POG Correction Almost Over
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!
Ed Bugos
Editor - The GoldenBar Report
www.goldenbar.com
February 15, 2003
The
Goldenbar Report: is not a registered
advisory service and does not give investment advice. Our comments are an
expression of opinion only and should not be construed in any manner whatsoever
as recommendations to buy or sell a stock, option, future, bond, commodity
or any other financial instrument at any time. While we believe our statements
to be true, they always depend on the reliability of our own credible sources.
Of course, we recommend that you consult with a qualified investment advisor,
one licensed by appropriate regulatory agencies in your legal jurisdiction,
before making any investment decisions, and barring that, we encourage you
to confirm the facts on your own before making important investment commitments.
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