a yearly mining conference
that could provide evidence of mining
consolidation and further gains for gold. Attendance
is up 30 percent from a year ago, conference
organizer Sandy Lawrence, president of
International Investment Conferences, says.
"I think this is where you will see the new bull
market in gold starting to take off," Lawrence says.

The spot price of gold rose as high as $307.80
Friday in New York. A London fix of the metal's
price at $305.10 was the first setting above $305
in two years. In Tokyo, as rumors swirled about
a possible government freeze on bank deposits,
December's gold contract hit its highest price, in
yen, since August 1998.

If the rally continues, gold's believers may soon
be calling themselves the next investment craze.
Bill Murphy, the former Boston Patriots football
player who founded what may be the world's most
rabidly fanatic gold Web site,, this week was flashing
the message, "Gold headed for $600 an ounce."

Murphy, a former Wall Street specialist in commodity
futures for Shearson Hayden Stone and Drexel
Burnham, also chairs the Gold Anti-Trust Action
Committee ( GATA is a Delaware
corporation that believes the U.S. Treasury, New
York Federal Reserve Bank and some of Wall
Street's largest banks, including Goldman Sachs,
conspired to keep the price of gold depressed
in the late 1990s as a way of manipulating
economic signals. Some economists use gold
as an advance indicator of commodity inflation,
the enemy of the world's central banks.

"My guess is we will not see gold at $300 bid for
very long. It could go $350 to $400 bid in a week
as the short-sellers panic," Murphy told me
confidently from his Texas office. "That will
shine the light on GATA big-time."

Lassonde at the merging
Newmont/Franco-Nevada/Normandy, while
well aware of the gold-conspiracy crowd,
prefers to put the metal in a more clinical light.
Lassonde says gold is unfettered by any
company or nation's liabilities, unlike a
Nasdaq-traded stock or a government's
Treasury bonds. "The ultimate definition of a
gold bull market is when gold is rising in all
currencies," he says. "And that is happening


Thom Calandra is editor-in-chief and a co-founder
of CBS MarketWatch. He has covered the gold
market for news organizations since 1988.