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Federal Reserve report proves U.S. manipulates gold price
IF YOU'RE FEELING REALLY BEARISH:
A LOOK AT GOLD STOCKS
By JOHN RUBINO
December 8, 2000
This is like coming home again, and I don't mean that
in a good way.
Back in the late 1970s I remember really liking a book
on libertarianism by Harry Browne (who might or might
not be the same guy who just ran for president on that
Besides being (sort of) a philosopher, Browne was a
quot;gold bugquot; investment guru, who said excess credit
creation was causing a boom in real estate and other
things which, coupled with rising energy prices, would
lead to a sharp decline in the dollar's value. Gold, he
said, would protect you against the resulting chaos.
He was right, and anyone who listened made a killing.
That was a long time ago, of course, and we've since
gotten our act together. Inflation is way down, and
gold has been so boring for so long that you almost
never hear it mentioned in serious company.
But lately those old arguments are starting to fit the
facts in a way that's eerily, disturbingly familiar.
Excessive money growth? Yep, by some measures at least.
A real estate boom and spiking energy prices? Uh-huh.
Stir in a surreal trade deficit and falling corporate
profits, and 1970s-style currency trouble becomes at
As for why gold does well when the dollar doesn't,
there are two reasons: First, there's only so much of
it in existence, and the new supply is limited and
fairly predictable. It's thus not subject to government
or Wall Street manipulation. Second, it's been used as
money for thousands of years, and old habits die hard.
So maybe it's reasonable to own a gold stock or two,
just in case.
To see which mining companies are still standing, I
checked in with Claude Cormier, editor of the Quebec-
based Ormetal Report newsletter. Not surprisingly, he
sees a lot of value here: quot;The (gold) market has been
down for so many years that there are very many
bargains. It's like 1992 in the Dow Jones stocks where
everything was selling at low P/Es.quot;
To identify the best bets, Cormier starts with their
hedging philosophy. Gold miners, like most commodity
producers, often sell their production years in advance
via the futures market. This guarantees a given price,
but it also limits their upside, because no matter how
much gold rises, a fully hedged company will only get
the contract price.
So if your goal is to benefit from gold price spike, quot;I
would try to avoid the companies that are heavily
hedged with a lot of gold sold forward, and stick with
companies that are not hedged and would benefit from an
immediate price increase,quot; says Cormier. Barrick
(ABX:NYSE - news), for instance, is heavily hedged, so
while quot;It's a great stock that will continue to be
stable in an environment where gold doesn't move, [it]
will not benefit as much as other companies if gold
Among the big, relatively unhedged players, Cormier
likes Homestake Mining and Newmont Mining.
But the best combination of risk and return is further
down the ladder, with the mid-tier companies, many of
which have good balance sheets, plentiful reserves --
and way more growth potential, says Cormier. quot;They are
the ones that will prosper if gold rises.quot; Here, he
* Meridian Gold, operator of mines in Idaho and Nevada
that are ramping up dramatically. In the September
quarter, it produced 112,000 ounces of gold at a cost
of $155 per ounce. In dollar terms, its sales rose 90%,
and (illustrating the operating leverage in this
business) earnings went from negative $4 million to
positive $10 million. Cash on hand is about $51
million, debt is minimal and despite the fast growth
rate, its P/E, or price-to-earnings ratio, is only
* Glamis, which has mines in California and Nevada.
It's growing at low-double-digit rates and is debt-
free, though not yet profitable. But it has new mines
in Nevada and Honduras, which look like big, low-cost
winners. If they both pan out, they'll lower Glamis'
break-even point dramatically.
* Agnico Eagle, an old-line Canadian miner that
produced about 90,000 ounces of gold in 1999. It's
working through some lower-grade ore this year,
resulting in higher costs and a widening loss. But its
finances are reasonably solid, and its exploration
program is aggressive. For those of you suffering from
tech stock withdrawal, there are lots of smaller, more
speculative mining stocks out there. Most of these
quot;juniorsquot; are developing gold deposits that are not yet
producing, but might sometime soon. quot;These have
extremely high leverage and are the kind of stock that
can move five or 10 to one,quot; says Cormier. His pick in
this sector is Francisco Gold (FGX:CDNX), which quot;has
$2.50 per share of cash in the bank, gold valued at $10
a share and sells for $5quot; (all figures in Canadian
So is gold going to $800 an ounce again (from the
current $300 or so)? Not unless China invades Taiwan or
Iraq nukes Saudi Arabia. But it's certainly possible
that some of the better mining stocks will outperform
B2B and wireless stocks in the coming year.
John Rubino, a former equity and bond analyst, is a
frequent contributor to Individual Investor, Your
Money, and Consumers Digest. His first book, quot;Main
Street, Not Wall Street,quot; was published by William
Morrow in 1998. At time of publication, he had no
position in any stocks mentioned. While Rubino cannot
provide investment advice or recommendations, he
invites your feedback at firstname.lastname@example.org.