Barrick''s confession makes Insight Magazine online


Fed Is Creating Golden Opportunity

By Aaron L. Task
June 13, 2003

As fans of "Superman" comics and/or "Seinfeld" know,
Bizarro World is a land where up is down, black is white,
good is bad and so on. In other words, it's sort of like the
world I found myself this week at the Denver Gold
Group's San Francisco gold forum.

Whereas equity and fixed-income traders foresee only
positive outcomes from the Federal Reserve's aggressive
monetary policy, gold advocates see Alan Greenspan
behind the wheel of an out-of-control vehicle headed for
a steep turn. Where equity optimists spy salutary effects
of a weaker dollar, gold bulls envision a crumbling
currency leading to higher inflation, buoying the yellow

That's perhaps a bit dramatic, but the salient point is
that recent gains by stocks and Treasuries have done
little to dissuade gold adherents from the righteousness
of their path.

Certainly, the rally in financial assets hasn't dampened
the bullishness of John Hathaway, manager of the
Tocqueville Gold fund, whose speech was the highlight
of Wednesday's session. (Full disclosure, I have a long
position in this fund, which is up 0.4% year to date
after rising 83% in 2002.)

Gold is the "best kept secret" in investing, Hathaway
declared, suggesting gold's five-year outperformance vs.
the S&P 500 is just the beginning of a long-term secular
upswing that could last as long as 20 years, judging by
past cycles. The bottom line is that Hathaway thinks
gold can go to $1,000 per ounce before its current bull
move ends.

The most important factor driving gold is that monetary
policy is being driven by deflationary fears, Hathaway
said. The Fed is expanding the money supply and talking
about "unusual methods" for combating deflation, as
embodied by Fed governor Ben Bernanke's "printing
press" comment last November.

"The more truculent the Fed is" regarding deflation ,
"the better prospects are for concern about paper
assets," Hathaway said. "In the aftermath of a bubble,
there is no quick fix." (In other words, by trying to
forestall the business cycle, the Fed is only going to
make matters worse for the economy and paper assets.)

The gold fund manager believes the Fed's "reflation"
efforts will exacerbate the dollar's decline and ultimately
result in higher interest rates, eroding the appeal of
equities as well as Treasuries. Loose fiscal policies --
and accompanying high federal and current account
deficits -- will also contribute to the dollar's weakness
and accompanying inflationary pressures.

Hathaway didn't discuss this, but others believe gold
will also benefit if the Fed is unsuccessful in combating
deflation, because investors' faith in the central bank will
be decimated.

Other factors Hathaway cited for his optimistic view include:

* Negative sentiment: In 1998, The Financial Times declared
"Gold is Dead," which Hathaway said is analogous to Business
Week's infamous "Death of Equities" cover in August 1979.
Sentiment about gold has improved, especially in the past
18 months, but most on Wall Street still dismiss it as a relic.

* Supply: Even as gold prices tumbled from 1987 until 2001,
the supply of gold production expanded by about 5%,
Hathaway observed. Currently, mine supply is declining
because of the closure of older mines, environmental
obstacles to permitting for new mines, and industry
consolidation. He also believes central bank selling, which
persistently pressured gold in the late 1990s, will decline
going forward as policymakers realize they were selling at
the bottom. Notably, a common theme among conference
presenters was how companies are getting rid of hedging
programs in order to increase their leverage to gold prices.

* Demand: The three-year bear market in stocks heightened
investor demand for so-called alternative assets. Ultimately,
asset allocators will move more toward tangible assets and
view gold in the same regard as timber and/or real estate,
Hathaway forecast. Because the market cap of the gold
industry is so small, even marginal demand by pension
funds and others of that ilk will have a huge impact on
the sector.

A crucial element in the demand story is the World Gold
Council-sponsored exchange-traded gold fund, which will
allow investors to purchase a proxy for physical gold and
"bring gold into the mainstream," Hathaway said. Trading
in the gold ETF -- officially the Equity Gold Shares -- is
pending Securities and Exchange Commission approval.
Assuming that occurs, individuals will be able to trade
gold as easily as, say, shares of Cisco. China's liberalization
of laws that had prevented citizens from owning gold is
another key source of demand.

Although many gold shares had huge runs in 2001 and
2002, gold stocks -- as represented by the Philadelphia
Stock Exchange Gold & Silver Index -- have lagged the
metal. In the past 12 months, for example, gold is up
10% vs. 2% for the index. Hathaway believes that trend
might soon "flip-flop" and the shares will outperform
the metal, which has fallen swiftly since exceeding $370
per ounce in late May. On Thursday, gold futures fell
0.5% to $353.70.

Hathaway cited Barrick Gold as a favorite, even if only
as a contrarian play. Barrick has outperformed the XAU
this year, but underperformed its peers by a wide
margin for some time prior because of disappointing
earnings, a large hedging program (which the firm says
it is unwinding and simplifying), and its ouster from the
S&P 500 last year. (Hathaway's fund is long Barrick.)

Barrick has been anathema to gold bugs because of its
hedging program, while Newmont Mining has been their
favorite big-cap. Richard Russell, editor and publisher of
Dow Theory Letters, is long Newmont shares and observed
that a close above $33 would establish a breakout from a
"huge ascending triangle-type" base. Such a breakout could
send Newmont "into the stratosphere," he wrote.

Newmont rose 0.6% to $31.68 Thursday, when contributor Gary B. Smith made a similar
observation about its ascending triangle.

Finally, Freeport McMoran Copper & Gold was the
suggestion of John Burbank, managing partner at Passport
Capital, a San Francisco-based hedge fund that is long the
stock. Burbank's firm manages $100 million and was up
6% year to date after gaining 22% in 2002, both net of

Because it is the world's largest copper producer, Freeport
McMoran is often overlooked by gold investors. Its shares
have also traded at a discount to peers because its main
operations are in Indonesia, not exactly a bastion of
political stability.

But if investors can look past those concerns, "this is a
great way to be long for basic business reasons -- free
cash flow" -- over $500 million annually -- "and good
leverage to higher gold prices," said Burbank, who
believes Freeport McMoran may soon increase its

On the most basic level, Freeport McMoran is the world's
lowest-cost producer of both copper and gold. That makes
it an intriguing play for those who see commodities being
at the beginning of a long-term bull cycle, regardless of
recent action in financial assets.