Calandra commentary: Gold''s tiny nuggets are thriving

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Gold Is Beginning to Sparkle Again
As Investors Seek Stable Investments

By Aaron Elstein
The Wall Street Journal Online
February 28, 2002

Abandoned for years by all but a loyal group of
investment curmudgeons, Wall Street has got
gold fingers again.

The precious metal recently rose above $300 an
ounce, its highest level in nearly two years, and
mutual funds that invest in gold mining companies
have been star performers against a backdrop of
dismal performance in other areas of the stock
market.

The rise stems largely from increased demand
in the U.S., where low interest rates have made
bond and money-market yields unattractive and
fears of war in the Middle East have people looking
for safer investments. Also giving the price a boost
is renewed interest by Japanese investors who are
looking to guard against the falling value of the yen.
Many Japanese, worried about the health of
commercial banks amid a prolonged economic
crisis, also have been shifting money out of savings
accounts into gold as their government prepares to
end blanket deposit-insurance.

To some, the minigolden age has been a long time
coming. Indeed, to a group of hardy investors known
as gold bugs, the rise in gold price isn't so much a
profit opportunity as vindication. "Gold has been a
currency for 3000 years and it's only in the past 20
that people have forgotten about its importance,"
says Henry Bingham, a strategist at Van Eck
Global, a New York investment firm that specializes
in natural-resources stocks and commodities. Mr.
Bingham says he has invested in gold since 1967.
"What we are seeing now is a secular revaluation
of gold, back to somewhere close to where it
belongs," he says. The gold rally has helped the
Van Eck International Gold Fund rise by 51% in
the past 12 months, close to the 54% rise posted
by the American Stock Exchange Gold Bugs
Index. During that same period, the Standard &
Poor's 500-stock index is down 10.5%.

But before saddling your horse to get in on the
action, consider this: Ever since gold peaked
at more than $800 an ounce in 1980, every few
years prices have spiked, tempting investors
into thinking a new gold rush was about to
happen. Indeed, some money managers caution
that recent gains might be just another tease. For
example, gold prices rallied in 1998 after the
Russian government defaulted on its debt and
the Federal Reserve had to orchestrate a bailout
of hedge fund Long-Term Capital Management.
But gold quickly fell back as investors became
infatuated with technology stocks.

For gold prices to rise or even maintain their
current levels, experts say, two things must happen:
Interest rates must remain low and the U.S. dollar
must weaken. Clearly, short-term interest rates are
low now, but many economists believe they aren't
likely to fall further, and indeed could start to rise if
the economy improves. Their argument was
reinforced somewhat Wednesday by Fed Chairman
Alan Greenspan, who told Congress that he sees
signs the recession is winding down. And the dollar
remains strong, compared to the yen or euro, and
shows little sign of weakening.

The strong dollar is bad news because as other
currencies weaken, the amount of gold foreign buyers
can afford goes down, thus depressing demand. Also,
if gold prices remain high for a year or two, mining
companies may well boost capacity, which eventually
would boost supply.

Because the equation for a sustained rally in gold
prices is incomplete, Bill Martin, co-manager of the
American Century Global Gold Fund, which is up
60% in the past year, says now may not be the time
to start dabbling in gold and gold-related stocks.
"Some gold stocks are up 70% and the price of
gold is only up 10%, so something has got to give,"
he says.

Gold is the ultimate in defensive investing. It can be
worth putting a small portion of your portfolio in it, but
it's unwise to put a lot of money into gold unless you
subscribe to the following: 1) You think stocks are
overvalued. 2) You believe corporations are going
to default more often on bonds and other debt
obligations. 3) Deflationary pressures, or a weak
economic recovery, will erode corporate earnings.
4) The U.S. dollar will fall and banks will be weakened
by their lending and derivatives exposure to parties
like Enron.

Because many gold bugs take some or all of these
views, they stand apart from Wall Street's bulls. Indeed,
rather than pore through balance sheets or examine
corporate trends, as many portfolio managers do, gold
bugs tend to be well-versed in such things as the history
of central banks' monetary policies. Such histories are
useful for gold investors to know because central banks
are big owners of gold and frequently sell it or lend it to
short sellers, both of which serve to help lower gold's
price. "There's a lot more to our kind of investing than
figuring out how much toothpaste some
consumer-oriented company is going to sell," says
Gregory Orrell, manager of the Monterey OCM Gold
Fund, who started following gold after his father
invested in several mining businesses.

Indeed, the price of gold dipped to around $290 last
week after the German central bank hinted it would
sell gold, though prices stabilized after investors
realized those sales wouldn't occur until 2005 at the
earliest. Such gyrations are signs of novices in the
gold market these days, some investors say.

And while the Enron debacle might make gold
seem like a relatively safe investment, the sector is
filled with its own horror stories of dubious
management teams touting phony Mother Lodes.
In 1997, for example, a Canadian company called
Bre-X Minerals burned scores of investors who bid
up its stock after company officials told of a huge
strike in Indonesia that proved bogus. "Gold is
about the most illiquid of all the major sectors that
people invest in," says David Gillespie, manager
of the Rydex Precious Metals Fund. "It's not a
place to play."

That said, there are plenty of legitimate gold-mining
companies in which to invest. Mr. Martin, the American
Century money-manager says people seeking to
invest in the sector should consider Newmont Mining
and Barrick Gold. Neither can be considered cheap
by conventional measures -- shares of Newmont,
which is based in Denver and trades on the New
York Stock Exchange, have risen 54% in the past
year and fetch a hefty 61 times anticipated earnings.
Barrick, based in Toronto, fetches 32 times expected
earnings and its stock has risen 27% on the Big
Board in the past year. Indeed, most gold stocks
are relatively expensive these days, fetching on
average 37 times earnings, compared to 31 for the
entire Standard & Poor's 500, according to
Multex.com, an investment research company.

Newmont recently completed its acquisition of
Canada's Franco-Nevada Mining and has acquired
control of Australia's Normandy Mining, so it could
benefit from squeezing out costs, Mr. Martin says.
And Barrick, he says, is the lowest-cost producer
in the business and also is less vulnerable to
market fluctuations because it sells gold in advance
at set prices, which protects shareholders if the
price of gold falls.

But while the rise in gold reflects a new sense of
caution by investors in a world that looks considerably
more dangerous than it did a year ago, Mr. Martin
says he doesn't sense it will regain its status as the
last, best place for investors to park their money.
"We live in a paper economy now," he says. "I don't
think the demand for hard assets that gold bugs
favor is coming back."

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Write to Aaron Elstein at aaron.elstein@wsj.com