Gotcha, Gold Cartel, gotcha!

Section:

By Thom Calandra
www.CBSMarketWatch.com
September 27, 2001
http://www.marketwatch.com/news/story.asp?print=1&guid=72F7EB78-4A85-
4152-8695-38927719ECA7&siteid=yhoo

NEW YORK (CBS.MW) -- Andy Smith, a veteran London-based
metals analyst, sees the price of gold hitting $340 an
ounce in the next several months.

If Smith, at Mitsui Global Precious Metals, is correct,
it would mark the first time since June 1997 that gold
had been as high as the mid-$300 range.

"I'm not a loose cannon," Smith said from London, where
he has covered metals -- and been mostly negative on
gold -- for 14 years. "Gold is clearly on death's door
with the lack of interest, but these are not normal
times."

Smith's call for a higher metal comes amid Wall Street
and European signs that professionals may be ready to
change their tune about the battered metal, which is
attempting to break the $300-an-ounce level. The price
of an ounce of gold in the spot market Thursday was
little changed at about $290 in New York.

Smith says he has noted increased buying of gold coins
in London in the wake of the Sept. 11 terrorist
attacks. There have been scattered reports of increased
buying of Swiss gold bars as well, he said Thursday.

On the equity front, bullion analyst John Reade at UBS
Warburg in London has been talking up the metal in
recent days, according to several sources, including
Bill Murphy, founder of rabidly pro-gold Web site
LeMetropoleCafe.com. Reade's comments may have
convinced UBS equity analyst Brian MacArthur to revise
his rating on Newmont Mining this week to a "buy" from
a "hold."

The investment bank also raised its gold-price target
to a year-end $293 from $270 as the metal commands more
of a risk premium after the Sept. 11 terrorist attacks
on American soil.

Large U.S. mutual funds, some 90 percent of them with
negative returns this year, are showing more of a
willingness to increase their weighting of gold mining
stocks, such as Newmont and Homestake Mining, profile),
in their portfolios. The Vanguard Precious Metals Fund,
for instance, now includes seven gold miners in its top
10, as of Aug. 31. Earlier this year the fund had just
three gold mining stocks in its top 10 and relied
instead on platinum, platinum and diamond producers.

Smith's comments, sent to Mitsui's institutional
clients in the past several days, are already turning
heads in the gold trade.

"Andy is a very visible and well known professional in
the gold financial markets," said Cheryl Martin, vice
president of North American investor relations for Gold
Fields Ltd. of South Africa, the third-largest gold
producer in the world. "Smith has been a consistent
bear as the central banks continued selling into the
existing gold price weakness. To have him change his
outlook, so drastically, is a definite indicator to all
of us in this business," Martin said Thursday.

Ross Norman at TheBullionDesk.com in London said it was
"rather shocking to see Andy in the bulls' camp."

Next week, top executives from Gold Fields, profile),
Newmont, Homestake, Barrick Gold, and several dozen
other large producers will meet at the Investment Forum
gathering of metals executives in Denver. The event,
sponsored by The Denver Gold Group, brings fund
managers together with executives and bankers. They are
sure to be discussing Smith's comments.

At Mitsui, Smith said in an interview there's been very
little reason for him to talk up gold's case in the
past decade. Before Mitsui, Smith worked for 11 years
at UBS in London. During much of that time gold prices
have been declining as investment demand for the metal
shriveled.

Smith points out that large holders of gold contracts
on the Comex in New York held a net long position of
just 91 tons of the metal -- which he called "modest"
against a backdrop of global financial flows that
surpass trillions of dollars a day in currency, equity
and bond markets.

"Gold has long stopped competing with the Swiss franc
and other investments," Smith said. "But it doesn't
have to compete in that league. All it needs now is one
or two (hedge) funds that are willing to earn some good
returns."

He points to the Tiger hedge funds, which spent years
building up the case -- and their position -- in
palladium, which has benefited in recent years from
Russian supply problems. "Over a three-year period they
built positions in palladium futures, options, even
(reputedly) equity, and established physical deals with
suppliers and end users," Smith points out. "Illiquid,
boring, work-a-day palladium was metamorphosed from
under $100 in 1996 to $1,100 (an ounce), after Tiger
had closed its positions, in February this year."

Gold, Smith says, "has been relegated to a low echelon
in the investing universe." A wave of central bank
sales -- and even the unwillingness of the usually pro-
gold Swiss to recommend gold in international
portfolios -- sent the price of the safe-haven metal
earlier this year to a 12-year low.

"It is surreal that I have to argue this, since I have
been a dogged bear all my career," Smith said. The
analyst sees a temporary decline in physical demand for
the metal in places such as the United States, where
jewelry sales might be put on hold in the wake of the
terrorist attacks.

Smith, who looks at prospects for the metal and not the
gold-mining stocks, also sees barriers in the form of
ignorance by banks and individuals who have "forgotten
how to invest in gold." Yet he is confident gold will
soon break the $300 barrier, which has held in the
immediate aftermath of the terrorist attacks two weeks
ago. The last time old prices rose above $300 an ounce
was February 2000.

"I just don't underestimate the ingenuity of funds to
make money in something like gold," Smith says about
international hedge funds. After gold surpasses $340 an
ounce, in as soon as three months, individuals and
institutions are likely to jump on the "momentum"
bandwagon, he says.

Some eight years ago hedge fund manager George Soros
and Sir James Goldsmith of London, using a combination
of aggressive options contract buying, futures trading,
and equity investments, pushed gold prices above $340.
It took four years for the price of the metal to come
back down to that level, when a Federal Reserve
economics paper suggested central banks might
rationally sell all their gold.

Some 15 of the world's largest central banks now
regularly sell about 400 tons a year of gold, which is
then used by both producers and bullion banks in a
market dominated by forward sales, gold lending and
other practices that are said by industry analysts to
depress the metal's price.

Smith's comments, in a weekly report titled "A Probable
Bull," prompted other calls for higher prices. "You'd
have to be nuts not to be positive on gold in the
current environment," said Robert Bishop at Gold Mining
Stock Report in Lafayette, Calif.

"It would be easy to laugh at Andy," said John
Brimelow, a strategist at Donald & Co., a New York City
investment bank. "But the fact is that he has been at
least as good as anyone else in the past decade at
forecasting gold prices, and he is clearly a great deal
brighter than most in the field."

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Thom Calandra is Editor-in-Chief of CBS MarketWatch.