West''s central banks panic over gold


12:10p EST Sunday, December 5, 1999

Dear Friend of GATA and Gold:

Here's an article about gold and hedging from today's
New York Times. It probably won't tell you much you
don't know, but it's interesting that the hedging issue
has made the mainstream press here, and there are
some plugs for a few companies.

Gold Anti-Trust Action Committee Inc.

* * *

Gold Producers Find Hedging Is No Help

By Joanne Legomsky
The New York Times
December 5, 1999

Gold mining has always been a hit-or-miss enterprise.
This fall, however, investors have been learning that
investing in gold mining stocks can be just as

On Sept. 26, European central banks announced plans to
limit gold sales, setting off a convulsive rally in the
prices of both the metal and the stocks. But while gold
has retreated modestly from its peak on Oct. 5, the
mining stocks have sold off with a vengeance.

In fact, the price of gold was $282.75 an ounce on
Friday, still up 4.7 percent from its pre-rally level,
but the Philadelphia Stock Exchange Gold and Silver
Index, which tracks 10 mining stocks, closed at 64.79,
down 9.3 percent over that period.

The divergence has two causes, one of them very recent:
the Bank of England's sale last week of almost 25
metric tons of bullion -- a move that hit the stocks
much harder than it hit gold or gold futures.

The more enduring issue, however, is that most gold
producers have hedged some or all of their production
-- using futures or options to lock in spot market
prices and protect themselves from erosion in gold's

At least twice during October, gold companies disclosed
their hedging exposure and, as a result, suffered steep
declines in stock prices. And the spreading weakness in
gold stocks since then has stemmed from a growing
perception among investors that hedging problems are

"Higher gold prices are not necessarily a green light
for gold stock investors," said John C. Tumazos, metals
and mining analyst with Sanford C. Bernstein & Co.
"Many firms will not be able to achieve meaningful
profitability from the latest rally."

In their quarterly reports, gold mining companies do
not break out the interest expenses associated with
borrowing or leasing gold. So investing in such stocks
is something of a gamble for those seeking gains from a
rise in the price of the metal.

Despite the blowups, investors should not lose sight
of the fundamental underlying the gold prices, some
experts said. George Milling-Stanley, manager of gold
market analysis for the World Gold Council, a trade
group, noted that worldwide demand has exceeded output
for several years, but central bank lending and sales
had more than filled the gap and depressed prices.

Alan Snyder of Snyder Capital Management in San
Francisco, said "the whole psychology has changed"
since the Sept. 26 announcement. "Banks will lend less,
hedge funds will short less, and producers will short
less," he said.

The bulls, however, differ in the best way to play
improving gold fundamentals.

Tumazos favors Franco-Nevada Mining and Freeport-
McMoRan Copper and Gold. Both have solid long-term
reserve growth prospects and no hedging liabilities, he

Snyder said Golden Star Resources, in Denver, would
benefit proportionately more than other stocks if gold
prices rose. That is because a big part of its reserves
would finally become profitable to extract. "If gold
goes to $350, it's a home run for them," he said.

Jean-Marie Eveillard, manager of the $20 million SoGen
Gold fund, said he worries about financial stability
and mining risk -- the possibility that a mine will
yield less than expected -- as well as a firm's hedging
exposure. He favors larger, more stable companies like
Newmont Mining, Placer Dome and Homestake Mining, all
of which have diversified holdings.

Of course, Eveillard said, buying gold bullion or coins
eliminates the stock price risk, but the bulk gold
earns no income.