When Gold's Day Comes / The Daily Reckoning

verfasst von - Elli -, 06.05.2003, 16:39

-->When Gold's Day Comes

The Daily Reckoning

Paris, France

Tuesday, 6 May 2003

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*** Curiouser...dollar hits multi-7 year lows, economy gets
no boost...

*** Bulls still bullish...but state and local budgets cuts
are not...outsourcing IT...

*** Gold rises...mistranslations...and more!

Curiouser and curiouser.

Day by day, we watch the quiet destruction of the dollar,
the pain of it keeping us from gloating. We saw it coming,
but we suffer along with everyone else. Yesterday's lunch -
- at 71 euros for a party of three - would have cost your
editor about $62 a year ago. Now, it is close to $80.

The Canadian dollar rose to a 5-year high against the
greenback yesterday. The euro hit a new 4-year high.

Back in the Homeland, who cares?

The Bush Administration talks about protecting the dollar,
but would probably prefer to see the greenback decline in
order to boost the competitiveness of U.S. products on
world markets...while reducing America's reliance on
foreign capital.

The Fed, meanwhile, has practically guaranteed the dollar's
decline. Since dollars cost almost nothing to print, the
Fed explained to an astonished world, it could produce as
many as needed to drive the price down. [For more on the
dollar's demise, see Thomas Fisher's article on the
subject:"The Dollar's Day of Reckoning"
http://www.dailyreckoning.com/body_headline.cfm?id=3141 ]

The curious part is that while the dollar falls on
international currency markets, there is still little
evidence of a big increase in consumer price inflation back
home. Central bankers, we remind readers, do not take a
malicious joy in killing their own currencies. They do so
for practical reasons, not pure entertainment. A little
inflation deceives people, encouraging consumers to spend
money they don't really have, and re-elect politicians they
don't really like.

But scanning the headlines, we see few favorable signs:

"War's Quick End Produces No Economic Boom," concludes the
Associated Press.

"Recession Threat Still Looms," notes TheStreet.com.

"Jobs scarce for grads," adds the Chicago Tribune.

What have we become, my sweetish friends? What kind of mess
have we gotten ourselves into? Neither war nor inflation
seems to do the trick. The foreigners have gotten the
message; the dollar sinks, just as the Fed intended. But so
does the economy it hoped to rescue.

Eric, more details, please...

------------

Eric Fry on Wall Street...

- The stock market took a breather yesterday, as the Dow
slipped 51 points to 8,531. The hyperactive Nasdaq refused
to rest, gaining 1 point to 1504. The high-tech index has
rallied 35% from its closing low of 1,114 last October 9th.

- Sadly, the feeble dollar can't keep up. The greenback
tumbled another half a percent against the euro yesterday
to $1.1287 - a new four-year low. If the dollar could hold
its value for more than a day or two, we might be tempted
to dislike U.S. stocks less. But as it is, the dollar's
weakness is yet one more reason to think twice about paying
30-plus times earnings for U.S. stocks.

- The greenback is crumbling like New Hampshire's"Old Man
of the Mountain." We dollar-holders can thank the Old Man
of the Federal Reserve for speeding the dollar's selloff,
and thereby eroding the purchasing power of our
savings...No one said that"fighting deflation" would be
painless.

- But who really cares about the dollar anyway? Stocks have
been on a tear of late. In fact, the post-war rally has
been so robust and has been going on for so long now that
the Wall Street strategists - remember them? - have resumed
showing up in public during daylight hours. They have also
resumed chirping their mellifluous refrains about"second-
half earnings recoveries" and"double-digit stock market
gains for 2003."

- Tobias Levkovich, institutional equity strategist at
Smith Barney, thinks stocks are still a great value. His
2003 price target of 1,075 for the S&P 500 represents a
gain of just over 15 percent from current levels.

- The perennially bullish Richard McCabe, Merrill Lynch's
chief market analyst, remains as perennially bullish as
ever. He's looking for a"major recovery or cyclical bull
market," which, we assume, will be even bigger and better
than the various"major recoveries" and"bull markets" he
has anticipated since 2000.

- Kevin Marder, chief market strategist at Ladenburg
Thalmann Asset Management is also - yawn - bullish. He says
that the Nasdaq came under"major accumulation" on two
different days last week...That's just gotta be bullish,
right?

- Meanwhile, out on Main Street, the only items under
"major accumulation" are pink slips. Outplacement firm
Challenger Gray & Christmas reports that announced job cuts
surged 71% in April from March's levels due to a surge of
layoffs in the public sector.

- Apparently, the budget crunch at state and local
governments is starting to take its toll on the job market.
As we've noted previously, the state governments will
likely come up about $70 to $80 billion short this year. So
it should come as little surprise that they might trim a
few jobs.

-"While it doesn't get all that much attention," Barron's
recently noted,"the state-and-local sector accounts for
12% of GDP and 15% of this fair nation's total employment.
That's more than either manufacturing or tech can lay claim
to. And it's one of the few sectors that had been growing.
Since the start of the recession, Stephanie [Pomboy, editor
of Macro Mavens] relates, states and locals added $85
billion to GDP and 300,000 jobs, helping to cushion the
$140 billion shrinkage in capital investment and the loss
of 2 million jobs suffered by the general economy during
this stretch. But things have changed, bigtime and for the
worse. The spur is fast becoming a serious drag."

- And the private sector is unlikely to pick up the slack.
"The sharp increase in job cuts last month should serve as
a warning that it is premature to conclude that the quick
end to the war in Iraq will bring a quick turnaround in the
economy and job market," said John Challenger, chief
executive officer of the firm that bears his name.

- Emblematic of the tight labor market, technology jobs are
becoming increasingly scarce. The Associated Press reports:
"Demand for information technology positions ranging from
software programmers to network engineers will hold steady
or decline in the next 12 months, according to a telephone
poll of 400 hiring managers by the Arlington, Va.-based
Information Technology Association of America.

-"The survey found there are about 493,000 unfilled
technology jobs in the United States, down from 1.6 million
open positions at the start of 2000...The tight market for
technology jobs comes as hundreds of American companies
outsource positions to smaller engineering and programming
firms in India, China, Russia and other countries with
inexpensive labor forces."

- Week by week, the economy shakes loose hundreds of
thousands of jobs, like a dog scratching off fleas...So if
you're trudging through the stock market looking for
capital gains, don't look for any help from an improving
labor market...that dog don't hunt.

------------

Bill Bonner, back in Paris...

*** Gold rose $1.30 yesterday. No comment. (At least from
me...my friend Dr. Steve Sjuggerud has a few tips for the
novice gold investor, below...).

*** What really happens when an Islamic terrorist blows
himself up? Does he really go to heaven and pass his time
in the company of"big-eyed virgins?" Or is the promise as
empty as a campaign pledge?

Of course, we don't know more than anyone else...for that
is the borne from which no travelers return. And we
wouldn't have given the matter any thought at all had not
Le Monde brought it up in this morning's edition. It seems
a German philologist, Christoph Luxenberg, has been
retranslating the Koran. The work is not as straightforward
as one might imagine, because it is not clear what dialect
of Arabian it was written in. There were several. And the
ancient Arab texts had no written vowels, which greatly
increases the odds of getting something wrong. Luxenberg
used a form of arabo-syriac for his translation and came up
with very different results from the standard readings.

Instead of"big-eyed virgins," the suicide bombers may end
up with"fruit as white as crystal." More important,
Luxenberg says his translation shows that the Koran was
intended as a selection of readings, meant to help explain
the Bible, not to replace it.

***"Dad, I know what I want to do now," said Maria
yesterday.

For the last 2 years, Maria has been home-schooled so that
she could pursue a career as a model. Despite working at it
diligently - she does 4 or 5 castings every day and has
gotten a few very nice jobs - modeling no longer has the
appeal it once did. Maria has spent too many hours standing
in line...or waiting around for someone to take her
photo...or doing whatever it is that models do. She's
getting neither rich nor famous. And so, the poor girl has
been agonizing over her future. Maybe it is because she has
so much of it to worry about.

"Modeling is just not what people think," she went on."I
feel like I'm wasting my time. I think I'd rather go to a
theater school."

At 17, she is making a career change.

---------------------

The Daily Reckoning PRESENTS: Gold's resurgence has brought
a lot of newcomers to the table. If you are one, a few tips
on playing the game are in order, compliments of True
Wealth's Steve Sjuggerud.


WHEN GOLD'S DAY COMES
By Dr. Steve Sjuggerud

Somehow, the U.S. has ended up with two major gold-stock
indices. But unlike the Dow Jones Industrial Average and
the S&P 500 Index, which have shown similar returns on the
overall stock market for nearly 80 years, the gold indices
just can't seem to agree...

One is up about 100% since the beginning of 2002, while the
other is up only 20%. What's going on? Why should we even
care?

The explanation of the strange behavior of the two gold-
stock indices is your introduction to the market for gold
stocks, where you can make a bundle or lose it all,
depending on whether you make the right moves.

We should care about gold because there are few industries
out there as hated as gold mining right now...and this
means that when the turn in gold-mining stocks finally does
come, the rewards could be truly extraordinary.

Now is not the time to buy gold-mining stocks, but the time
is getting close. Once we see the"important" gold-mining
index start an undeniable uptrend, it will be time to
buy...

But which gold index is the"important" one? The two major
U.S. indices are the"XAU" Index and the"Gold BUGS Index."
Each is distinguished by the stocks that make up the
respective indices.

The XAU is actually the Philadelphia Stock Exchange Gold
and Silver Stock Index. It's a way to take the pulse of
generic mining stocks. It has been around since 1983, and
it's the industry standard.

The Gold BUGS index is not an index of generic mining
stocks. It is specifically a gold index, and will
specifically contain only"non-hedged" gold mining
companies - those that are fully exposed to the price of
gold, for better or worse.

This is where the important difference between the two
indices lies. The largest two stocks in the XAU Index are
Barrick Gold and AngloGold. Yes, these are two of the
world's largest gold-mining companies. But they also
significantly"hedge" their bets - putting themselves in a
position where a significant increase in the price of gold
above a certain price may not necessarily benefit their
business.

Barrick has hedged about $6 billion of future gold
production at $341 an ounce. AngloGold has 9 million ounces
hedged - closer to $3 billion.

Hedging may be a prudent business decision. It's helped
smooth out the losses for Barrick in a down gold market.
Barrick states,"Between 1991 and 2002, Barrick's forward
sales program [its hedging] allowed the company to secure
an average premium of $67 per ounce on the 32.6 million
ounces of gold we sold, generating additional revenue of
$2.2 billion. Barrick's forward-sales program eliminates
one of the biggest risk factors facing our business [the
price of gold]. By managing this risk, Barrick can expand
its asset base, increase its mineral reserves and
production, and, most importantly, generate predictable
returns for our gold sales."

Unfortunately, when the market is roaring higher, a hedging
program will also smooth the profits out in an up market -
meaning the gold companies that have hedged their bets will
not make nearly as much money as those that aren't hedged.

As an investor looking to get the most bang for your buck
out of gold, hedged gold stocks like Barrick and Anglogold
are not your best choices. Yet these two stocks make up
about 45% of the XAU Index - the inferior index. I consider
the Amex Gold BUGS index (symbol ^HUI) a much better index
to track...

The Amex Gold BUGS Index (the"BUGS" part actually is an
acronym for Basket of Unhedged Gold Stocks) is much younger
than the XAU Index, having started in 1996. It is a better
gauge for how gold shares are acting in relation to the
price of gold. The two major stocks in this index are
Newmont Mining (NEM) and Goldcorp (GG).

When you consider the fact that Newmont, the world's #1
gold miner, only has a market value of $1.3 billion, you
can see that the world of gold-mining is incredibly tiny.
If you added up the value of every gold mining stock on the
planet (roughly 2,000 companies), it would only come up to
about half of what the tech stock Cisco trades for...

When gold's day comes, an unhedged gold stock like Newmont
could do extraordinarily well. Remember, the company is
only valued at $1.3 billion. But get this: It has $419
million in cash! So the value of"the business" is closer
to a tiny $880 million. This is a company with gold
reserves of 87 million ounces - with a current value of
nearly $30 billion dollars! Using Newmont as an example,
the downside should be limited, due to its gold hoard in
the ground. Yet the upside potential could be huge.

You can use the standard analysis tools to analyze gold
companies, as long as you compliment your analysis with
some scrutiny of their gold. With gold companies, you must
also consider the cost per ounce of production and the
state of gold reserves themselves. Cash costs of production
at Newmont, for example, are expected to be around $200 an
ounce in 2003. So gold, at $335, is nicely profitable.
Reserves, again, are 87 million ounces.

The websites of Newmont, Barrick and AngloGold spell out
all the details in their"analyst" and"investor relations"
sections, including their hedging activity, their reserves,
their costs per ounce, and more. Online, go to
www.newmont.com, www.barrick.com, and www.anglogold.com,
respectively.

Before investing in gold shares, start with these three
websites to get your feet wet and gain an understanding of
their businesses.

Then, when the time is right - when we see a clear uptrend
in the Amex Gold BUGS Index - you may want to consider
investing in an unhedged gold producer, like Newmont,
Goldcorp, Kinross or another member of the Gold BUGS index.


Sincerely,

Steve Sjuggerud, PhD.
for The Daily Reckoning

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• When Gold's Day Comes / The Daily Reckoning - - Elli -, 06.05.2003, 16:39