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Gold Is Still Solid


By Leo Larkin After shooting to more than $380 an ounce in February amid prospects of war with Iraq, gold prices finally hit the wall on Mar. 13. The April gold contract traded on Nymex plunged more than $10, to $336 an ounce, on reports that key Iraqi military officials may surrender without a fight.

We at Standard & Poor's see further near-term declines in gold prices and shares of gold-producing companies as the war premium fades rapidly. Nevertheless, S&P remains positive on shares of gold producers. The industry's long-term fundamentals are favorable. Erratic financial market returns should boost gold's attractiveness as an alternative investment. The U.S. dollar continue to be weak vs. other major currencies, making the dollar-denominated purchase of the metal attractive to non-U.S. investors. And the gap between global demand and production should widen, despite the higher prices seen recently.

Another factor working in the metal's favor: reduced hedge sales by major producers. A sharp decline in interest rates since January, 2001, has made short-selling by producers and market speculators less profitable. Short-selling has been a major negative for gold prices in the last several years.

GLOBAL EXPLOITS Rising commodity prices, reflecting consolidation in commodity-producing industries and a recovery in global economic growth, also augur well for the yellow metal. Through Mar. 13, the Bridge Commodity Research Bureau Commodity Price Index was up 2.5%, after a 23% rise in 2002. A rebound in the global economy and large increases in U.S. money supply should lift commodity prices in 2003. And that means inflation will still be a factor for investors to contend with -- playing to gold's traditional role as a hedge against rising prices for goods and services.

Our current favorite in the industry is Newmont Gold (NEM). The world's largest gold company, considerably bulked up by its three-way merger with Normandy Mining and Franco-Nevada in February, 2002, should realize some compelling long-term benefits from the combination. Newmont has the greatest trading liquidity of the major gold producers and very low political risk, with 70% of production in North America and Australia. Having the smallest amount of gold hedged of any major producer, Newmont is well positioned to benefit from rising prices. We rank the stock 4 STARS (accumulate). Its lofty p-e multiple, however, holds us back from assigning it 5 STARS (buy).

Among other leading stocks in the group, we have a 4 STARS ranking on Barrick Gold (ABX). It has been trimming its hedging activities, which makes it more attractive in a strong gold price environment. Like Newmont, the stock has a high p-e multiple. We're less positive on Placer Dome (PDG), which carries a 3-STAR (hold) recommendation. Analyst Larkin follows stocks of gold producers for Standard & Poor's


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