If it's a bull, prices
of the asset, currency, or commodity always rise further than
most people expect; in a bear market they always fall further…
in the late stages of a bull market all of the nonsense comes
from the bulls, but during the late stages of a bear, the nonsense
is all bearish. So if the nonsense is densely bullish, but prices
of the asset continue surprising on the downside, the bear market
is young - on picking tops and bottoms (Ed Bugos)
not be more ecstatic about the nature of the rising gold tide. The
corrections in the price of gold continue to shorten in duration
as well as extent, resulting in an increasing momentum for the Golden
Bull that even Mr. Magoo could see.
time it appears, for this market to head for primary bear market
control at $328 to $338 per ounce, and then beyond. We estimate
that a break in the dollar index below 112 will be enough to get
gold there, but to propel gold prices into a primary bullish sequence,
the dollar has to fall through 108, the last highest low in the
primary bullish sequence that began in 1995. Do yourself a favor;
don't take your eye off that ball.
So it's not quite time to break out
the champagne and caviar. On the way to 108 the mainstream analyst
and broadcasting community is going to bring up the idea that a
concerted intervention is on its way to support the US dollar. The
Japanese would be glad to help, it is likely to be reported, because
their reformist government wants a weak yen. In fact, I'd bet Bloomberg
writes it first, despite the increasing correlation between a rising
yen and rising Nikkei.
But boy would that help the dollar
get there faster. One of Rubin's shrewdest tools in managing the
dollar is probably the knowledge that "intervention talk" aimed
in support of other currencies over the years has been an
important psychological factor in support of the strong dollar.
"Sure, we'll help you guys out and tell the world we're doing
it." What would the layperson make of that? That the dollar
any kind of intervention favoring the dollar could be seen as a
sign of weakness not leadership, for the intervention would arise
as a defensive policy for a currency the whole world perceives to
Besides, there are other reasons,
more economic, that interventions don't work, and the governors
of dollar policy know them all. Nonetheless, we can't predict what
the humans in charge of these policies are actually going to do.
We can imagine, however, there will be pressure by many market participants
to move in the direction of interventions... based on other recent
There is good reason to be bullish
on gold, and bearish on the dollar today.
However, there is one exceptional
reason to get bullish on gold in my own view from the penalty box.
And it is ironic, so ironic. Are you ready?
The Meaning of IT
The biggest contribution of the IT (information technology) revolution
is not a ramp up in technological innovation for our society, or
in the productivity of our machines.
Rather, it's most important contribution
is in the potential for an unprecedented knowledge advance for all
of society, which should appear as though a large sledge hammer
was thrust through the thick
veil of contemporary ignorance in all subjects. The Internet has
destroyed many information monopolies as a result of the favorable
economics arising from the break down in any knowledge advantage
previously enjoyed by either the buyer or seller in a transaction,
provided of course that buyers and sellers take advantage of them.
The most guarded of all these information monopolies is that which
is presided over by Fed Chairman Greenspan and the global banking
community, whose main business is inflation.
At any rate, this process has been
developing slower than some might expect because there still is
only a fraction of the population who are efficient end-users of
Generic economic experts might
point to today's declining profits on Wall Street and quote you
the efficient market hypothesis as having been accelerated with
the benefit of the Internet. But you already know the real reasons
for falling profits (…inflation breakdown, shhh).
Nevertheless, the contribution of
IT as we see it will probably become more manifest and easier to
perceive when the Internet's capacity as a near perfect medium of
"information" exchange is optimized by the market economy. What
we mean is that as buyers and sellers learn to use the IT we're
counting on the process to organize the world's information and
knowledge in a way that best suits society in its aims.
The economic benefit may be restricted
to helping the freer exchange of goods and services within an economy,
which means that it promises to aid the role of money in any market
system. But right there is our gold coup. Can the Fed be to the
dollar what the Internet will be to money? Absolutely not.
The Internet is a powerful breakthrough
for the knowledge field and for freedom, if it is left alone. Thus
to the extent that institutions like the Fed, IMF, BIS, or nearly
any public authority depends on ignorance or illiteracy, the information
revolution is bullish for gold prices, not technology stocks. The
latter was transitory speculation and euphoria.
Of course the ongoing revolution
in IT will draw out new and exciting discoveries, but they will
have nothing to do with the impact of the revolution on the business
of money. In fact, they will have nothing "on" that impact either.
The Fed, for its part, is going to
have to figure out how it can continue to fool most of us into believing
that the dollar is as sound as gold in its economic role as money.
The US Treasury department shares
in this responsibility, but after all, the US dollar is just a Federal
Reserve Note today.
So if you're a gold bull today, you
probably believe in the government's capacity for manipulation,
past, present, and future. But if you also happen to be bullish
on the human capacity for knowledge and advance, as we are, then
you must be able to see how the Internet has become a grave threat
to the opponents of gold & free market capitalism. The rising price
of gold is then a bullish indication of capitalism's return.
Though, it is a bearish indication
for the global banking establishment that controls so much with
Hedge or Liability?
Even Freeport made fresh intermediate highs on Monday and Tuesday
morning. All US gold bourses made new 30-month highs this week,
except for the HUI (Amex Gold Bugs index), which went off to new
four-year highs. That index is in a primary bull market due
to its weighting in non-hedged production.
other indexes are only marginally short of making bullish primary
trend reversals themselves.
There has been a lot of good commentary
from the independent analyst community that has highlighted the
vagaries of hedging in a bull market for the commodity in question;
specifically, over-hedging in the gold industry. Of course, this
is a relative concept and it is a difficult one. It's not black
and white. Indeed, not much of anything is.
In some cases, the criticism of a
company's hedging practices is warranted. In other cases, it isn't.
Within a particular industry, and while prices are falling, the
market is likely to place a higher risk premium on the producers
that aren't hedged. In other words, the shares of the hedged producer
should fall less. If prices are rising, as in a bull market where
they always rise more than people expect, the market is going to
put the higher risk premium on the hedger, meaning the hedged producers
will gain less quickly, and depending on the extent of their prior
hedging, may not gain at all.
We can't know the proper amount of
appropriate hedging, only the market can. The hedger can only know
to the extent of his or her ability to figure out what the market
There are two ways to enter into
most derivatives transactions. One is through exchange standardized
futures contracts with the least amount of counterparty risk and
the other is through OTC forward contracts, which features are normally
custom tailored for the specific transaction between the hedger
and dealer. This is where most of the counterparty risk you hear
of shows up, and what prompted Mr. Sinclair (Chairman of Tan Range
Exploration; TNX, a TSE listed gold company) to write to Newmont
as a shareholder and publish the letter at Le Metropole. If you'd
like a copy of the letter please mail us at: mailto:firstname.lastname@example.org
It was very good. Since we haven't
seen Newmont's replies, we don't know the answers to the questions
that were raised by the ex operator of metals trading for the Sinclair
Group prior to 1989. And since most of the gold industry uses the
less liquid OTC instruments for their hedging, the questions are
Yet any heavy criticism of Newmont
is probably unwarranted for a few reasons. First, the overall hedge
is much smaller than any other producer, particularly in Newmont's
blue chip league. Only 8% of their total reserves are hedged. Second,
most of the contracts are denominated in Australian currency and
so long as the AD can keep up with the price of gold against the
dollar then the value of their hedges should stay intact. Third,
many of these hedges are put option contracts that were purchased,
so the liability is probably limited. Fourth, the contracts are
financial liabilities only to the extent that the company can't
deliver the actual gold into them. Otherwise they are mainly a drag
on earnings when prices are going up and a buffer when they're going
down. Fifth, they plan to unwind
at least a third of those acquired hedges over the next few years.
What I'm trying to say is that we
have to give Newmont some credit for its acquisition of Normandy's
hedge book as ushering in one of the events that began to separate
the performance within the sector between hedgers and non-hedgers.
Newmont's success was a vote by the market, which had become increasingly
bullish on gold prices, and which is why Anglogold heeded the signal
The market's preference for Newmont
over Anglogold in its bid for Normandy sent Anglo a strong signal.
After all, Newmont just became the world's largest gold producer.
It subsequently announced that it too would change course on its
hedging practices. The rally in gold shares following this industry
consolidation was increasingly concentrated toward the unhedged
producers. Shareholders of the gold companies with the least amount
of their future gold production hedged have done the best since
When today's analysts write that
unhedged producers are rising faster than the hedged ones they're
saying that the market is placing a higher risk premium on the hedgers,
which as we've noted before, means the market is pressuring today's
hedgers to reverse their hedges in order eliminate this risk premium
so that they too do not become the target of a hostile takeover
by the unhedged producer whose shares are trading at a discernible
valuation premium - ie. stronger currency.
to criticize Newmont for catalyzing this market process, for gaining
significant global market share at the same time, and for holding
a bag full of dynamite that when it explodes will have a much more
bullish affect on its bottom line overall anyhow, is something that
might create a buying opportunity. And it comes as the consequence
of a first quarter earnings report that probably disappointed investors.
Newmont lost $0.04 per share, which
compares with a $0.20 loss in the same quarter one year back. Management
blamed rising production costs in its Nevada operations for the
shortfall, and warned that this year's profits will fall short of
It received an average realized gold
price of $291 in the quarter compared with $264 in the year ago
quarter, while its total production costs rose to $262 from $220;
only half of that rise is due to rising cash costs. The non-cash
rise is the consequence of a $30 million increase in the expensing
of the "Depreciation, Depletion, and Amortization" account to $113
million from $85 million in 2001. That's about $0.10 per share right
Cash on hand, however, grew from
$47.2 million a year ago to $511 million at the end of the first
quarter 2002 due to a big increase in cashflow from operations during
the quarter. The company's
operating loss fell to $13.2 million from $31.1 million before gains
on derivative instruments reported to be $19 million in this quarter
compared with $16 million in the year ago quarter.
Newmont's management also said it
plans to reduce its debt down to 10% of total capitalization, as
well as reduce the hedges it inherited from its Normandy acquisition
over the next three years. In a recent press release, Pierre Lassonde,
the President, said:
"With our non-hedging
philosophy, we continue our proactive program to reduce and simplify
the hedge book we inherited from Normandy. During the quarter,
the acquired hedge book was reduced by approximately 250,000 ounces
to 7.3 million committed ounces. In addition, the floating gold
lease rate exposure was reduced to 55 percent of committed ounces.
Our ultimate goal is the closeout of the hedge positions in an
orderly and timely manner, while looking for opportunities to
accelerate delivery into or closure of the book." For the balance
of 2002, Newmont expects to deliver a minimum of 1.0 million committed
ounces at an average gross gold price of approximately $303 per
ounce, which will net to an estimated $286 per ounce after accounting
for associated gold borrowing costs. This price will improve if
the Australian dollar continues to strengthen against the US dollar
- Newmont Press Release
Our criticism of hedgers stems largely
from the fact that we are bullish on gold prices. If we weren't
the criticism would have a less important place, and in fact, if
we were to be bearish on gold, the more hedging the company did
the more we would see it as the sound choice, so long as the counterparty
risk is properly accounted for, and of course, so long as the hedging
doesn't become the company's main line of business. I hope that
Mr. Sinclair's letter prompts Newmont to review its disclosure guidelines
and lead the industry in publishing such details to shareholders
so that the market can do its job and value their shares accordingly.
It could be to their benefit if their
competitors hedge books are far worse off than theirs.
In any case, the higher the price
of gold goes, the more pressure there will be for companies to stop
hedging or close down their hedge books altogether. We've said that
before, many times over, as have many of the gold analysts we follow.
In such an environment all (short)
hedges become a potential liability. But in responding to the pressures
by shareholders (with respect to their action in the market), one
by one, the excess hedgers are going to fuel this bull market or
risk being eaten up by a competitor with a stronger currency.