Durban reported issuing shares to close hedge book early

By Thom Calandra
www.CBS.MarketWatch.com
May 21, 2002

SAN FRANCISCO -- Gold's sharp rise is boosting the
6-year-old Gold Bugs Index of unhedged miners much
more than its larger counterpart, the 13-year-old
Philadelphia Gold and Silver Index.

In a day, as the price of spot gold surpassed $315,
the Amex Gold Bugs Index (HUI) rose 11 percent vs.
a 3.1 percent gain for gold. The Gold Bugs Index,
representing gold companies that sell their product
straight into the market without derivatives or forward
sales, has tripled in value since late 2000.

The dollar-weighted Gold Bugs Index was designed
to provide investors with a way to benefit from
near-term movements in gold prices by including
companies that do not hedge their gold production
beyond 1.5 years.

Andy Smith at Mitsui Global Precious Metals points
out that even with the high-flying gains for unhedged
gold producers, the 11-member Gold Bugs Index is
down 40 percent since its 1996 inception, about the
same over the period as the 10-member Philadelphia
XAU (XAU). This compares with a gold price that is
down 20 percent in the same span.

The Financial Times Gold Mines Index (1808281)
since January 1996 is down 30 percent but since
late 2000 is up 133 percent. Smith, who has a $355
upper price target for gold this year, says this is to
remind gold fans quot;not to lose their heads.quot; Gold mining
stocks, he says, quot;really are fat-bottomed girls.quot; In other
words, when gold heads south, mining stocks, hedged
producers or not, take a dive.

Of course, few on the mining scene are forecasting a
drop in gold's price. Dollar weakness, terrorism fears,
and Nasdaq's almost 20 percent drop this year have
sent gold's per-ounce price to its highest point since
early 2000. Indeed, skeptics who said silver, gold's
poorer cousin, was not participating in this year's gold
rally are sure to raise their eyebrows Tuesday. Silver
futures contracts rose sharply in New York, with the
active contract up to $4.84 an ounce, its highest point
since early 2001. The Silver Institute's 2002 World Silver
Survey will be released later this week.

The chief executive of gold and silver vault Central Fund
of Canada Ltd. (CEF) said deliveries of bullion, gold, and
silver, are quot;taking longerquot; as the market rally continues.
quot;Hopefully, the market does not tighten up to the point
where we can't get metal delivered in a timely fashion,quot;
Stefan Spicer told me Tuesday. Central Fund, a
closed-end fund, has 8,155 million ounces of silver and
163,027 ounces of gold in Canadian vaults. quot;We are a
proxy for silver and gold,quot; Spicer said. Central Fund
shares, traded on the AMEX in New York, hit a 52-week
high Tuesday morning.

At Mitsui, analyst Smith in London told me Tuesday the
main difference between the Gold Bugs Index and the
XAU is the presence of Barrick Gold (ABX) in the larger
Philadelphia Index. Barrick is the largest hedged mining
company and, to the dismay of gold purists, frequently
uses the so-called spot-deferred market and tricky
derivatives for selling gold in an effort to boost the prices
the Toronto company gets for bullion.

In Barrick's place in the Gold Bugs Index is Goldcorp.
(GG), which sells gold in its pure, unadulterated form.
Gold purists believe producer hedging by Barrick,
Anglogold, Placer Dome Gold, and others contributed to
excess supplies of the metal in lending circles, thus
depressing the price for much of the 1990s.

quot;The HUI/XAU play is essentially a Goldcorp. vs.
Barrick play,quot; says Smith. quot;I think they call it apples vs.
pears.quot; Goldcorp, whose shares have gained 75 percent
since Jan. 2, accounts for about 20 percent of the
weighting in the Gold Bugs Index, making it the second
heaviest stock in the index, after the far larger Newmont
Mining (NEM), which has some hedged sales of gold
after its purchase of Australia's Normandy Mining earlier
this year.

Goldcorp. is taking the further step of issuing dividends
in gold, not cash, to investors. The Canadian company
operates Red Lake Gold Mine in Ontario. Analysts regard
Red Lake as one of the richest and easiest-to-mine
deposits of gold in the world.

John Doody at Gold Stock Analyst on Tuesday said he
expects the growing red ink in the U.S. current account,
which represents capital flows into and out of the country,
to send gold prices far higher in the near future. Economists
are concerned the current account, approaching 5 percent
of America's gross domestic product, will persuade
foreigners to cash in their dollar-related investments.

quot;I see gold headed to $450. Foreigners have finally had
their fill of dollars and are now on balance selling dollars
to reinvest elsewhere,quot; said Doody, whose top 10 gold
stocks have gained 104 percent since Jan. 2. The
newsletter editor says he expects gold to reach his price
target by the end of next year.

quot;Including this one, there have been six bull markets in gold
since the U.S. stopped converting dollars from foreign central
banks into gold on Aug. 15, 1971,quot; Doody told me. quot;Four of
the six bull markets have been driven by the current account
deficit, and the smallest gain gold made was 76 percent.
Since this move started from $256 in April 2001, a 76 percent
move this time would be up to $450, and this is my target by
end of '03.quot;

Index-linked baskets for the XAU and the HUI -- which could
trade like the Nasdaq 100 QQQ and the Samp;P 500's SPY --
are not available to investors, largely because the small
stock-market value of mining companies lacks the market
capitalization requirements that would satisfy regulators.
The entire market capitalization of the XAU, known formally
as the Philadelphia Gold and Silver Index, is $45 billion at
current prices.