Off to South Africa in a few hours

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By Thom Calandra
FT MarketWatch.com
January 26, 2001

LONDON (FTMW) -- Gold fund managers are lining up behind gold, with
some suggesting the besieged metal might make a comeback.

The Bank of England's 25-ton gold auction this week, one of a series
of gold sales by central banks worldwide, was 4.8 times
oversubscribed, pointing to a widening gap between physical supplies
and consumer demand.

"That tells you people are buying. There is a big demand for gold in
the spot market," said John Hathaway, who manages the $20 million
Tocqueville Gold Fundfrom New York City. Hathaway said rising demand
for gold could lead to a rare backwardation of gold prices. That's
when the price of an ounce of gold for sale today is worth more than
a contract for future delivery of the metal.

"To me it is a question of when gold moves higher, not if," says Joe
Foster, manager of the $100 million Van Eck International Investor's
Gold Fund.

A recent Salomon Smith Barney report, citing a gold industry trade
group, said the deficit between physical supplies and growing
consumer demand for the cheap bullion could be as high as 25 percent.
Gold sells for about $265 an ounce, close to its lowest point in 16
months and not far from a 20-year low.

Critics point to forward-hedging gold companies as the culprits
behind a low gold price. The world's No. 1 producer, Anglogold of
South Africa, and Canada's Placer Dome Gold and Barrick Gold each
sell their future production to dealers, getting more for their gold
than they could in the spot market.

The so-called hedging tends to depress gold prices, in part from the
use of derivatives. The hedging also encourages central banks to lend
their gold at increasingly lower interest rates, once again putting a
lid on speculators' willingness to bid the price of gold higher.

"Excessive hedging is damaging to the gold price because it supports
central bank lending, contributing to the negative attitude that most
investors have toward gold," says Foster at Van Eck.

Foster says gold companies that continue to hedge their production
are gaining higher prices but playing a risky game. If gold prices
rise significantly and rapidly, a mining company with an aggressive
hedging book could be forced to sell its gold at a price that is far
below the current market price.

"I would be more lenient in my views toward hedging at significantly
higher prices, but with gold hovering near its 20-year lows, this
isn't rocket science," he says from New York City. "It makes
absolutely no sense."

'Not a clue'

Placer Dome Gold of Vancouver, which hedges gold production, told
investors this week that the low gold price has led it to reduce the
price it sets for gold reserves on the balance sheet to $300 an ounce
from $325. The gold mining company, which produces 3 million ounces a
year, cited central bank sales and, curiously, weak demand. Placer
Dome made no mention of the oversubscribed Bank of England gold sale.

"With all due respect to Placer management, they don't have a clue,"
said Hathaway at Tocqueville. "They don't have any special insights
that are not available to the rest of us. This has been a five-year
death march for gold, and Placer Dome is trying to preserve capital."

Hathaway says he likens the "death march" to natural gas prices,
which languished for years as producers cut their activity and
decreased their investments in pipelines, exploration equipment and
other capital expenditures. In the past year, natural gas prices in
the United States have just about quadrupled.

"This year we have crossed a threshold; the psychology has changed
dramatically," Hathaway reasons. "The capital investment flows into
the material sectors have been really choked off the past five or six
years. The previous generation of (natural-resource) managers over-
invested and got lousy returns, and the next generation said, 'I am
not going to overproduce,' and it is exacerbated by the strong
dollar."

Most gold believers point to the financial landscape when making the
case for the metal, which tends to rise in times of accelerated
inflation or fiscal crisis. Yet gold prices have benefited little
from the technology sell-off, a horrendous American trade deficit and
signs the U.S. Federal Reserve will be unable to prevent a recession.

"Looking at the macro-economic environment, many indicators are
trending to levels of past recessions," said Foster at Van
Eck. "Manufacturing activity, debt levels, current account balances,
the technology bust, energy prices -- the stage is set. The only
thing that has not yet changed is investors' attitude. The Fed will
have difficulty combating the excesses that have built over the past
10 years, and when this becomes obvious, gold will move into the
spotlight."

Adds Hathaway, "We have been exporting capital and importing goods
and services. If those flows reverse because foreign goods become too
expensive, and the dollar goes way down, then this whole idea of
outsourcing to Mexico and Asia for assembly and re-export becomes a
bad idea, just like the California utilities getting rid of their
power generators."

What's the trigger for a higher gold price? One fund manager in
London, who asked to remain unnamed, noted that the Bank of England
is halfway through its programmed sale of gold reserves and could
decide to end the auctions if regulators anticipate a higher gold
price.

"A sharp, sustained rise in the gold price combined with a withdrawal
of gold liquidity from the market by the central banks could create
problems for the hedged producers," said Foster at Van Eck.

As for investment choices, Foster said he owns shares of Goldfields,
the second-largest South African producer after Anglogold. "I believe
Goldfields is the most underrated gold company on the planet. Their
operations are undergoing vast improvements and they have an
impeccable balance sheet," he said.

Hathaway at Tocqueville also owns shares of Goldfields and recommends
Homestake Mining, a California company and fourth-largest North
American gold miner, and Harmony Gold Mining, another South African
company. All are considered unhedged producers of gold.

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Editor's note: Thom Calandra owns shares of Goldfields.