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The
United States is now on orange plus alert. There was actually no
change to the alert status from orange last week, but reacting to
reported threats by Al Qaeda, Washington deployed heat seeking Stinger
missiles around the Capital. Increasing concern over North Korea
and an audio tape by Osama bin Laden crying out for Muslims to fight
the "allies of the devil" prompted the action.
Fund selling was blamed for gold's
weakness Wednesday. Presumably in anticipation of further sales
on the TOCOM exchange in Japan Thursday morning - Japan's markets
reopened from a holiday Wednesday morning to find lower gold prices.
It was a classic shakeout.
The pundits explained gold's pullback
as originating from the idea the US war on Iraq has been postponed.
Hogwash. Bush doesn't need NATO or the UN as he's already threatened
them to be on the verge of irrelevancy. You heard right.
The fact that the world protests against this war is of no consequence
to GW. I guess he really wants to get into Iraq before April.
I suspect that the most bearish influence
on gold prices came from what happened to silver. Silver futures
got clobbered. The bears took out important short term trend support
at $4.60 on the nearest contract and drove prices down to an intraday
low of $4.49 - well below the 200 day moving average, which is at
$4.68 today. Selling was seen out of the India's industrial sector.
But the intermediate and primary trends remained neutral.
A deflation wind (gas?) swept
through US markets Wednesday nevertheless, as the dollar made new
short term highs the day before and closed a might higher Wednesday
also (though it didn't translate into a higher high).
 There
aren't any bullish footprints on the dollar index chart yet, but
the weakness in gold prices suggested they were coming.
Cocoa was the only commodity that
showed gains Wednesday. The rest were off 1 to 2 percent and pulled
the commodity indexes down by about the same amount - 1%.
Undoubtedly this weighed on the gold
trade and strengthened the tone of the dollar in F/X markets.
 Oil
prices fell back a little in Europe, but were supported by bullish
inventory data. Oil inventories dropped by about 4 million barrels
for the week ending Feb 7th to their lowest levels since 1975. Mostly
they fell in the Gulf Coast and Midwest (PADD II and III) regions.
NYMEX Crude raced off to new highs ($35.95).
After trying to discount the best
case war scenario earlier this week and then Greenspan's bullish
inference for the economy - that it isn't necessary to lower
rates further - stock prices fell further towards their October,
and 1998, lows. Bond yields fell lower both Tuesday and Wednesday
after climbing Monday, also despite Greenspan's remarks about the
budget - that once debt to GDP begins to rise, there's just no
self correcting mechanism, the debt just continues to rise
- as well as his support of Bush's tax plan on dividends.
Don't take this wrong. We fully support
any tax reduction schemes, and are highly skeptical of the charge
that any such reductions are bearish for the budget. However, there
are two potential side affects of Bush's (dividend tax) plan the
market probably isn't considering at the moment. The first is that
the incentive will go to paying out higher dividends in order to
boost stock values at the expense of business spending by
companies. The second is the effect on the relationship
between stocks and bonds as the budget deficit is already set to
grow.
The case for higher interest rates/yields
is already strong on account of the inflation argument (dollar weakness
and strong commodity prices), the current account deficit, as well
as the future of the government's intensifying overseas borrowing
needs. But the favorable tax treatment for stock dividends could
exaggerate the decoupled nature of equities and fixed income markets
that has been in place since 1998.
In short, the plan could backfire.
No wonder Greenspan supports it.
I'm kidding under the assumption he doesn't like Bush much, or at
least not as much as Clinton.
Anyhow, Bush's team has claimed that
there is no link between higher budget deficits and interest rates.
To an extent this is true I think, but not while the dollar's weak.
Speaking of which, we happen to think
gold is a bargain again. Undoubtedly there is concern that a falling
stock market will produce deflation, but that's just perfect for
creating buying opportunities in the metal.
Gold stocks fell back after Tuesday's
sharp rally, but although those gains were wiped out, prices didn't
fall below Tuesday's lows on average.
Nonetheless, our outlook for gold
shares is still cautious - see last week's issue - in the short
term, but our outlook for the metal is brighter now after a $40
pullback in only a week! Sure, we might see further weakness Thursday,
but our view is that a bear market on Wall Street continues to be
bearish for the dollar's liquidity (investment) premium. The dollar's
bounce at around this level was expected, but to be frank, it's
not as bullish a bounce as I'd expected would be the case anyway.
Certainly, this war nonsense has
thrown a bombshell of confusion at the markets, and our outlook
for gold and oil has to adapt to it. What I mean is that the media
driven war focus brings in the weak hands that have been conditioned
to speculate on the immediacy of war, almost to the neglect of the
fundamental outlook for the dollar, as well as gold and oil. The
result is volatility and of course, opportunity. Bear Sterns said
it right when they described the war premium in gold at the margin.
 Last
year we said that whenever the peace trade (sentiment) inflates,
investors should buy the dip in oil. Now that gold has been put
in play at the margin, the same applies there, at least until our
fundamental outlook for higher gold values changes.
When we wrote our top five gold stocks
issue in January, our confidence wasn't great in the timing of an
initial entry position. It's getting better. If I had to speculate
on a short term bottom for the gold stocks, I'd say it will happen
at about 120 to 125 for the AMEX Gold Bugs index, which is about
another 5 to 10 percent lower. The average gold stock is likely
to be more volatile than this index of course. Ranking the timeliness
of an initial entry position in gold stocks on a scale between 1
and 5 (1 being most timely), I'd say subjectively that it is still
a two, but that as we approach the aforementioned levels in the
HUI it would become a "one."
If the Dow is going to new lows,
I feel confident that the outlook for gold prices will increasingly
strengthen, and broaden.
At any rate, the dip in gold prices
is likely to bring in the hedgers once again after they refused
buying the last 20 point gain in gold prices on their way to $390.
You'll see what I mean in a minute...
Still the Second Largest Hedge
Book in the World
Dear Bobby Godsell (Anglogold
CEO),
If you think Anglogold's shares doubled
during 2002 because it's the world's second biggest gold company
(Newmont is arguably number one today), guess again. The company's
shares gained for one reason only - its commitment to reduce the
hedge book. Don't lose sight of that, and don't let this happen
to your stock:
Indeed, Anglo's stock has performed
exceptionally well relative to its blue chip peers. It was the only
blue chip producer that broke out to new highs in the latest gold
rally - December/January.
 If
you're willing to accept that companies like Barrick have the equivalent
of a risk premium priced into their stock in lieu of their bearish
hedge position, imagine what might happen to the price of their
shares if management decided to liquidate the liability in a bull
market (gold) - the stock wouldn't only go up, it would probably
outperform its peers. There's extra leverage. Not only would the
bottom line then fall more in line with gold price moves and flow
more directly through to shareholders, but also, valuations could
then recover to where the unhedged values already are.
This is what I think was happening
in Anglo's market during 2002. The market began pricing it in the
direction of a real gold company under the assumption it would continue
reducing its hedges. Godsell has been loud enough about it after
all.
Anglo's hedge book had as much as
19 million ounces of gold committed during 2000. That was three
years worth of production and almost a third of their reserves -
proven & probable. Today there is little more than 11 million ounces
committed. Most of the hedges were bought back, but some were delivered
into.
It's still the second largest hedge
book in the world, preceded only by Barrick. Moreover, Anglo still
has the largest marked to market cash drain on its books.
However, it also boasted among the
most aggressive hedge buyback plans during 2002. Newmont, Placer,
and Barrick on the other hand are ho-humming along like deer stuck
in headlights (that may change at Barrick now???).
 Anglo
has advertised its commitment to shareholders, that it would reverse
its hedges now that it's become bullish on gold. Consequently, and
this I think is very important, the marked-to-market loss
on their hedge position stabilized throughout last year
while others' worsened (we haven't got NEM and ABX hedge data for
the fourth quarter yet but trend has deteriorated all year long).
Barrick's hedge book was worth a
"positive" US$356 million at the end of 2001. In the third quarter
it was worth a negative US$300 million (see chart). That's almost
a US$700 million bearish swing in three quarters. Newmont acquired
its hedges during the first and second quarter - what a deal. And
while Anglo's hedge book deteriorated compared to the fourth quarter
of 2001, it stopped deteriorating shortly thereafter. We attribute
that wholly to the company's buyback program!
However, in its fourth
quarter report, Anglo also said that the marked to market value
of its hedges declined to a negative US$590 million by the end of
January from a negative US$447 million at the end of December -
where they largely stabilized through 2002. Thus, while this value
stabilized all year long during 2002 on a $40 gain in the price
of gold, in only one month it deteriorated by almost 35% on a $20
gain in the price of gold. What happened?
They stopped buying back their hedges,
obviously. Maybe they expected this dip. Or maybe they've turned
bearish. Maybe they wanted to see how the market would do without
them buying it up every other day. Choo-o-o-o, Choo--o-o! That's
the sound of the train as it left the station. Blew right by them.
Gold prices kept charging higher without them.
I think you get the point Mr. Godsell.
Don't try and outguess the market. There's too much at stake. If
Anglo is fundamentally bullish, there's no reason to be hedged whatsoever.
The gold market is liquid. Buy back 5 million ounces this year and
be done with it - and watch your stock go to the moon. Or crash
and burn with Barrick. The same message goes out to Wayne Murdy
of Newmont. Be bullish, as Merrill Lynch would say!
A copy of the complete story in today's
Daily Global Market Outlook is available to subscribers through
Goldenbar.com
Edmond J Bugos
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