God bless Thom Calandra, who, almost alone in the financial media, gets it

WALLOPED DOLLAR TO ACCELERATE GOLD

By Thom Calandra
CBSMarketWatch.com
May 10, 2002

SAN FRANCISCO (CBS.MW) -- The possession of gold,
Thomas Bailey Aldridge once said, has ruined fewer
men than the lack of it.

This column isn't about Aldridge, the American short-story
writer who quit school at age 13 to write for 19th-century
magazines. I just put it there so you can turn away from this
column now if you don't want to hear my view of markets
in coming years -- a view that essentially is the gold story
with some dollar-trimming and a swollen current account
deficit for good measure.

A month from now, a year from now, five years from now
-- you choose the timing, because I won't -- the price of an
ounce of gold will be three to six times what it is now. By
then, the world's money flows will have stopped way
short of the fiber-optic fork in the ocean that leads to New
York.

By then, the euro will be worth a ton more than 91 cents.
So will the Canadian dollar and the Australian dollar. By
then, overseas investors long will have stopped hoarding
U.S. securities in their digitized central banks or their
frosted chalets. (As I write this, the flow of fur-ner money
into dollar-denominated assets is falling sharply, to well
less than half the average monthly flow of $44 billion we
saw last year.)

The world's battered economies, the ones that rely on
metals and other natural resources for their livelihoods,
like Ghana, Australia, South Africa, Chile, Canada, even
Russia, will be less battered. We'll be seeing more folk
heroes from the top bullion producers, like South Africa's
Nelson Mandela this week, ringing the bell at the New
York Stock Exchange, or listing on the Toronto Stock
Exchange.

Gold Fields' Chris Thompson presents the bullish story
for bullion.

By then, the paper wealth that is the industrialized world's
stock and trade will be more paper and less wealth.
America's current account deficit, the best way to judge
this country's money flows, already will have surpassed
an annualized $450 billion. (See definition below of the
ticking time bomb called the current account deficit.)

There are some who believe that when the red ink in
the U.S. current account surpasses 5 percent of gross
domestic product, all heck will break loose in financial
markets. Stephen Roach at Morgan Stanley is on
record saying a quot;hard landingquot; for the dollar, and with
it the boatloads of U.S.-linked securities in foreign
portfolios, may be inevitable. quot;A crisis of confidence
is not inconceivable,quot; Roach writes. (Six or nine
months from now, you can go back to Roach's report
and long for the good old days, when a euro was worth
just 91 cents.)

I submit that with that swollen account deficit and the
dollar's decline will come (has come and is coming) an
explosive move up in the price of gold. The $310 metal,
up almost 20 percent this year, one day will sell for a price
that reflects a cascading American balance sheet. With
U.S. households living off their spree of credit-card and
mortgage debt, the perpetual stock market and housing
market bubbles in this country, and in most of the world's
major cities, will hiss, hiss, hiss.

In coming weeks, I hope to bring you several high-profile
money managers and (of course) mining executives who
state better than I do the case for, as Tocqueville Gold
Fund (TGLDX) manager John Hathaway put it to me,
quot;a big numberquot; for the gold price. Whether that big number
comes from a sinking dollar, or the $63 billion of gold
derivatives on the books of U.S. banks and trust
companies (as of Dec. 31), or creeping inflation, shocking
deflation or, Lord help us, bigger and more deadly
exploding mailboxes, remains to be seen.

Ian McAvity, the longtime newsletter editor whose
Deliberation on World Markets provides in my view
some of the hardest-to-find historical charts, money
flows and hard data on international gold mining equities
and gold and silver bullion, says the gold-price trigger
may be days or weeks away.

McAvity, who keeps paper files of every chart, stat and
mining press release, stretching back 25 years, points
to a pending rush by hedged gold miners to reduce the
amount of gold they are forward-selling. As Gold Fields
Ltd.'s (GFI) top executives, Chris Thompson and Ian
Cockerill, put it this week from New York, the
forward-sale of gold is a source of supply in a falling
gold market, spurred by bullion banks and central banks
lending their gold reserves. But in the current market,
where gold relentlessly sets new highs, the scramble
to close forward-sale contracts -- to de-hedge and go
to the spot market for bullion -- is a source of potent
demand in a rising gold market.

South Africa's Gold Fields and several other large
miners, such as Newmont Mining (NEM), have virtually
no hedged sales of gold. In other words, they sell an
ounce of gold for whatever it sells for in the spot market.

Andy Smith, the London-based precious metals analyst
at Mitsui amp; Co. whose work in this field sets him apart
from most Wall Street gold analysts, estimates there
are 3,000 tonnes of gold on mining companies' hedge
books. quot;In Q1 2002, (South African) Anglogold (AU)
disarmed its hedge book by 1.7 million ounces, some
20 percent more than quarterly output, implying about
0.3 million ounces of buy backs on top of deliveries into
hedge positions,quot; Smith notes. quot;Anglogold's hedge
was defused another 0.65 million ounces in April. In fact,
this de-hedging in Q1 exceeded (gold) imports into
Japan . . . by almost 30 percent.quot;

McAvity up there in Toronto on Friday told me a story,
complete with charts and press releases from long ago,
to illustrate how powerful the rush to de-hedge can be in
a rising gold market. In May 1993, a company called
Lac Minerals, now operated by Barrick Gold (ABX),
announced they had decreased their hedge book to
85,000 ounces from 585,000 ounces. The company said
it was doing so quot;to take advantage of rising gold prices.quot;
The average price they achieved on their remaining
85,000 ounces of hedged gold was $333 an ounce.

When the announcement hit the wires that day in May
1993, McAvity coined what came to be known as the
quot;Lac gap.quot; The price of gold gapped up to first $363
an ounce, then higher and higher. By summer, the
price would reach $407 an ounce, not bad for a metal
that began the year at $328.

quot;History certainly won't repeat itself precisely, but a look
back at the surge in 1993 may add some perspective
to what I believe is going on now,quot; says McAvity.

On Friday spot gold's price just after midday was up $2
to $311.30. Gold mining equities in Canada and New York
were trading erratically, approaching their highest points
since October 1999. Gold mining indexes, as measured
by the Amex Gold Bugs Index (HUI) and the Philadelphia
XAU (XAU), were last up 1.2 percent for the day.