Bundesbank president takes leave; someone else will try to talk gold down

Section:

By Chris Mallon
The Motley Fool
April 7, 2004

http://www.fool.com/news/mft/2004/mft04040716.htm?
logvisit=y&source=estmarhln001999&npu=y&bounce=y&bounce2=y

We all know what the real golden rule states: "He
who has the gold makes the rules." If the price of gold
stocks is any indication, it appears investors have
taken this rule to heart.

Since hitting a low of $254.20 in 1999, the price of
gold has risen methodically, closing at $421.40 per
ounce last Friday, a gain of 66 percent, or 11 percent
annually. Thanks to operating leverage, gold-mining
shares have performed far better than the metal,
particularly the unhedged producers that make up the
Gold Bugs Index (AMEX:HUI). The index has risen
557 percent from $36 in November 2000 to Friday's
close of $236.50, on the backs of such companies
as Newmont Mining, Gold Fields, and Goldcorp.

What makes the unhedged miners so special? Every
gold company has a cost per ounce of gold mined,
which is a combination of fixed and variable costs per
unit. Generally, the more ounces a company mines,
the lower the unit cost. Sales, on the other hand,
fluctuate with the price of gold and can rise quickly
over short periods of time. That is, provided the
company isn't locked into selling at a specific price.

Here's where it gets interesting. Hedged gold producers
follow the conservative strategy of selling future gold
production forward, getting a guaranteed price per
ounce for future production. Unhedged miners are just
the opposite, selling most of their gold at the spot
(market) price, exposing them to the fluctuations of
the gold market.

As the price of gold has risen, unhedged producers
have experienced tremendous sales growth, and --
more importantly -- significant gross margin
improvements. Newmont's sales for 2003 totaled
$3.2 billion, nearly double the $1.7 billion the
company did just two years ago. While some of the
sales growth is due to acquisitions, it's undeniable
that a rising gold price helped push gross margin from
33 percent in 2001 to 41 percent in 2003. Similar sales
and gross profit increases can be found in the other
unhedged miners.

By standard valuation methods, gold stocks look pricey
at this point, with the industry sporting an average
trailing P/E of 27. And most of the companies are getting
their first taste of profit in years. Yet, if gold is
really in a long-term bull market -- which I believe it
is -- the potential for explosive earnings growth makes
these risky gold producers look downright cheap.

---------------------

Chris Mallon believes the gold bull is for real, but he
doesn't own shares in any of the companies mentioned
here.

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http://www.minersmanual.com/minernews.html

http://www.a1-guide-to-gold-investments.com/euro-vs-dollar.html

http://www.goldcolony.com

http://www.miningstocks.com

http://www.mineralstox.com

http://www.321gold.com

http://www.SilverSeek.com

http://www.investmentrarities.com

http://www.kuik.com/KH/KH.html
(Korelin Business Report -- audio)

http://www.plata.com.mx/plata/home.htm
(In Spanish)
http://www.plata.com.mx/plata/plata/english.htm
(In English)

Subscription site:

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http://www.hsletter.com

Eagle Ranch discussion site:

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Ted Butler silver commentary archive:

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