Gold benefits from disgust with blue chip stocks


By Thom Calandra
April 22, 2002

SAN FRANCISCO (CBS.MW) -- With gold playing hopscotch
around $300, some analysts expect more fireworks from the
precocious metal.

Gold's spot price Monday morning rose $2 to $304.10 an
ounce. Gold stock prices, meanwhile, seemed poised for
another leg up in their six-month rally. Gold stocks as
measured by the XAU miners' index and the Toronto Stock
Exchange's gold-share index rose more than 1.5 percent
Monday morning.

Andy Smith at Mitsui Precious Metals in London has a
forecast for gold this year at the very high end for
professional analysts: $355 an ounce. Smith says
"technical analysis suggests gold may test $290 to $292
support in the near term, then, if this holds, move onward
and upwards to $328."

Smith says fiscal turmoil and price momentum are gold's
best friends. "The momentum of international risks is
increasing," Smith says from London. That includes French
voters' move toward an extremely conservative candidate,
Jean-Marie Le Pen, who placed second in national
elections this weekend.

On the momentum angle, Smith points to U.S. gold mutual
funds, which dominated first-quarter rankings. Most
gold-only mutual funds are up more than 40 percent since
Jan. 2. Smith also sees less gold selling in the futures
market. Speculators in New York, he says, are running
net long positions of more than 100 tonnes for only the
fourth time ever.

Smith said he rests much of his bullish case on the
willingness of miners to reduce or eliminate their tricky
selling strategies, called hedging. Most major producers,
anticipating higher bullion prices, have reduced their
hedge books, a practice that floods the market with
gold as executives attempt to lock in slightly higher
prices for their mining output.

Smith says gold, which is up about 12 percent since
January, has yet to enjoy platinum's massive rally
since September. The spread between an ounce of
platinum and an ounce of gold is now $247; on Sept.
10 it was $170.

Smith takes solace in how well gold's price has stuck
above $300. Pronouncements of possible selling from
Germany's central bank and from the International
Monetary Fund have done little damage to gold's rally,
he says.

"I favor 'thinking small' as explanation' for the rally,
especially miners' abstinence from hedging, and
speculators' almost unprecedented patience on the
long side, rather than the 'big picture' stories," Smith
said Monday morning from London.

Another gold optimist, Barry Cooper at CIBC World
Markets in Toronto, has forecast an average $325
an ounce for the metal for 2003. "We may have to
change that," he said Monday morning.

Cooper, who ends his voicemail messages with
"Have a golden day," said gold prices will benefit
from many factors this year and next. Top of the list is
supply and demand. Last year was a peak year for
global gold production, he said. He estimates 2,600
new tonnes of gold came to the market in 2001, with
another 1,000 tonnes of scrap gold and about 400
tonnes of the metal sold by central banks.

"The production of the large producers will be off 3
percent to as much as 10 percent this year," says
Cooper. "There are not a heck of a lot of new mines
being developed." Cooper also sees reduced
hedging by producers as a big plus for the metal.
He counts only Placer Dome and Barrick Gold
as "active hedgers."

Investors, says Cooper, are voting with their dollars,
preferring to buy shares of the world's largest
unhedged producers, Denver's Newmont Mining
and South Africa's Gold Fields, as opposed to their
hedged counterparts.

"Investors just don't want to be stuck with a hedged
position if gold rallies strongly," he said.

Indeed, shares of unhedged producers have outpaced
by a wide margin those that hedge by forward-selling
their gold. Shares of Gold Fields, South Africa's second
largest gold miner, are up 145 percent. The company
has no hedge book. In contrast, shares of hedger Placer
Dome have risen 13 percent and Barrick Gold is up
just 16 percent.

"Hedging has got to be a dirty word," says Cooper. So
have central bank sales of the metal. Cooper predicts
the Bank of England, which recently concluded a
three-year series of gold auctions, will not announce
another auction of gold reserves. "The U.K. needs all
the gold it has (about 300 tonnes) as a precondition for
entry into the euro, if they decide to go that route," he says.

Cooper, like Smith, also sees a fading connection
between the dollar and gold. From 1996 through most of
2001, a strong dollar translated into weak gold prices.
This year, with the dollar holding most of its gains against
a global basket of currencies, gold's price is rising
steadily. "There is no longer a negative correlation between
the two, which means we don't have to see a dollar
collapse for gold to perform," he says.

Cooper's favorite gold stock is the unhedged Goldcorp.
The Canadian producer's shares are up 41 percent this
year. Most of Goldcorp's gold comes from the Red Lake
district of northwest Ontario, an area that has produced
some 16 million ounces of gold since the 1930s.
Goldcorp's average grade from its underground Red
Lake mine runs about 2 ounces per tonne vs. a worldwide
underground average of 0.25 ounces per tonne.

Cooper estimates Goldcorp will be able to pull as many
as 6 million ounces of gold from the mine. Production this
year will approach 500,000 ounces. With Goldcorp shares,
which sell for about 28 times current earnings, "you are
buying the option to participate in future gold rallies and
on their expanding their reserves through discovery," the
analyst says.

Copper says he has a sheet hanging near his desk that
shows 15 investment banks with their 2002 gold-price
forecasts. All of them, he said, were in $270 to $290 range:
Barclays at $271 an ounce, Deutsche Banc, CS First Boston,
Merrill Lynch and Salomon Smith Barney all at $280 an

"The average was $283 an ounce, and I was the only one
with a 3 in front of their estimate," he says with a chuckle.