Freedom Lawyers of America

By Thom Calandra, CBS.MarketWatch.com
Last Update: 12:43 PM ET Dec 16, 2002
SAN FRANCISCO (CBS.MW) -- Gold proponents, nervously awaiting further gains after a startling one-week rally, are pointing to several areas poised for strong gains.

They include tiny exploration companies, several overlooked bullion producers and the actual metal itself.

The dollar-linked spot price of gold Monday morning was continuing to defy gravity, rising as high as $334.90 an ounce. "I think we saw some pretty important breakouts last week, but it's important that we get follow-through," said Ian McAvity, whose Toronto-based Deliberations on World Markets is in its fourth decade of charting financial markets.

McAvity says the range of $325 to $340 is the current "breakout area" for the gold price. "This was an important inflection point range in 1991/93 and 1985/86. It also marked the peaks of the October '99 spike, when Ashanti Goldfields (ASL) and Cambior (CBJ) blew up their hedge books," McAvity says.

If spot gold and gold futures contracts launch a follow-through rally Monday or later this week -- and that's a big if -- McAvity sees a possible "struggle" around $340, "but $380 looks like the more likely resistance to halt an acceleration move."

After starting 2002 at $270 an ounce, gold's price is up 24 percent. The metal's rally is linked to a host of events, including a sliding dollar, a weak stock market, terrorism fears and perhaps most of all, a looming supply shortage if central banks and commercial banks try to recover the bullion they have lent to third parties in the form of leasable gold and derivatives. See: Researcher catalogues vast 'short position.

"The mid-tier, unhedged producers give investors the best risk-reward for pure leverage to the gold price," says Paul van Eeden, a commodities analyst with the newsletter International Speculator. "These are Meridian (MDG), Goldcorp (GG), Glamis (GLG), Iamgold (IMG) and Harmony (HMY). For people who want leverage to both gold and silver, I suggest Wheaton River (WHT), which is unhedged in production and has excellent leverage to both gold and silver due to the nature of their ore body in Mexico."

Unhedged producers are those who sell forward none of their gold in the leasing market. The practice of hedging, during periods when the gold price is falling, allows producers to receive incrementally more for their metal. In a rising gold market, a hedged "book" can become a liability for producers who must deliver their product, say, at $335 an ounce when the metal is trading at $355.

Whether gold reaches $355 an ounce or higher by the end of the year will have much to do with the dollar. Bullion analyst Andy Smith of Mitsui Global in London notes the gold price in the past two weeks rising in step with the dollar's losses against the euro.

Recent speeches or interviews by central bank officials in the U.S., Britain and Japan have raised the specter of a coordinated global reflation of assets. Such a reflation, in the name of global economic revival, would involve slashing the value of the world's No. 1 reserve asset, the dollar.

"Policy makers around the world have jumped on the anti-deflation bandwagon as never before," Stephen Roach, chief economist at Morgan Stanley, said Monday. Roach, who warns about the dangers of global deflation, sees a chance of a dollar meltdown in coming months and/or years.

"The Japanese authorities have embraced a three-pronged program to counter deflation -- fiscal stimulus, non-traditional monetary stimulus, and, most recently, a depreciation of the yen," Roach said in a report Monday.

The dollar-gold angle is filtering onto Wall Street.

"Gold is money and money is seemingly about to be devalued," says Caesar Bryan, who manages the $85 million Gabelli Gold Fund (GOLDX). Bryan, whose fund is up 80 percent this year, sees an increasing negative correlation: gold's rising price vs. the falling trade-weighted dollar and the falling U.S. stock market, as measured by the S&P 500 Index.

Gold prices tend to rise when the dollar is falling -- in part because a shaken dollar may indicate fiscal stress on a worldwide basis. The Federal Reserve's Major Currency Dollar Index, currently about 98.6, may provide a window into dollar weakness/gold strength. The spot gold price, as measured by the afternoon London fix, divided by the index is now at 3.37 or so.

Several members of the Gold Antitrust Action Committee, a controversial group that contends central banks and commercial banks for years have suppressed gold prices, says this dollar-gold indicator rarely goes above 3.25.

The indicator was above 3.25 for six days in July, when the dollar lost ground rapidly against other currencies. At midday Monday, the indicator was marking its sixth day above the 3.25 level. (See chart below.)

Bryan, who has been managing the Gabelli Gold Fund since 1994, says he has been buying the actual metal for his portfolio. Bullion now accounts for about 3 percent of the fund, he said Monday.

The money manager says investors have a right to be nervous about buying shares of gold mining companies whose values have risen 200 percent and more this year. Still, Bryan says he exposes his portfolio to a range of explorers and producers, from miniscule to large.

On the small side, Gabelli Gold Fund owns shares of Arizona Star Resource (AZS), FNX Mining (FNX), Golden Star Resources (GSS) and Nevsun Resources (NSU). Most of those are based in Canada and have seen their shares double and triple in the space of 12 months. Bryan's fund also has a small position in Kenor (457810), a Norwegian miner.

Robert Bishop of the long-standing Gold Mining Stock Report says he expects more of gold's positive price action. "Merely holding $330 is going to lead to a gathering of momentum -- and to prices that are likely to surprise those accustomed to viewing gold as a loser," Bishop told me.

His favorites include Nevsun Resources, which is conducting test drills of mineral deposits in western Mali, Africa. "Much farther down the food chain, Odyssey Resources (ODX) has

Turkish projects that will be active in the near-term, and is negotiating on an acquisition that could truly change the face of the company," Bishop says. Odyssey trades on the Toronto Venture Exchange.

K. Brent Cook, a minerals geologist on staff at merchant bank Global Resource Investments in Carlsbad, Calif., says investors are waiting for a major gold discovery to inject new life into the exploration industry.

"The exploration business has suffered five of the worst years I am aware of," Cook says. "Major mining companies severely cut their exploration budgets, and literally hundreds of junior exploration companies went bust."

The geologist has his eye on China and a company called Southwestern Resources (SWG), which two weeks ago indicated fruitful early results from gold mineralization across Yunnan Province. The Toronto-traded company's total market worth is less than $100 million U.S.

"If my very preliminary interpretation of the geologic setting and results to date prove correct, this gold system could surprise a lot of people," Cook says.