Now, Some Of What Glitters May Be GoldJeffrey M. Laderman
Gold briefly hit $875 an ounce back in January, 1980, and basically it's been downhill ever since. The yellow metal has staged several rallies over the years, but none were sustainable, and they turned out to be suckers' bets. So it's not surprising that gold's runup--$26 an ounce, to nearly $353 over the past six weeks--has been greeted with skepticism. Indeed, on Apr. 28 gold retreated to $350.
But this time may be different. The market psychology is slowly turning in favor of gold. The stage is not set for $800, $500, or even $400 an ounce any time soon. For that, you would have to see a far higher rate of inflation. But gold has probably seen its lows and should remain above them. Says Robert Guy, director of N. M. Rothschild & Sons Ltd.: "I'm confident the market has bottomed out."
BOLD MOVE. Gold had been edging upward for weeks, but the price surged on Apr. 23 (chart). That's when word came that Soros Fund Management, run by superinvestor George Soros, had purchased 6.8 million shares of Newmont Mining Corp. at 39 1/2, a 7% discount to the open-market price of the stock. Soros bought the 10% stake in the Denver-based mining company from a company controlled by billionaire investor Sir James Goldsmith and a fund run by Lord Jacob Rothschild. In addition, Soros may buy another 3.2 million shares at 39 1/2, subject to Newmont's approval. The total deal comes to $395 million for 13% of Newmont.
Soros is not known to be a gold bug, so his bold move put gold--a pariah investment for years--in a new light. "George Soros took on the central banks and won," says London-based analyst Andrew Smith of the Union Bank of Switzerland, referring to last year's European-currency crisis during which Soros reportedly made $1 billion by betting against the British pound. "If he's bullish on gold, there's something here." Before Soros' purchase, notes Jeffrey A. Nichols, president of American Precious Metals Advisors, "the large-scale speculators were on the bearish side."
(The Wall Street Journal reported that Goldsmith poured more than $300 million of the proceeds into options to buy gold bullion. Goldsmith did not divulge the terms of his options. But gold analysts say he could buy options on $395 million worth of gold for less than $10 million. The idea he would spend $300 million on options that could expire worthless makes no sense, say analysts. Goldsmith could not be reached for comment.)Even before the Soros announcement, things were looking up for gold. Gold-mining shares rallied in the first quarter, even as bullion prices stayed flat. Harry Bingham, who runs the $525 million International Investors Fund, a gold mutual fund, says he first noticed the changes a few months ago when foreign institutional investors called asking to buy stocks from his portfolio. "Perceptions are changing about the economy, inflation, and gold," says Bingham. "Worldwide disinflation is coming to an end, and the next move is reflation."
Right now, the inflation argument is more speculative than real. There's just no evidence of it. But lower interest rates in the U.S. and Europe make gold more attractive, because it reduces the cost of holding the metal.
ASIAN HEDGE. The bulls' case also focuses on pure supply and demand. For several years, the market was flooded with gold from the former Soviet Union and the Middle East. Last year, central banks pounded the market, selling 17 million ounces, according to Jeffrey M. Christian, managing director of the CPM Group. He thinks the banks will still sell 14 million ounces in 1993, but since demand is up, those sales won't sink the market.
There's especially big demand for gold in the Far East, which last year absorbed about half of worldwide production. Asians buy gold to hedge against local currencies and political uncertainties. Mainland China, in particular, has been amassing gold with its increasing wealth, purchasing an estimated 400 tons last year, according to Gary Cheung, executive director of the Hong Kong-based Sun Hung Kai Forex and Bullion Co. Japanese gold purchases have been declining for years along with its price, but that could change. In yen terms, gold has never been cheaper.
Long accustomed to bear-market conditions, gold producers are not yet counting their profits. The recent move is "very encouraging," says Timothy J. Haddon, president and CEO of Amax Gold Inc., "but it's not a major event." To move into high gear, says Haddon, gold would have to move up beyond $400 an ounce. So if George Soros is betting on $400 gold, the superinvestor may wind up being sadly disappointed.