current gold weakness will not last

  1. 9,081 Posts.
    " Mon Aug 18, 2003
    Author: CBS MarketWatch - Thom Calandra's StockWatch

    SAN FRANCISCO (CBS.MW) - When long-time bullion-market participants smell something in the wind, it's time to start sniffing.

    Ian C. MacDonald remembers when the dollar was coming off the gold standard in 1971, after then-President Nixon unhinged the currency's link to bullion prices. Back then, MacDonald was just a lad starting out in the business.

    "We were in a bear market for 20 years, and I think most people in this business realize that's changed," MacDonald, who has traded precious metals most of his adult life, tells me from New York City. "I think $400 is in the cards between now and the end of the year."

    MacDonald, 55, has made precious metals trading a career, one that has served him well in good gold times and bad. He heads the Global Precious Metals Department in New York for Commerzbank Securities. The British-born trader managed precious metals for Credit Suisse First Boston for 17 years, and he set up the firm's New York City operation in 1982.

    MacDonald's confidence in a second-half gold rally for 2003 comes as Wall Street's technical, commodity and equity analysts make a broad case for the metal's near-term prospects.

    In recent weeks, analysts from investment banks including Morgan Stanley and Merrill Lynch, as well as market timers such as Woody Dorsey and a broad range of commodity analysts, are harping about a rally for the metal, which Monday stood at $360 an ounce, down from a $390 high in early February.

    In addition, natural resource fund managers are said to be chomping at the bit to boost their holdings of gold, copper, silver and platinum mining companies. The precious metals and base-metals mining sectors have outperformed nearly all equity gainers in the past six weeks.

    "I think most of the smart people in the fund management business realize they need a way to grow their assets without depending entirely on technology stocks," says Robert Friedland, founder and chairman of several natural resource companies, including gold and copper miner Ivanhoe Mines (IVN) and energy company Ivanhoe Energy (IVAN).

    Friedland's holdings have appreciated sharply this summer as demand for resource exploration companies dovetails with decreasing supplies of everything from natural gas in North America to copper and gold in China.

    What's more, some central banks, notably China's, are increasing their reserve holdings of gold as they distance themselves from the ailing American dollar. "Just go long everything China is short of" says Friedland, whose Ivanhoe Mines intends to sell copper, and gold, to China manufacturers from its developing Mongolia mine.

    If the People's Bank of China is to keep its slice of gold holdings in a swelling foreign-reserves account at 2.4 percent of the total,estimates Merrill Lynch in a just-released report, the central bank must increase gold holdings by 120 tons. "This represents 60 percent of gold consumption in China during 2002," says Merrill Lynch's Marvin Wong in his report from Hong Kong.

    MacDonald, in his daily supervision of Commerzbank's bullion trading, sees a big difference in market psychology these days. Buyers are not as lackadaisical as they once were.

    "The psychology has changed," says the trader, picking up on a trend voiced to me by several influential commodities buyers this summer. "Two years ago it was price sensitive. Buyers would reduce their price levels because they always knew central banks, not only were selling their gold, they were pre-announcing when they would sell it."

    "Remember, before Sept. 11 (2001) the market was showing signs of wanting to bottom out. Now, the main dynamic is that we are not, repeat not, seeing new mine production come out of the market," says MacDonald, who talks each day with fund managers, central bankers and the mining executives who are desperate to increase their withering gold reserves.

    "Environmental permits are making it harder and harder even, in places like South America. We are discovering ore bodies but, the chances of bringing them online in the next five years is unlikely," he says. South Africa is another good example. Twenty years ago, the country was producing 700 tons of gold a year. Not that's down to 350 tons.

    In addition, the world's largest central banks, in a five-year pact, had agreed to limit their sales of gold to about 400 tons per year. "But most of the banks have sold their allocations. And we have a lot of producer de-hedging, which creates even more demand. The end result is that during the past year or so, we haven't seen a lot of selling into these gold rallies," he says.

    MacDonald also likes the demand side of the equation. In the past two weeks, several top executives, including Newmont Mining President Pierre Lassonde (NEM) in an Australia speech, have pointed to a growing number of Middle Eastern buyers.

    "In the Middle East we are seeing a lot of diversification into gold. Demand in Turkey has doubled. People living in the Middle East have a view totally opposite to you and me. We now have a bigger split between east and west in terms of political views. There are countries that truly believe the U.S. is going to invade them, so people are tending to move into gold rather than dollars," MacDonald says.

    On the trading floor, market specialists now realize that buyers aren't just buying the metal for the sake of a quick trade. "The buyers really want the gold, and this has been very hard for the industry to accept after years of soft prices," he says.

    MacDonald tends to believe the securitization of gold - enabling people
    to own the metal via stock-market trades - will increase demand. As reported here 10 days ago a much-ballyhooed proposal for a New York Stock Exchange -traded gold fund is unraveling. The fund's sponsor, the World Gold Council, is now shifting its attention elsewhere, to stock exchanges in Europe, South Africa and Canada. See:A version of paper gold faces hard times.

    The gold council's inability to launch a NYSE product this summer is almost certain to benefit existing closed-end funds that allow investors to own actual gold via stock exchanges, including Central Fund of Canada (CEF) and Central Gold-Trust (GTUUN). The council, a trade group, almost surely will be facing huffy, or at least puzzled, members at its yearly gathering, a meeting that is scheduled for late September and coincides with the executive-filled Denver Gold Forum.

    On a brighter note, MacDonald says several other metals, in addition to gold, will benefit their owners, including platinum and silver. Platinum's price Monday was flirting with $700 an ounce. "The thing with platinum is that it is a very thin market, and it has a unique habit of overreacting."
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