Will gold''s breakout pick up momentum?

Global Investing:
Believe it or not, gold is not all that glisters

By John Dizard
Financial Times
September 15, 2003

There is something very wrong about a financial
conference where the journalists are better dressed
and groomed than the participants. Such was the
case at the New York Institutional Gold Conference
a week ago. Actually, there was one attendee better
turned out than I. It turned out he had just come from
plea bargaining down a felony charge.

A couple of decades of losses have left the remaining
goldbugs looking quite worn. However, they were in a
good, not to say smug, mood last week. After all, spot
gold has gone from $345 the ounce in July to some
$380 by the end of last week. For this crowd, the rise
in value was not as important as the chance to grab
their neighbours' lapels to say quot;I told you so.quot;

Furthermore, they had someone on hand to confirm
they were right -- sort of. Jim Rogers, the investor,
commentator, and biker, showed up in his trademark
blue blazer and bow tie to talk about commodities
inflation. The difference between Mr. Rogers and many
of the people in the room is that he knows when to sell
as well as buy. That's why he still has the money to go
on round-the-world safaris with his new bride.

The goldbugs gobbled up the raw meat in Mr. Rogers'
speech, but ignored the vegetables.

quot;Take all your money and put it into commodities,quot; he
exhorted, and their eyes gleamed. A few years ago Mr.
Rogers started a commodities index fund, which he
was not actually selling at the conference. Since the
index's inception in 1998, it has risen by 107 percent,
a considerably better performance than U.S. equities
over the same period.

However, the goldbugs started to snooze when Mr.
Rogers compared gold with other commodities. quot;You
should buy the ones that haven't moved, like coffee,
soybeans, or sugar,quot; he said, as eyes glazed over.
quot;Everybody here is bullish on gold, and there are a
lot of gold mystics. Hey, this isn't a soyabean
conference. Remember that gold production never
went down, and the central banks all have a lot of gold
they want to sell.quot;

Along with Mr. Rogers' admonitions about the macro
case for gold relative to other commodities, there are
some specific reasons the gold bull market may be
about to pause while general inflation gathers speed,
as I believe it will.

There can be little doubt that much of the gold buying
over the summer has been gold mining companies
reducing their hedges. Many gold mines, remember,
have sought to damp the volatility of their earnings by
selling short some gold in the derivatives markets to
offset their naturally long position in the metal.

However, many investors do not like this practice, as
it dilutes the earnings impact of a rising gold price. So
gold mining executives have been reducing their gold
short sales as the price rises, in effect doubling up on
their bets. In the commodities business, we refer to
this as a quot;Texas hedgequot;.

There may be an announcement of a big de-hedging
programme by a leading gold mining company at the
Denver mining conference that starts on September 24.
I am not able to name names (such as, say, Barrick),
but that's the talk in the gold derivatives world. I think
that move would help mark a temporary top in the gold
rally. It is going to take a while to find enough new
buyers to replace those miners who have finished
reducing their hedge books.

Shortly thereafter, more financial institutions will
announce that the summer sell-off in the bond market
has seriously affected their earnings. However, the
forced sales of bonds by mortgage securities holders
are over, which means there will probably be a better
bid for the Treasury curve for a while.

Still, there are too many indications that inflation is
beginning to take off -- though not to 1970s levels.
That is what the market is telling us through the rise
in the value of inflation-indexed bonds relative to the
quot;nominalquot; or unindexed, government bonds.
Furthermore, what had been a commodities bull
market denominated in dollars has become a
commodities bull market in all the major currencies.

Susan Sterne, the eminent consumer economist and
whisperer into the ears of Fed presidents and board
members, believes inflation is understated in the
U.S. by at least 40 basis points. quot;Remember the
hedonic adjustments to the consumer price index,quot;
she says. The quot;hedonic adjustmentsquot; are the
government's reductions in price rise measures to
account for improved quality. According to Ms.
Sterne's measurements, these fudges are made to
some 30 percent of the consumer price index. Many
of the hedonic adjustments were started after 1999,
so we have had several years of understated inflation.

Even after a sell-off on the completion of the mine
de-hedging, gold will probably rise again. However,
it might not rise as much as more mundane
commodities, such as those soyabeans, or copper.
Somehow, though, these don't inspire a quasi-religious
mania in many small investors.

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