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Newmont plans to close Normandy hedge; and what a well-timed announcement

Section: Daily Dispatches

12:54a ET Monday, September 9, 2002

Dear Friend of GATA and Gold:

Today's issue of Barron's has a long and
wonderful interview with GATA consultant
James Turk that comes closer than anything
yet to busting through the wall of silence
erected around gold by the mainstream
financial press in the United States.

The text of the Barron's interview is
appended here.

Note particularly Turk's reference to the
efforts of the U.S. Exchange Stabilization
Fund to control the gold price. Of course
Turk did the investigative reporting and
accounting to expose the ESF in his
newsletter, the Freemarket Gold amp; Money
Report (a href=http://www.fgmr.com, which he
shared with GATA.

The mainstream U.S. financial press mentions
the ESF even less than they mention gold, so
this interview is a triumph for our side.

While GATA is not in the stock-picking
business, it's OK if you enjoy and benefit
from Turk's gold mining company
recommendations in the interview, which are
passed along here only incidentally.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

* * *

From Barron's
Monday, September 9, 2002

Miner Keys

Longtime gold booster says the metal
is due for a rousing comeback

An Interview With James Turk....

Gold appears to have broken out of its
longtime funk. But is the move just a flash
in the pan or something more substantial? For
an answer, we turned to one of the more
obsessed gold authorities we know, James
Turk, publisher of the Freemarket Gold amp;
Money Report newsletter and founder and
managing director of, a company
striving to make the metal the currency of
choice in global commerce, especially in
cross-border transactions. An international
banker and manager of the commodity
department for the Abu Dhabi Investment
Authority for much of the 1980s, Turk spent
most of the '90s providing strategic advice
and forecasts to investment managers. To
learn why he thinks gold is on the cusp of a
new bull market and which stocks he's focused
on, please read on.

--Sandra Ward

Barron's: Gold has had quite a run. What can
we expect going forward?

Turk: The move we had earlier in the year was
so good, we were bound to see some
consolidation in July and August, which is
normally a quiet time of the year for gold,
anyway, and that's what we got. Now, my
expectation is we will test resistance at the
$325-an-ounce threshold again in either
September or October. I believe $325 will be
crossed this year and that will mark the
beginning of the bull market in gold.

Gold had been in a clear downtrend through
the '90s until May 1999, when the Bank of
England said it would sell half its gold
reserves. That resulted in panic selling and
gold bottomed in July 1999 at $252 an ounce.
It worked its way higher, then tested that
low in early 2000 before climbing the past
few years to current levels. What we've seen
is a huge base being formed and the price
going higher as the metal has been
accumulated. Once the $325 level is taken
out, that will signal the beginning of a new
bull market.

Q: We've had a bear market in gold for 20
years. So how long will a bull market last?

A: I have a long-term model I use to identify
trends in the gold market that I call the
quot;fear index.quot; The index reflects the relative
position of gold compared to the dollar. When
fear about monetary problems is rising,
people move to gold from dollars, and the
fear index captures these moves. The index is
calculated by taking the U.S. gold reserve,
multiplying it by the gold price and dividing
it by M3, the broadest measure of money
supply, to quantify the percentage of gold
relative to dollars in circulation and
determine the level of confidence in the
dollar and any possible cyclical patterns.

The fear index shows four distinct bullish
cycles for gold since 1971, when the gold
standard was abandoned: inflation in the
early and late '70s, the savings-and-loan
crisis in the '80s, and then the collapse of
the exchange-rate mechanism in the early '90s
when George Soros broke the Bank of England.
We just got the fifth buy signal at the end
of May. At the least, these cycles tend to
last a couple of years. We don't know how
long this one is going to last, but my
expectation is we're at the beginning of
another bullish cycle that will last at least
two years.

Q: But if you're looking at gold reserves as
a percentage of M3,doesn't flooding the
system with liquidity skew the result?

A: All I'm doing is taking the year-to-year
growth in M3 at the end of each month and
plotting it on a chart. Back in the 1970s, we
had double-digit inflation rates because we
had double-digit rates of growth in M3. Then
former Fed chairman Paul Volcker's mandate
was to reduce inflation, and he did it by
reducing the growth rate of M3. Fed Chairman
Greenspan continued those disinflationary
policies when he came into office in 1987. In
1992 we had a short period of deflation when
M3 declined from the previous year's level.

This 1992 period is significant, because it
marks the blowup in the exchange-rate
mechanism. But the Volcker-Greenspan policies
became so painful to European countries,
Italy and Great Britain specifically, that
they chose to break from the exchange-rate
mechanism and pursue their own course. That
was a message for reinflation in the '90s and
we've had massive growth in M3 since then.
The early part of this reinflation led to the
1993-1994 bull market in gold and gold
stocks. And the reinflation has continued.

Now we're headed to the next stage, which
isn't supply-driven, but rather a demand-
driven issue. When you talk about inflation
or deflation, you're talking about the
quantity of dollars and therefore the supply
of dollars. Yet we need to focus on demand
for dollars rather than the supply of
dollars, because we assume demand remains
constant though it doesn't work that way in
the real world. The demand for the Argentine
peso disappeared overnight.

I am not saying that's going to happen with
the dollar, but the dollar nevertheless has
fallen in the foreign-exchange markets, which
suggests that the Fed isn't contracting the
growth of M3 fast enough to maintain the
dollar's strength relative to other
currencies of the world.

Q: So are we heading into a deflationary

A: I don't think so. I wouldn't call it
inflationary; I wouldn't call it
deflationary. We will see rising prices, not
because of the dramatic increase in supply of
dollars, but because of dramatic decreases in
demand for dollars. The supply of dollars may
remain the same, but if demand declines, the
dollar purchases less, which expressed in
terms of prices means that prices will be

Q: Talk about China's role in the gold

A: The Chinese impact on gold will be
extremely profound. The Chinese-language
character for gold is the same as the one for
money. As far as the Chinese are concerned,
gold is money. The Chinese central bank
reported an increase in their gold holdings
to the International Monetary Fund last year.
But the number is still small, about 500 tons
compared with 395 previously reported. The
general market view, though, is that the
Chinese central bank has been accumulating
gold and not reporting all their holdings to
the IMF.

Q: Somebody must be selling it to them.

A: Now you are getting into the whole issue
of who is selling the gold and who is
shorting gold. There is a point of view that,
in addition to some mining companies, banks
and other financial institutions have been
borrowing gold to fund dollar assets and earn
a spread similar to that of the yen carry
trade of a few years ago. People were
borrowing yen at 0.5 percent to fund dollar
assets and making 5 percent on the spread
until the yen started to appreciate. Now,
gold is being borrowed from the central banks
and sold into the market in exchange for
dollars. That's fine in a declining gold-
price environment, but in a rising gold
environment it can kill you. We know the
central banks loan the gold, but it's unclear
which ones are doing it and how much they are
loaning out.

There is evidence to suggest the Exchange
Stabilization Fund, a quasi-government agency
under the direct control of the U.S. treasury
secretary and the president, has been active
in the gold market. If the gold price were to
rise, the multinational banks who are the big
shorts in the gold market wouldn't be able to
cover their shorts and would take big hits.
That's why the ESF is involved to help manage
the price of gold.

It isn't unprecedented that gold is loaned or
flows into the market. What's unprecedented
is the lack of disclosure. My sense of it is
that there's more than 10,000 tons loaned
into the market by central banks. If that's
true, that's four times annual production.
Can you imagine if people were short four
times wheat production in one year? There is
systemic risk here.

Q: Are you recommending people buy gold
bullion, or should they buy gold stocks?

A: People make a mistake thinking bullion is
an investment. Mining stocks fall into the
investment category, but bullion is cash. It
isn't an investment. You buy bullion for
liquidity purposes. You buy bullion for
safety purposes, because there is no return
to bullion unless you lend it out. It's
clear, though, that people see gold as an
increasingly important component of their
cash and liquidity holdings.

Q: What about gold stocks?

A: There are two models that I like to use.
The XAU, which is the Philadelphia Gold amp;
Silver Index, is a basket of about nine
different mining stocks, including the majors
and some good quality second-tier stocks as
well. Tracking the 12-month year-over-year
change in the XAU provides a good sell signal
if it registers 50 percent growth over the
previous year, regardless of the price of the
XAU. Conversely, when the XAU declines 25 to
30 percent from the previous year, it's
typically a good buy signal in terms of
relative appreciation.

Another model I find useful is one that
quantifies how many gold grams are needed to
purchase one XAU share. For example, the XAU
now trades at about 72. A gram of gold is
about $10. By dividing the gram price into
the XAU price, we see it takes about seven
grams of gold to purchase one XAU. This is
significant, because historically the gold-
mining stocks have been relatively
inexpensive and represented good buys at
times when it takes about six grams to buy an
XAU share. When it takes 10 or more grams to
purchase one XAU, the mining stocks tend to
be relatively expensive. Even though six
months ago we had a breakout from the six-
year downtrend in gold stocks, we've retraced
and we're close to a buying opportunity where
gold stocks look cheap compared with gold

Q: But what about the fundamentals of gold
stocks? Don't you have to look at hedging and
what it costs to get the gold out of the
ground, rather than just gold's price?

A: There are a number of measures to use to
evaluate gold stocks. The first one to
consider is whether a company has hedged
future production. That's the great divide. I
recommend gold-mining stocks that don't hedge
or have minimal hedged positions, because if
the gold price rises, the stocks that are
hedged are giving up potential cash flow by
being forced to deliver into those hedges
below the market price. There are a number of
companies that have losses on their hedges
simply because the gold price has risen
beyond the price at which they sold forward.

Q: What else do you consider before buying a
gold-mining stock?

A: The second consideration is the cost of
production -- not just the operating cost,
but the total cost basis to get the gold out
of the ground. In this regard, there are two
types of mines: underground mines, with deep
shafts that enable the ore to be mined, and
open-pit mines from which the gold is dug
out. Generally speaking, the underground
mines have a high capital cost, and the open-
pit mines have a relatively lower capital
cost but higher operating costs.

Say a mine has a total production cost of
$280 an ounce, and the price of gold is $300
an ounce. It makes $20 per ounce. Say another
mine has a total production cost of $100,
gold is at $300 and so it makes a profit of
$200. If the gold price were to rise to $320
from $300, the mine that has a $280 total
cost is doubling its profit from $20 to $40
per ounce, whereas the one that has a $100
cost is only increasing its profit by 10%.

The company with the higher total production
cost is operating on the margin, and any
increase in the gold price has a much more
immediate impact on the bottom line than it
would for the low-cost operators. In a bull
market, the marginal stocks will tend to
outperform. There's more risk associated with
them, but as the gold price rises there's
more potential as well. It always comes back
to risk versus return. The nonmarginal low-
cost producers won't have as much
appreciation, perhaps, but they will go up as

Q: What are other factors to consider?

A: No. 1 is management and the quality of the
balance sheet, but you also have to look at
the quality of the mine, the life of the
mine, and political risks.

Q: So it wouldn't be wise to just buy a
basket of gold stocks to play a rise in the
price of gold?

A: I wouldn't recommend it. I would recommend
that you pick and choose very carefully
companies that aren't hedged, whose
managements have a demonstrated record of
success and the potential for paying
dividends down the road. As the gold price
goes up, the mine has two options: It can
take the excess cash flow and expand its
business to other areas and buy more mines,
or it can pay a dividend to their
shareholders over the life of the mine. Some
of these are very long-lived mines.

Q: Which companies are you recommending?

A: In South Africa, my favorite is Harmony
Gold Mining. This is a company that changed
the face of mining in South Africa. Under the
old system, mining houses would operate a
series of mines and they would collect a fee
for doing that. That system broke down.
Harmony emerged as a great management team
with some very good properties, and they
built up one of the world's biggest mining
companies. It's got a relatively high cost
structure, so it's leveraged to the gold

Durban Deep is a more speculative turnaround
story that is also highly leveraged to the
gold price. It was a marginal mine and there
was a lot of uncertainty about its future.
They put a good management team in place with
Mark Wellesley-Wood, the new chief executive,
but I wanted him to put together two good
quarters before I recommended the stock. He
did that in the second and third quarter last

Q: Anything more recent?

A: In the last couple of months, I
recommended adding AngloGold. Anglo-Gold is
the largest South African mining company and
it's the second-largest gold producer in the
world. It's been aggressively reducing its
hedge book. And it's a good dividend payer.
Plus, they have a lot of geographical

Q: What are you looking at in North America?

A: The premier stock is Goldcorp. It's a
wonderful situation. They are mining the
world's richest gold mine in Canada in an
area that's been a major producing area for
70 years. Their existing mine has many years
to go. They have a good management team and
one of the best balance sheets and cash-flow
positions in the mining industry. It has
shown tremendous price appreciation over the
past 10 years and it's outperformed the Samp;P

Goldcorp has been a growth stock because they
discovered a new deposit next to an old mine
that is now the world's richest gold mine.
They're raking it in. To put it into
perspective, they're mining gold with a grade
of more than two ounces per ton. Many mines
can make money on gold with a grade of a
fifth or less of an ounce per ton. It's a
tremendous company, and even though it's done
extremely well, there's still a significant
opportunity. They pay a dividend and I expect
the dividend will continue not only to be
secure but will increase along with the price
of gold. They just announced a dividend
increase of 20 percent Wednesday. It's a real
Cinderella story.

Q: What else do you like?

A: Newmont Mining I like. It's got a hedge
position bigger than I would like to see. The
hedge came from Normandy Mining in the three-
way merger of Franco-Nevada, Normandy and
Newmont. Management has indicated they wanted
to reduce the hedge position. However,
they've been very slow in going about it. For
now I am willing to live with the situation
because management owns a big chunk of shares
and I like that commitment. Newmont is the
world's biggest producer. They've got some
great mines and good geographical
diversification. The balance sheet is much
improved after the merger and they have the
tactical brilliance of President Pierre
Lassonde on their side, which to my mind goes
a long way.

Q: Any other more recent buys?

A: I've just added a few more to my buy list,
one U.S. company and two Canadian companies.
The U.S. company is Glamis Gold. They are
very good operators. They're unhedged and
they've just acquired a couple of Central
American properties.

One of the two Canadian companies is Agnico-
Eagle Mines, which trades on the New York
Stock Exchange. They have no hedging on
precious metals, though they hedge some base
metals and run an underground mine in Canada.

The other one is Iamgold. It jointly owns two
mines in Mali with AngloGold, which is the
operator. And both Mali properties are world-
class. Iamgold gets a share of the revenue as
an owner and Anglo gets a share for owning
and operating. Iamgold is a cash cow, and
because it's completely unhedged, it's a
very, very attractive way to benefit from a
rising gold-price environment.

Q: What don't you like?

A: I don't recommend any Australian stocks
now, simply because their hedge positions are
underwater. Newcrest Mining is one pan; its
hedge book is negative US$440 million. But my
top pan is Australia's Sons of Gwalia. It has
a US$340 million unrealized loss on its hedge
book and is relatively more hedged than
Newcrest, and its properties aren't as good.

Q: Are they at risk of bankruptcy?

A: There are two points of view. Some will
argue that they don't risk bankruptcy because
eventually they're going to produce the gold.
In theory, that's true, as long as there's no
operating problems. But they may receive
pressure from the banks because the banks
don't want the companies to carry these huge
unrealized loss positions in the event of a
disruption in the production of the gold. In
1999, when gold rallied, we saw two mining
companies -- Ashanti and Cambior -- go
bankrupt in everything but name. Their hedged
positions killed them. They were selling
aggressively on the way down and got caught
when gold rose to more than $300 an ounce.
Now the question is: Who will be caught at
$350 an ounce?

Q: Thanks, James.



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Dr. Fred I. Goldstein, Senior Broker



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