Canada suddenly discovers that it''s a gold-mining country


Gold, and gold stocks, have enjoyed
a rapid run-up since May.
Do they have more room to run?

By Mark Gongloff
CNN/Money Senior Writer
Wednesday, October 6, 2004

NEW YORK -- Confronted with a shaky U.S. dollar,
soaring oil prices, sluggish stocks, and the
ever-present threat of terrorism, investors have
clamored lately for a commodity that's been a
favorite pain reliever since the Stone Age: gold.

Earlier this year, the price of an ounce of the yellow
stuff surged to its highest level in nearly a quarter
century, driven in part by the fear that impending
inflation would weaken the U.S. dollar. When the
world's most powerful currency falters, investors
sometimes turn to gold to ease the sting.

Gold tumbled from its peak when inflation's fangs
turned out not to be very sharp, but quickly started
climbing again when the dollar continued to struggle,
weighed down by an anemic stock market, an
oil-soaked U.S. economy, continuing headaches in
Iraq, and more.

Since May 10, as the dollar has lost about 4 percent
of its value against a basket of other major currencies,
the price of an ounce of gold has risen about 10
percent. And the American Stock Exchange's index
of unhedged gold-mining stocks, or Gold BUGS
(HUI), has risen some 30 percent.

Because they're unhedged, gold BUGS typically
live and die by gold prices, but the hedged
gold-related stocks found in the Philadelphia
Stock Exchange's Gold and Silver Index (XAU)
have also gained some 25 percent since May 10.

Some individual gold stocks have done even
better in that time, especially small-cap shares
such as Gold Reserve, up 69 percent; Meridian,
up 66.5 percent; and El Dorado Gold, up 49

But mid- and large-cap gold shares have thrived
as well, with Placer Dome, up 46 percent, Freeport
McMoran, up 38 percent, Newmont Mining, up 23
percent, Barrick Gold, up 13 percent; and
AngloGold Ashanti, up 15 percent.

What's more, gold and most gold stocks are still
down for the year, the U.S. dollar is still falling, and
gold still hasn't returned to its earlier highs --
meaning it may still have room to run.

"The run-up in gold is completely justified," said Ron
Coll, gold analyst with Jennings Capital in Toronto.
"As long as the dollar continues to trend lower, gold
will trend higher. That's the theme it will follow
through the fall and into next year."

But a weak dollar may not be the only thing driving
gold prices. As with every other investment that's
enjoyed a hot summer, including oil and U.S.
Treasury bonds, some observers smell a whiff of
speculation in gold prices and think a correction is

Others point out that many people see gold as
something to keep them warm at night in the face
of impending doom -- after all, following a major
disaster, either geopolitical or economic or both,
gold will likely still have value, if only to
accessorize post-apocalyptic Road Warrior

"We see gold not as a trade; we don't even look
at it as an investment. We look at it as insurance,"
said Jean-Marie Eveillard, portfolio manager of the
First Eagle Gold Fund, which has nearly $600 million
in gold and gold-related stocks and securities. "It's
the ultimate hedge -- it tends to prosper in difficult

With that in mind, Eveillard said, First Eagle has put
5 to 7 percent of its separate global fund in gold or
gold-related assets. What could go so wrong that
they need such insurance?

For one thing, there's always the chance that the
dollar's decline could turn into a full-fledged rout, if
foreign investors decide they've had enough of
supporting America's wild deficit-spending binge. Oil
prices could surge ever higher, slowing down the U.S.
economy. Terror attacks could turn a slowdown into
another full-fledged recession.

Eveillard said these are the kinds of disasters that
would have to occur to drive gold much higher. But at
$420 an ounce, it's become a fairly expensive
insurance policy.

And certainly, from a technical standpoint alone, gold
and several gold-related stocks have run far and fast
without many breaks and could be in for a short-term
correction, according to Katie Townshend, chief
market technician at MKM Partners.

But there may be other, more fundamental reasons
why gold could stay strong in the longer term too,
even without a major disaster, according to Frank
Holmes, CEO and chief investment officer at U.S.
Global Funds, which includes the $62-million
U.S. Global Investors Gold Shares Fund (USERX).

The U.S. dollar will almost certainly have to keep
falling, according to most analysts, especially if
China agrees to revalue its currency, as so many
U.S. officials are pressing it to do.

China has recently opened up a gold-trading market
and allowed its consumers to buy gold, adding to
the world's demand for the metal.

A recent lack of spending on new mines, thanks in
part to stiffer environmental regulation, has tightened
the supply of gold.

Even if the war in Iraq somehow ends fairly quickly --
which seems unlikely, at this point -- global military
spending, oil prices and the threat of terrorism will
still remain high, all of which are boons to inflation
and to gold. Like Eveillard of the First Eagle funds,
Holmes says investors can't get rich trading gold or
gold-related stocks, which rise and fall with the price
of bullion. But he also recommends investors put
5 to 10 percent their money in gold and gold-related
assets until the trouble for the U.S. dollar blows
over -- which could take a while.

"Right now, we have negative real rates of return on
Treasury bills and massive deficit spending," Holmes
said. "Historically, a currency can't be strong with
those two factors."


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Centennial Precious Metals
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Phoenix, Arizona 85032
Dr. Fred I. Goldstein, Senior Broker



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