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Goldman sees gold losing its luster

By Susan Lerner
CBS.MarketWatch.com
May 29, 2002

Investors expecting gold stocks and the precious metal to
continue to glitter may be in for a surprise, according to
one analyst who downgraded several gold miners Wednesday.

"We believe that gold will be more challenged to rise
substantially from current $324 levels over the next year
due to weakness in physical jewelry demand," Goldman Sachs'
analyst Daniel McConvey told clients.

Cutting his ratings on AngloGold and Barrick Gold to
"market performer" from "market outperformer" and on
Australia's Newcrest Mining to "market outperformer" from
"Trading Buy" because they had surpassed price targets,
he recommended that investors who are overweight in the
sector take some profits.

"On a scale of one to 10 we are between four and five in
our confidence that gold stocks will outperform other equities
over the next year," McConvey wrote in a research note.

His recommendation on the group continues to be "market
weight" but that didn't stop McConvey from raising his price
targets on the gold stocks he covers by 10 to 20 percent
given the momentum of the current gold price rise.

Among those were Freeport-McMoran Copper & Gold, which
he called the most attractive way of investing in the
gold sector because it has more earnings leverage to
increases in the gold price and is backed up by a stronger
valuation. His price target on Freeport shares rose to $25
from $21.

Other target hikes went to Newmont Mining, which was
raised to $36 from $32; Barrick to $25 from $22; AngloGold
to $36 from $29; and Newcrest to A$9 from A$8.

McConvey believes sustained low interest rates, general
equity market deterioration and further increased global
political and economic uncertainty will be necessary for
gold prices to continue their drive higher. On the other hand,
he said, a market pickup followed by a Fed move to increase
interest rates in a more optimistic macro environment or
any major news of a planned sales from a central bank
could have a significant negative impact on gold prices.

McConvey wasn't alone in expressing concern about the
valuations of gold mining stocks.
Merrill Lynch analyst Michael Jalonen, who follows the
Canadian gold sector, noted that the 19-month rally in
gold equities had raised the TSE Gold Index by 118
percent but that historically gold equity bull markets
have returned an average gain of 174 percent over an
average 19-month duration. To match this average gain,
he said the Gold Index would have to rise another 28
percent.

"Getting there would require gold to mount a serious
charge towards $350/oz.," Jalonen said. "With valuations
at historically high levels, a pullback in the gold price
would likely have a negative impact on share prices."

Jalonen says he wouldn't be surprised to see gold retrace
some of its recent gains in the near-term since he, like
McConvey, expects further weakness in year-over-year
demand for gold jewelry in the second quarter because
of the higher gold price.

"Historically, fabricators have taken some time to get
used to higher gold prices."

Gold futures, which have traded recently around levels
not seen in over two years, closed up $1.40 at $325.50
an ounce on the New York Mercantile Exchange
Wednesday afternoon. Gold equities were mixed but
those downgraded by McConvey traded lower with
AngloGold lighter 3.4 percent at $33.12 and Barrick
down 3.3 percent to $22.43.

* * *

Goldman economist likely
to be found dead in the morning

WASHINGTON, May 29 (Dow Jones) -- Goldman Sachs
economist Bill Dudley said a sharp decline in the dollar
presents one important risk to the consensus view of a
sustained, non-inflationary economic recovery.

"A sharp dollar decline would hurt U.S. growth
prospects," Dudley said in an economic comment
Wednesday. "The nominal trade deficit would widen
initially and the yield curve would steepen. It also would
raise U.S. inflation."

Dudley said this risk is "significant" because the dollar
is significantly overvalued. He said a sharp decline in the
dollar's value would prove difficult for policymakers,
placing the Federal Reserve in an uncomfortable position
as both the growth and inflation outlook deteriorated.

"Moreover, there would be no easy remedy," the economist
said. "A tighter monetary policy might not prove supportive
because it could be viewed as damaging to U.S. growth
prospects. Currency intervention probably would be
ineffective."

Wrapping up his comment, Dudley said: "A sharp dollar
slide appears almost inevitable at some point. The
imbalances are too large and are growing too fast to be
unwound smoothly. The timing, of course, is highly
uncertain. But we believe it makes sense for investors
to stress-test their portfolios to see how they would hold
up if the dollar were to slide significantly."