House committee needs to hear from you in support of Paul''s gold legislation

By Thom Calandra, Editor
CBS.MarketWatch.com
Friday, July 5, 2002

Gold investors say they are more convinced than ever
their metal will resume its rally as others fall victim
to a stock-market crash later this year.

Yet believers in gold, which has rallied on the back of
Mideast and India-Pakistan turmoil and a relentless
stock market decline, say the rules have changed in
the past two weeks. Gold's spot price, once flirting with
$330 an ounce, is now near $310. The euro's failure to
reach the $1 mark -- the European currency was at 97
cents Friday -- has helped thin gold's 20 percent gain
since Jan. 2 to 15 percent.

quot;The technical damage sustained by gold and gold
shares means that playing the sector has become an
issue of market timing, not the jump-on-an-uptrend story
that has characterized the sector in the first half of
this year,quot; says Robert Bishop, editor of Gold Mining
Stock Report in California.

Bishop says the ailing stock market may provide the
next spark for gold. quot;Smart money continues to exit the
market on rallies. The loss of investor confidence in
U.S. companies is being accompanied by questions
about the basic integrity of our financial markets,quot; says
Bishop, who forecast a Fourth of July rally for the stock
market several days ago.

The price of gold, and gold stocks, is becoming more
tied to the health, or maladies, of the stock market, and
less tied to the dollar and international events, say
gold's supporters.

quot;Somewhere above the $340/$360 range, I expect to
see a one-day jump of $20 to $25,quot; says Ian McAvity, a
longtime gold investor and editor of the Toronto
newsletter Deliberations on World Markets. quot;It may
coincide with the Dow well south of 8,000.quot;

In trading one day last week, gold's price rose $5 an
ounce in the early New York hours as the Dow Jones
Industrial Average fell 200 points. Yet as John Doody,
editor of Gold Stock Analyst, points out, the gold rally
was short-lived. quot;By day's end, the positions had
reversed as a result of obvious but unannounced
government intervention in the stock and gold
markets,quot; said Doody, considered one of the most
exhaustive sources on gold's price movements.

Doody and dozens of other newsletter writers are
pointing increasingly to what they see as weakness in
gold that is tied to yen-selling by the three big central
banks: the U.S. Federal Reserve, the Bank of Japan,
and the European Central Bank. Others say commercial
banks are short-selling gold to depress the bullion rally.

In this year's first three months, quot;the big New York banks
that play this market, Chase/Morgan (JPM) and Citbank
(C), increased their gold derivative books from $48.9
billion to $56.5 billion, a 15.5 percent increase since the
start of the year,quot; Doody reported in his newsletter. The
U.S. Office of the Comptroller of the Currency tracks
options, futures, swaps, and other contracts sold by
commercial banks as derivative products. quot;Whether the
banks' derivative position increased due to Delta hedging
to maintain a neutral exposure, or due to shorting the metal
to try and jam the genie back in the bottle, we don't know,quot;
Doody says.

To be sure, summertime gold prices almost always feel
the effects of gravity because of reduced buying of jewelry
in the July-through-September period. This is most
pronounced in India and other Asian countries where the
metal is revered. India, the largest consumer market for
gold, experiences its monsoon season starting in July and
has no major festivals that would spark gold purchases
during the summer months.

Few gold analysts see a decision by Vanguard to close
its $700 million Precious Metals Fund to new investors as a
sign Wall Street is ready to embrace gold mining stocks.
All gold mutual funds have led the performance charts this
year, some with 50 percent and greater gains. The gold
mutual funds benefited from a rally in gold mining stocks
of all sizes, from the large, such as Newmont Mining (NEM),
to the small, such as Goldcorp (GG).

The Vanguard Precious Metals Fund (VGPMX) said the
fund's quot;strong performance against the backdrop of weak
stock market returns has attracted substantial cash inflows,
which has raised our concerns about investor time horizons
and expectations.quot; The fund is up about 28 percent this year.
Through the end of May, the gain was much larger: 50.7
percent.

Mutual funds often shut their inflow valves when investors
most want to own their particular sector. The Vanguard fund
drew in $124 million in new cash during the first five months
of 2002 against $400,000 in net new cash flow for all of 2001.

In the case of gold mining stocks, inflows are especially
worrisome because the combined market capitalization of
major gold mining stocks -- about $35 billion -- is a drop in the
bucket compared with the overall stock market. The amount
is considered so tiny that gold stocks have yet to qualify for
an exchange-traded fund that would allow investors to trade
the sector in the form of one security, like is done with the
Nasdaq 100 (QQQ), the Samp;P 500 Index and dozens of
industries, from drugs to banks.

The World Gold Council, which sponsors gold-denominated
bonds, is working on plans for an exchange-traded fund for
the actual metal. If the council, a trade group, succeeds in
navigating regulatory waters, investors would be able to buy
gold in the shape of a security at any time during the U.S.
market day.

Bishop, the newsletter editor of Gold Mining Stock Report,
predicts mutual funds, as they seek to put the checks that
gold-seeking investors are sending them this year,
increasingly will examine smaller mining companies as
possible investments.

quot;Gold breaking through resistance in the $330 to $340 range
could hasten the flow of funds down the food chain,quot; Bishop
tells me. quot;Two other variables are also likely to come into
play: a major gold discovery, which always delivers a ripple
effect throughout the sector; and further consolidation, with
majors and intermediates buying juniors that have the gold
reserves of tomorrow in their portfolios.quot;

Bishop says Francisco Gold Corp. in Canada is a good
example of this phenomenon. Francisco shareholders in
June approved a merger with tiny Glamis Gold Ltd., a
Nevada company. The combined companies' goal is to
produce half-a-million gold ounces a year.

quot;Over time,quot; says Bishop, quot;I expect that higher gold prices,
a major discovery, and further acquisitions of juniors will
result in junior companies being more widely owned by the
funds.quot;