cbs.marketwatch.com By Thom Calandra, CBS.MarketWatch.com Last Update: 12:12 PM ET March 3, 2003

SAN FRANCISCO (CBS.MW) -- Not six months ago, gold miners were the stock market's biggest money-maker. Now they're the new whipping boys.

Investors are treating mining companies as if the price of gold were 10 percent lower than it actually is, says a veteran metals-watcher. This is a rare occurrence in an industry whose share movements the past 18 months have magnified gold's gains by a factor of three or more.

After a brisk gold run to almost $390 an ounce, bullion in recent weeks has lost about 10 percent of its value. On Feb. 17, the metal's spot price touched $341.50 an ounce, its lowest point since the 2002 year-end rally that took it above $340. The metal, which attracts investors during terrorist flare-ups and in economic crises, has lost ground in all major currencies.

Even the weekend capture of a notorious terrorist suspect in Pakistan may send gold, hovering near $350 an ounce, down another 10 percent in coming weeks, say the skeptics. Some short-sellers, primarily $100 million (and less) hedge funds, are actively promoting gold-miner shares as doomed to lose 50 percent of their value in the next six months.

On Monday, gold stocks were selling off sharply in all of the world's major equity markets, down 3 percent and more to their lowest point since mid-December. The spot price of gold in New York also was taking it hard, down almost $4 to $345.80 an ounce. See Financial Times Gold Mines Index.

Against this backdrop, say gold-bashers, the group facing the biggest risk is gold-mining shares, in particular the highest-fliers whose market values tripled and quadrupled in less than two years. That includes small exploration companies such as Canada's Nevsun Resources (CA:NSU: news, chart, profile), which last year was the world's biggest-gaining gold share after its promising discoveries in the west African nation of Mali.

With swollen market caps, mid-sized companies such as Meridian Gold (MDG: news, chart, profile) remain vulnerable even after a 15 percent drop since mid-December, say Wall Street's gold critics.

The largest companies, among them Barrick Gold (ABX: news, chart, profile), are thought to be susceptible to coming losses for a variety of reasons, among them dwindling prospects for new discoveries, complex balance sheets and a looming wave of insider selling.

In the face of that skepticism, veteran gold watchers are steadfast. Analysts who have followed bullion since its heyday of the late 1970s and early 1980s deliver what looks like a unanimous verdict: the gold rally is merely on pause and will resume later this year.

John C. Doody, the dean of quantitative analysis for gold shares, says most gold producers, large and small, are still incredibly cheap against a $350 gold price.

Doody's Gold Stock Analyst is a number-crunching newsletter that sets the standard for the bullion metrics of publicly traded mining companies. In it, Doody regularly evaluates the miners based on their break-even market capitalizations -- the average per-ounce price of their proven and probable reserves plus their cash costs for the gold these companies actually pull from the ground.

When the total comes to less than the current gold price, a cheap gold stock is born.

Doody says the gold producers whose shares are available to investors in North America are selling as if gold were selling for $317 an ounce. Freeport-McMoRan Copper & Gold (FCX: news, chart, profile), based on Doody's market cap-per-ounce premise. Using his measure, Freeport's gold portfolio is valued by the stock market at just $57 an ounce.

"There are many other issues to be considered, such as debt, projects in the pipeline," Doody told me Monday morning from his office in Florida. "Meridian Gold's Esquel, for example, has no proven and probable yet, but the stock is priced as though the market thinks Esquel has 2 million to 3 million ounces."

Mine location is another variable. Is a promising deposit in a country, or a state, where gold mining, is an established business, aided by popular opinion and government regulations, like Canada or parts of the United States? Or is it somewhere that holds great political risk, like Venezuela or Indonesia? "If Freeport's mine were in Nevada, the stock would be $100," says Doody about Freeport McMoRan's Papua, Indonesia, mine, the world's largest gold deposit. Freeport shares sell for $17 each on the New York Stock Exchange.

Among the cheapest gold miners, according to Doody's valuation model, are African miners Randgold (RANGY: news, chart, profile), Ahanti Goldfields (ASL: news, chart, profile), Gold Fields Ltd. (GFI: news, chart, profile) and Harmony Gold (HMY: news, chart, profile). Canada's Eldorado Gold (CA:ELD: news, chart, profile), Peru's Buenaventura Mines (BVNOF: news, chart, profile) and Denver's Golden Star Resources (GSS: news, chart, profile) are also dirt-cheap, Doody says.

Doody says his valuation model is a starting point for identifying undervalued mining shares. "This is a very simplistic approach, but it's a method one can use to start evaluating the gold stocks." The gold analyst is sticking to his 2003 forecast of a $450 gold price.

Others are just as convinced the gold rally is just taking a breather. One of them, Freemarket Gold & Money Report's James Turk, had a February price projection of $430 an ounce for spot gold's price. Turk uses monetary measures, including Federal Reserve-boosted money supply levels, to forecast gold prices, which are influenced by the level of the dollar, pace of inflation and the fiscal soundness of the world's major economies.

Turk, speaking to me Monday from Toronto, says his "fear index," a ratio of America's money supply levels and the country's gold assets, indicates far higher gold prices in the coming 12 months.

"Having missed February by such a large amount, one would think that prudence dictates that I should revise my targets downward, but I haven't," Turk says. "I'm sticking by my fear index, which remains bullish. When the euro starts trading above $1.085, then look for the gold price to start rising again." The euro Monday morning was worth $1.081 in American currency. See: Researcher uses monetary metric to good effect.

Global researchers say the strongest theme for the metal may be a shift by countries, Russia and China among them, to reduce their reliance on dollar-linked paper assets (mainly U.S. Treasury securities) as the main source of their foreign reserves.

"In Russia, the deputy finance minister said dollar reserves should be cut to 50 percent from 70 percent, and gold reserves more than doubled to 10 percent," says Adrian Day, a Maryland fund manager.

First Deputy Finance Minister Alexei Ulyukayev's gold bulletin in Moscow rang bells among commodity researchers, who generally credit central banks with setting long-term trends in the accumulation and disposal of physical assets such as gold.

James T.S. Tu, director of investment management and research at commodities specialist Gerstein & Fisher in New York, says central bankers are becoming convinced their dollar assets will decline under the weight of America's record-high trade deficits and Washington's willingness to triple its deficit spending in the next five years.

"They know the dollar will go down because of unsustainable deficits, unrestrained money supply, a weakening economy and the terrorist/war threat," Tu tells me. "Central banks will be the biggest gold supporters." The increased purchases of bullion will come from countries with large trade surpluses today, such as China (2 percent reserves in gold and a $102 billion trade surplus with the United States in 2002) and Japan (1.7 percent gold reserve). Resource-rich countries that will benefit from a commodity boom, such as Saudi Arabia (7.3 percent gold reserve), also will increase their central-bank gold holdings, Tu says.

Such countries' gold portions of foreign-exchange reserves fall far short of those in developed countries. The United States has about 56 percent of its foreign-exchange reserves in gold, France has 51 percent and Germany has 39 percent. "Central banks design policies that they stick to day after day, year after year. They rarely change direction. Now they're moving away from dollars and into euros and gold," says the Gerstein & Fisher director. "It will last years."

One other positive development for gold could be the introduction of an exchange-traded fund for the metal, says John Hathaway, manager of $215 million Tocqueville Gold Fund (TGLDX: news, chart, profile). Several entities, including the World Gold Council under the direction of Gold Fields' Chairman Chris Thompson, are working with index-asset managers such as State Street Global Advisors to sponsor a gold-backed ETF.

Such a security would amount to the QQQ of gold and trade real-time on a major North American exchange, most likely the American Stock Exchange. The ability to buy physical gold via a stock-market proxy almost surely would boost investors' pen-up demand for the safe-haven metal, market watchers say.

For more on investing, see our March edition of Trading Strategies. Also:  Thom Calandra on an explosive short-term war rally.

Coming soon

The Calandra Report, a $159 subscription service for Alert Investors. Brought to you by CBS.MarketWatch.com. The first issue is due out this week. Thom Calandra's StockWatch is in its seventh year at CBS.MarketWatch.com

www.cnn.com Monday, March 3, 2003 Posted: 11:20 AM EST (1620 GMT)

Venezuelan President Hugo Chavez is among the characters in the game.

It's just a way of liberating stress, just fun. -- Jesus Barrios, creator of "Political Combat"

CARACAS, Venezuela (Reuters) -- Venezuelans fed up with the long-running political duel between President Hugo Chavez and his opponents can now deliver the final knockout blow themselves in a new computer game.

The game "Political Combat," pits the pugnacious leftist leader against some of his best-known political enemies, such as business leader Carlos Fernandez and union boss Carlos Ortega.

The animated characters slug it out with kicks and punches in scenarios that recreate the hot spots of political violence around Caracas from the Miraflores presidential palace to the opposition stronghold of Altamira Square.

Players can take on individual opponents or adopt different characters to battle each other in a graphic action replay of the political confrontation that has kept the world's No. 5 oil exporter in turmoil for more than a year.

Chavez, a former paratrooper, appears as a camouflage-clad figure, barely recognizable except for the distinctive wart on his forehead.

The game's creator, Jesus Barrios, insists he is not suggesting that violence will solve Venezuela's crisis. Several dozen people have been killed and several hundred hurt in violent street clashes over the last year.

"It's just a way of liberating stress, just fun," Barrios told the Caracas daily El Universal.

Early buyers seem to have less peaceful intentions. "I just can't knock that damn Chavez out ... but almost!" wrote one customer on the Web site selling the game. "I want to give a beating to that fascist Carlos Ortega!" wrote another.

In real life, Chavez seems to have won some rounds against his foes. He was as first elected in 1998, six years after he staged a botched coup bid, and went on to survive a short-lived coup last year and a grueling opposition strike in December and January.

As for his real-life foes, business chief Fernandez is under house arrest facing rebellion charges and Ortega is in hiding to avoid a detention order against him.

www.forbes.com Reuters, 03.03.03, 11:18 AM ET By Alistair Scrutton

CARACAS, Venezuela (Reuters) - Every day Venezuelan businessman Rafael Pedraza scours an official Web site to see if President Hugo Chavez's government will allow his firm to buy dollars, now as scarce a commodity as the whiskey he wants to import. "We're on edge," said Pedraza, an executive in Venezuela for Diageo, a whiskey importer that needs dollars to buy new inventories. UK-based Diageo, the world's largest spirits company, must also import basic supplies like bottle tops and labels for its rum exports to keep business going. While oil output is recovering after a two-month opposition strike, that other life blood of business, foreign exchange, has dried up since leftist Chavez introduced exchange controls in February to stop dollars hemorrhaging out of the world's No. 5 oil producer. The strike, which slashed vital oil output and choked off government revenues, was called to try to force the populist president to resign and hold early elections. He stayed put but decreed emergency currency and price curbs to shore up an oil-relient economy already reeling into recession. Diageo is hoping against the odds. Chavez, railing against the "dolce vita," has labeled whiskey a luxury that may not be on a list of goods the government will allow to be imported. By Wednesday, a new mechanism for buying dollars will kick in. A state-run currency board, run by an ex-military officer with close ties to Chavez, is expected to publish on its Web site those products that can be imported after six weeks of a total ban on dollar purchases. Priority, Chavez has said, will go to goods such as basic foods and supplies for utility firms. The president promised that not one dollar would go to "coup mongers" - a phrase used to describe strikers and political opponents. Thousands of business executives like Pedraza are also on tenterhooks as their inventories slowly fall. "As I understand it, nobody has yet got a single dollar," said Francisco Mendoza, head of the exporters association and who owns a fruit export firm. He expects non-oil exports to nearly halve this year as access to finance dries up. It is a shortage with political overtones. Investors worry that Chavez will use the controls to further squeeze companies - largely his foes - in what opponents say is another step down the road towards imposing Cuban-style Communism. "Businessmen are devastated. Aside from red tape problems, most executives I've talked to say they fear that the controls will become a political tool," said a European diplomat. "Over 60 percent of raw materials are imported and companies desperately need dollars," Mendoza said, complaining that his firm could not buy imported seeds and fertilizers.

NO MORE MCDONALD'S? "Those with products not on the list need not bother apply," said Edgar Hernandez, the currency board head who took part in a failed 1992 coup led by Chavez. The government is expected to sell about $600 million a month, about half the actual demand for the greenback before the new controls. U.S. icons like McDonald's may also be hit. Hernandez has singled out against fast-food companies, saying they will not be in the priority category for dollar import authorizations. He added that other luxuries like "some very tasty foreign" cheeses may also be kept off the list. Firms must supply hefty paperwork, from tax returns to financial balances, to get dollars. It will take at least 10 days to get dollars once the mechanism starts. This red tape worries businessmen who say that it will open up the system to corrupt state officials. Some European executives sat down recently in a plush Caracas boardroom to talk over the new controls. "It was a very bleak atmosphere, universally depressing really," said one person who attended the meeting. Firms can go to a parallel market -- something the government has condemned although as yet it is not illegal. "The trouble is that is it at least 30 percent more expensive and it's risky," said Mendoza. Newspapers, some of the most vocal opponents of Chavez, are waiting anxiously. They suffered shortages of imported paper and print in the mid-1990s during previous currency controls. But the government has denied it will persecute newspapers. "It's still early to know whether it will be used as a political tool. But since the controls we haven't imported any paper or printing equipment. said Maria Rosa Rullo, spokeswoman for El Universal, one of Venezuela's biggest daily newspapers. "The situation will get critical in two weeks," she added. (Additional reporting by Patrick Markey)

www.nashvillecitypaper.com Commentary by Doron Levin   The prospect of a U.S. war with Iraq is driving up jet-fuel prices, hurting the already weak finances of major U.S. air carriers and spurring them to try their own price increases. Since mid-November, the price of jet fuel has climbed to a peak of more than $1.20 a gallon from about 70 cents, the latest increase reflecting an oil depot fire on Staten Island, N.Y. and strikes in Venezuela. A penny increase in jet fuel costs the U.S. industry $180 million a year. The second-biggest expense after employee costs, higher fuel prices are a heavy burden on the finances of major carriers already weighted down by bloated union contracts and other expenses. It’s hard to determine, though, which is more debilitating: billowing costs or plummeting revenue. The major carriers are conflicted. On one hand they are trying to keep ticket prices affordable to attract travelers back to the skies and from low-cost carriers. On the other hand they are desperate to maintain cash flow and not fall prey to bankruptcy, as UAL Corp., parent of United Airlines Inc., and US Airways Inc. have in recent months. In February, Continental, the fifth-largest U.S. carrier, raised round-trip ticket prices $20, saying the move was designed to mitigate rising fuel prices. American and US Airways Group Inc. quickly matched Continental. Northwest Airlines Corp. decided to match only on some of its lowest fares. Three days later, Continental, American and US Airways, seeing that their increase wasn’t matched fully, restored their earlier fares. Two days after that, ATA Holdings — a low-cost carrier — raised some prices $3 in each direction, a move matched by United, American and Northwest on competing routes. By the end of the month, Northwest, Continental, American and two other majors again raised fares $10 in each direction on many routes, citing rising fuel costs. Whether the latest increase holds likely will depend on passenger traffic. Just as in the automobile business, where overcapacity has caused falling car and truck prices, airline ticket prices suffer because there are too many seats and not enough travelers to fill them. Rising and falling fares are the airlines’ version of appearing and disappearing rebates on cars. Following steady price increases in the 1990s, airline revenue averaged 14.34 cents per mile in 2001, according to the Air Transport Association, a trade group for U.S. carriers. That number fell to 13.12 cents per mile in 2001 and to 11.93 cents last year. The preceding numbers represent revenue to the airlines, not including fees and taxes. If tickets seem as expensive as ever, that may be because they reflect more taxes and fees than ever. In 1972 about 7 percent of the price of a ticket was for tax and airport fees. Twenty years later it was 15 percent; last year it climbed to 26 percent. In other words, now an airline pockets only $149 of $200 in airfare. For the person or business buying the ticket, however, it’s still just expense. “The reason for weak demand isn’t just competition and too much capacity,” said John Heimlich, the trade group’s director of economic and market research. “Tons more people are driving because you can communicate better from cars. Substitutes for meetings like videoconferencing are better than ever.” The major carriers want nothing more than to introduce a broad price increase that travelers will accept, but they seem to differ on how to do it. Northwest, based on its tactics, appears to favor increases mostly on the lowest discount fares, while major competitors try across-the-board raises. Low-cost carriers like JetBlue Airways Corp. insist they are committed to maintaining simplified low fares, despite rising fuel costs. Fuel prices, though troublesome, have been higher. Prior to the Persian Gulf War in 1991, jet fuel prices peaked above $1.40 a gallon; within a year they had returned to the neighborhood of 70 cents a gallon. It’s a good bet, with economies weak worldwide, that a short conflict in Iraq will be followed by falling energy prices and some relief for airlines. What’s far less clear is that the major carriers have found a way to price air transportation that keeps them solvent without thoroughly confusing their customers. Doron Levin is a columnist for Bloomberg News. Editor’s Note: Tom Neff is out of town this week. His column will return next week.

money.cnn.com

March 3, 2003: 1:16 PM EST

KUWAIT (Reuters) - Kuwait may have to shut down 700,000 barrels per day, or one third of total oil output, if war erupts on Iraq, intensifying fears markets could be short of more than just Iraqi supplies during a conflict.

Two production hikes already this year have left OPEC with just enough spare capacity to cover a potential disruption in Iraqi exports of close to two million barrels per day (bpd).

Even a 400,000 bpd outage from Kuwait could stretch the cartel beyond its capacity and might necessitate the release of emergency petroleum reserves from major consuming countries.

The state Kuwait Oil Co said it would shut its northern oilfields near the border with Iraq as a safety precaution, closing 400,000 bpd of Kuwait's 2.1 million bpd. It also said the 300,000 bpd western Manakish oilfield might be closed.

"Kuwait will close all its northern oilfields when a possible war starts to safeguard the workers in these fields," KOC Chairman Ahmad Rashid al-Arbid told the official Kuwait News Agency.

Arbid said Kuwait would try to cover the shortage from other western and southern oilfields. The Gulf producer has already closed two small northern oilfields -- totalling 25,000 bpd.

For its part, OPEC sought to assure markets it would remove supply limits and pump flat out if a U.S.-led war were to halt oil exports from Iraq, the world's eighth largest exporter.

Asked in a BBC interview broadcast Monday whether OPEC would remove its production ceiling if war were to disrupt Iraqi oil supplies, OPEC President Abdullah al-Attiyah said: "Yes. If there is a shortage and the world needs more oil, we will do it...We will pump maximum capacity if the market needs it." Contingency plans

The cartel is likely at its March 11 meeting to set up a war contingency plan to suspend quotas once hostilities start. OPEC temporarily abandoned output limits shortly after Iraq invaded Kuwait in August 1990 to cover outages from the two producers.

Kuwait was swift to lend its support to a suspension of OPEC's ceiling -- lifted twice already this year to cover a shortfall from strike-bound member Venezuela.

"Whatever OPEC will decide, Kuwait will cooperate," Kuwaiti Oil Minister Sheikh Ahmad al-Fahd al-Sabah told Reuters.

In any case, most analysts say OPEC has few extra barrels to dispense -- little more than Iraq's 1.7 million bpd of exports.

With only Saudi Arabia holding substantial spare volume, actual cartel supplies will depend on how much more Riyadh decides to pump.

The kingdom, the world's biggest oil exporter, is already producing just over nine million bpd, and stands ready to pump to its 10.5 million bpd capacity.

If OPEC has insufficient spare capacity, consumer countries represented by the Paris-based International Energy Agency have said they will release emergency strategic reserves for the first time since the 1991 Gulf War.

The price of oil was lower in London trading Monday morning, as a barrel of Brent crude for May delivery was off 47 cents to $31.35.