Gold and Silver Potpourri

July 16, 2002

In the second quarter gold funds again led the pack, up 11.11%. A distant second was real estate funds, up 4.98%. Specialty diversified equity funds were up 5.04%. The top four groups combined account for only $10 billion in assets or just over 3% of the $3.26 trillion in all equity and mixed equity funds.

The XAU was up 7.5% on 7/9/02 to close at 77.96, the largest increase since 5/2000. That index includes hedged issues. The AMEX Gold Bugs Index, HUI, which has mostly unhedged stocks, was up 8.1% to close at 136.73, the highest in a month. Silver had a giant day up 7.8 cents at $5.058. The elitists hauled out one of their trained lapdogs again, Ernst Welteke. A good way to describe Herr Welteke is gehintodt or brain dead. He has made his second announcement that he wants the option for the Bundesbank to sell some of its gold bullion after the Washington Agreement expires in 2004. By 2004 the German economy should be in collapse and such a sale would be a moot point as thousands riot in the streets. Ernst wanted to swap gold for stocks and bonds that are off 15% since his last announcement. He should get together with Tony Blair and Gordon Brown who have already lost hundreds of millions of dollars through British gold sales. Even a cretin can see that these criminals are rigging the gold market. Newmont's hedge position has attracted much discussion. In the Normandy purchase they inherited a hedge book of 7.55 million committed ounces of gold. In the first quarter they reduced the hedge book by 250,000 ounces to 7.3 million ounces, and significantly reduced the floating lease rate exposure. For the rest of the year they expect to deliver a minimum of one million committed ounces leaving their hedge position at 6.3 million ounces.

Mr. Lassonde tells us the possible appreciation of the Australian dollar, in which the hedge book is dominated, will offset a rising gold price. The Aussie dollar has already had a nice appreciation and two interest rate increases, so on the short to medium term we see it trading around its current level of 56.82 or less. On the other hand, we see a very possible increase in gold prices to $330 to $355.00 an ounce, which would be detrimental for Newmont. At the rate of hedge book liquidation it could take another six years to terminate the hedge position or by the end of 2008. We question Mr. Lassonde in regard to gold purchases or a cover spiking the gold price, in as much as Durban Deep recently covered its position. That presents the possibility, which has been undisclosed that Newmont may not easily be able to liquidate the book. In the final analysis, no matter what explanation is given, Newmont knowingly purchased Normandy and its hedge book. Newmont is hedged for the next six years by their own admission. That means in order to get Normandy's production they had to join Barrick, Placer Dome and Anglogold among others in the ranks of hedgers.

Based on these facts we would not buy Newmont -- and if we owned it we would sell it and purchase unhedged shares in *Agnico-Eagle (AEM-NYSE) AND *Goldcorp (GG-NYSE). We find this decision a simple uncomplicated one. Newmont has decided, if reluctantly, to be a hedger and should be treated accordingly. We don't get involved in popularity contests we make business decisions. We also do not believe consolidation is good for the industry. It may be good for Mr. Lassonde and Mr. Schulich but we do not believe it is necessarily good for shareholders. These are the same two gentlemen who found it distasteful to support GATA. We may see more consolidation in the industry but that does not mean its good. That may explain why Newmont is laying off geologists and farming out exploration. Considering Newmont's previous strong position against hedging we can only conclude that they vacated that position to become top banana. They may be the biggest mining company in the world, but we expect their shares to starting behaving like those of Barrick and Placer Dome. In conclusion, we find Mr. Lassonde©&Mac246;s actions out of character and disconcerting. He should be liquidating the hedge book more quickly. We wonder why he isn't? Spiking the gold price doesn©&Mac246;t wash. Hopefully that will change and that we can recommend the company again.

Following are excerpts from:
Gold ú Morgan Stanley - June 27, 2002
We're Still Bullish
Michael Durose & Brian Markovich
MSCI SECTOR MATERIALS

"We maintain our Attractive view of the gold industry, as we expect gold equities to outperform the broader markets. Positive catalysts include a decline in the US dollar, ongoing geopolitical uncertainty, low to negative real rates, financial market volatility, and further consolidation. Buy the dips. We view the 8ú10% pullback in gold equities during the past month as a healthy correction. We still think gold is in a bull phase and a logical trading strategy is to increase exposure to gold equities on share-price pullbacks. While the easy money has arguably been made, with gold stocks up 40ú50% year to date, our industry view remains Attractive.

"We still think there is upside in stock prices and the group will outperform on a relative basis. In our view, the best approach for investors wanting exposure to gold is to focus only on the best companies, characterized by high-quality management, low-cost production, strong balance sheets, and the ability to generate free cash flow. Our Overweight-rated recommendations are Goldcorp (GG, $10.55, target $12.50), Gold Fields (GFI, $12, target $20), and Newmont Mining (NEM, $28, target $36).

"The gold contango remains low. All eyes are on the Fed. Rather than expecting rate hikes, most commentators now think that rates will remain unchanged or may even decline for the foreseeable future. This should be positive for gold as the contango in the gold market remains low (about 1.5%). We believe there's little incentive for speculators to short gold or for aggressive forward selling by producers.

"And real rates remain negative. This is the key to strong investment demand for gold, in our view. As long as real rates remain low to negative, the opportunity cost of holding gold appears minimal. So, rather than holding low-yielding paper assets, some investors prefer to hold hard tangible assets like precious metals and real estate.

"Speculators remain long and open interest levels remain high. With ongoing stock-market volatility, geopolitical uncertainty, and an environment of low real rates, the speculators on COMEX remain net long 4.1 million ounces, according to the latest commitment of traders©&Mac246; data. We think that short-term gold price movements will be determined by the behavior of the speculators. Periods of long liquidation should be followed by periods of buying. Furthermore, open interest levels remain high, as some 180,000 (18 million ounces) contracts are trading weekly.

"But supply and demand will ultimately determine the price in the long run. As with any commodity, long-term supply and demand fundamentals should ultimately determine the price. Therefore, we believe it is critical that gold mining companies continue to focus on supply-side discipline and look for ways to increase physical gold consumption (such as the gold marketing initiative). One risk to the gold rally is the year-over-year decline in physical gold off take in 1Q. According to the World Gold Council, consumer demand for gold dropped 10%, to 749.5 tonnes. Investment demand was 36% higher (to 125.6 tonnes), offset by a 15% decline in jewelry consumption (to 623.9 tonnes). A budget of $10 million has been allocated for this year's industry-sponsored gold marketing initiative. The goal is to increase the physical consumption of gold in the form of high-end jewelry. This year, six US cities, with populations of 1ú2 million, will be targeted. The goal is to increase mind share. The expectation is that up to $200 million per year could ultimately be spent on a global gold marketing initiative to stimulate physical gold consumption.

"Gold prices start to return to normal levels. Many investors are asking how much higher gold prices could go, or whether this is as good as it gets. In the past five years, gold has typically traded at $260ú300 per ounce. Rarely has it been able to sustain a price above $300. However, a histogram showing how the price of gold has traded in the past 20 years suggests a more normal range is $320ú400. So, in essence we are just beginning to get back to a more normalized pricing environment for gold, in our view.

"Our message to investors is to stay the course. We still think there is more upside in gold and gold equities. We recommend waiting for the pullbacks, buying the dips, and focusing on the best companies. Gold stocks typically move up and down with gold price movements; however, if the focus is on companies with the best fundamentals, then we think investors will be rewarded. We think the investment thesis for gold remains intact. Gold industry consolidation, volatile financial markets, a weakening dollar, and an environment of low real rates keep us positive."

THE INTERNATIONAL FORECASTER
An international financial, economic, political and social commentary.
Published and Edited by: Bob Chapman
FOR A FREE INTRODUCTORY COPY GO TO:
Robert Chapman bif4653@comcast.net

http://www.gold-eagle.com/gold_digest_02/chapman071602.html