Gold's Bull Run Is Embryonic

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    Wednesday May 15, 2:46 pm Eastern Time

    Newmont President Says Gold In Early Stages Of Bull Market

    DENVER -(Dow Jones)- Newmont Mining Corp.

    "NEM President Pierre Lassonde said Wednesday that supply-and-demand forces will cause the price of gold to keep rising for many years.

    Previewing a presentation he will make at a Merrill Lynch conference in Boston Thursday, Lassonde said the recent rise in gold prices to above $300 an ounce isjust the beginning of a long-term rise.

    "I think we're in the early stages of a bull market that will last many years. I don't think this is a flash in the pan whatsoever," Lassonde said.

    On the supply side, the low gold prices of the last five years have curtailed exploration and development of new projects, said Lassonde.

    For that reason, he expects 2% to 4% less gold to be produced per year for the next five years. Currently, about 80 million ounces a year is produced worldwide.
    All the large companies, including Newmont, have cut back their budgets, and the smaller companies haven't had access to money for several years, he said.

    The current price of gold, at about $307 an ounce, is not enough to entice more exploration and development, Lassonde said.

    Because of the long lead times of seven to eight years for getting a gold mine up and running, prices need to go "quite a bit higher" to translate to a boost in production, he said.

    On the demand side, Lassonde stressed that a reversal of hedging trends will work in favor of a rising price.

    Gold producers have borrowed 4,000 metric tons of gold from central banks over the last 10 years, he said. Now those producers are paying back more than they're borrowing.

    Forward selling of production is not as attractive as it once was because of low interest rates. In a typical situation, a broker will borrow gold bullion from a central bank at, say, a 1% lease rate, sell the gold on the market, and park the proceeds in an interest-bearing account at 4% to 5%.

    That spread between the gold lease rate and interest rate enables the broker to pay a higher price to a producer of gold for future delivery than the current spot price. When it comes time to pay back the central bank, the broker receives delivery of the gold from the producer and pays back the central bank.

    With a lower difference between the gold lease rate and the interest rate, central bank borrowing is less appealing and hedging of future production is less pronounced.

    In 2002, Lassonde said, the net payback (after borrowings are subtracted) to central banks will be 350 metric tons. He figures that the price elasticity of gold is $5 an ounce per 100 metric tons of gold per year, so the net payback of 350 metric tons from production should translate to an increase in the gold price of $17.50 an ounce.

    In 2001, the net payback to central banks was a negative 75 metric tons, he said. In 1999, hedging resulted in the dumping of 500 metric tons of central bank borrowings on the market, he said, and that can be directly correlated with the $25 drop in the gold price at the time, from $275 an ounce to $250 an ounce.

    Lassonde also foresees a weaker dollar helping the dollar-denominated gold price. For example, he said, a stronger dollar hurt the gold price between 1980 and 1985, during which the gold price dropped from $800 an ounce to $300 an ounce. But when the dollar weakened by 33% versus a basket of currencies between 1985 and 1987, the price of gold partially rebounded, to $500 from $300, he said.

    If the dollar falls 20% versus other currencies, then "odds are that gold's going to go up 20%," he said. And because of trade deficits and other reasons, he thinks the dollar is on the brink of weakening.
    Some analysts say that demand for jewelry - which accounts for a large percentage of gold consumption - will decline if prices rise too much, therefore setting a self-regulating cap on gold prices.

    But Lassonde said jewelry demand acts as a floor on prices, since demand increases when prices are low. But it doesn't serve as a cap on prices, he said, because investment demand, not jewelry demand, drives gold prices on the upside, and investors tend to flock to gold when prices are rising.

    Lassonde also isn't concerned about the selling of gold by central banks. He thinks the primary European central banks will extend their 1999 agreement that limits sales to 400 metric tons of gold a year through 2004 into the future.

    If the gold price does continue to rise, Lassonde argues that Newmont, the world's largest gold producer, is well-positioned because of its low hedging position and high leverage of profitability to an increasing gold price."

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