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By Thom Calandra
CBS.MarketWatch.com
Friday, January 4, 2002
http://cbs.marketwatch.com/news/story.asp?guid=%7B3240BD45%2D47C1%
2D4C42%2DAC5B%2D4C4C355942B7%7D&siteid=mktw
SAN FRANCISCO -- Gold sure could use some of the squeeze
that is pushing silver prices to nearly one-year highs.
While gold prices start the new year tamely flirting with $280 an
ounce, silver, thanks to delivery snafus and tight lending of the
metal, is rising smartly. The metal, which has more industrial
uses than gold, has risen in recent weeks to almost $4.70 an
ounce, an 11-month high, from just above $4.
"Silver will trade back down," says Larry Edelson, managing
editor of the highly regarded Safe Money Report
Because of delivery problems and near-20 percent lease
rates that restrict lending of the metal, the spot price of
silver is higher than contracts for future delivery. So-called
squeezes -- the professionals call it backwardation --
happen rarely and usually evaporate when supply starts
moving again overseas and in the United States.
"I'm a bear on silver but a bull on gold," says Edelson, who
had been reluctant to endorse long-languishing gold.
Gold, says Edelson, will need to clear many hurdles
before it sheds its reputation as a losing investment. Many
technicians, the folks who study trading patterns for
commodity futures contracts, agree.
Amanda Sells, an independent consultant used by Mitsui
Global Precious Metals in London, says, "Gold's upside
potential will only increase to $328 on a clear and
confirmed break of $292." Her comments came in a
year-end report issued by Mitsui and its headline metals
analyst, Andy Smith, a London-based researcher who
went positive on gold in mid-2001 after shunning the metal
for years.
Smith himself sees gold making strides this year as gold
producers move away from their practice of selling their
delivery of the metal forward to lock in higher prices. Such
hedging stimulates lending of gold by central banks and
others, thus diluting any gold metal rallies.
The debate between those who hedge, like South Africa's
Anglogold, and those who do not, like North America's
Newmont Mining, will probably take center stage this year
in the gold industry, says Robert Bishop, longtime editor of
The Gold Mining Stock Report.
Newmont Mining's battle against Anglogold isn't just on
the hedging fields. Newmont, outbidding Anglogold, is close
to winning a takeover effort for Australia's largest producer,
Normandy Mining, at a price tag of $2.2 billion. The
consolidation of gold mining companies around the globe
has pushed shares of these producers higher. In Australia,
where rumors of gold bids are rampant, gold stocks this
week moved within points of an all-time high.
Still, the question for investors, and stymied executives at
gold mining companies, both hedgers and straight producers,
is entirely a $300 one. Is this the year gold breaks the $300
mark and stays there?
Edelson at The Safe Money Report says yes.
"Gold's not there yet, but it's getting closer," he said Friday.
The price of an ounce trades at about $279 in New York and
London. "First signal, look for a close above $282. If gold can
do that, then a test of $300 would be sure to follow. And after
that, any close above $306, and it's off to the races."
Such seemingly small gains for gold prices are meaningful
for gold producers, especially those that are paid the spot
price for the metal they pull from the ground in places like
North America, Indonesia, Australia and South Africa.
Non-hedgers such as Newmont, South Africa's Gold Fields
Ltd. and Canada's Franco-Nevada Mining see their operating
margins rise a percentage point and sometimes more with
each $10 rise in gold's price.
Analysts say investors should expect the share price of a
non-hedged gold mining company to triple the percentage
gain in the price of the metal. Of course, that works in reverse
on the down side of the slope.
Edelson, a former Europe-based commodities trader whose
job is to coach investors on the safest possible investments
for their hard-earned money, sees several reasons why gold
could go to $340 an ounce or "possibly higher" this year.
One is an acceleration of debt crises around the world.
"Argentina isn't the only problem with debt, not by a long
shot," he says.
Another is global worries about central banks' reinflation
attempts. Banks such as the European Central Bank and the
Federal Reserve conceivably could flood their economies
with cash as they keep lowering interest rates. The likely result
would be accelerating inflation, which is almost always a
positive development for gold, a commodity whose net worth
is burdened by no country's currency, debt levels or politics.
"This is a biggie," says Edelson. "Look at how the long bond
market (in the United States and elsewhere) has had its worst
crash since 1996 on reinflation concerns. Soon, that will
spread, giving gold a boost," he says.
Edelson sees investors slowly registering their concerns with
global politics, starting with America's war on terrorism and
spreading to South American finances and things nuclear in
India and Pakistan. "The wars are far from over," says Edelson.
As Smith in London points out, gold will need the support of
aggressive fund managers, ordinary investors and those
dastardly hedging gold miners who promote the loose
lending of the metal.
The tightly knit community of gold bugs, including this writer,
has its fingers, arms and legs crossed.
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