Bullion bulls rate gold's next move--Metals stocks will see vast gains, says Calandra

<a href=cbs.marketwatch.com>THOM CALANDRA'S STOCKWATCH By Thom Calandra, CBS.MarketWatch.com Last Update: 12:48 PM ET June 6, 2003

SAN FRANCISCO (CBS.MW) - When executives from 15 or so gold mining companies gather in San Francisco next week, fund managers will be asking searching questions about the metal.

Can gold build upon a two-year rally that took it as high as $390 an ounce earlier this year? Will gold mining stocks join the rally that has propelled shares of both small-cap growth mutual funds and individual companies, largely in the technology sector?

Which exploration companies are most likely to be scooped up by the industry's giants in the never-ending balance-sheet quest to increase provable reserves of bullion? Most importantly, analysts, executives and money managers will be debating whether several new forms of "paper gold" scheduled for release this summer can lead investors to stake part of their stocks-dominated portfolios to bullion.

Gold these days resembles a critically acclaimed Hollywood film that's barely breaking even at the box office. Investors are counting on the sequel for the real fireworks.

The Denver Gold Group, one of several organizations that host mining forums in North America, is stepping up its schedule of shows aimed at professional investors. This year, as gold prices rallied from multi-year lows, the Denver trade group staged a Switzerland conference for the first time.

With the San Francisco show scheduled for next week, the trade association is attempting to enhance gold's image among hedge fund managers, mutual fund professionals and the financial press. Right now, the metal could use a nudge.

With the stock market rally dominating the attention of investors, gold this year has been on the back burner. The metal's dollar price, $363 an ounce, and slow-moving gold mining shares as measured by the XAU Index (XAU: news, chart, profile), can't compete with the price leaps of small-cap companies that are enjoying a rush of investor interest.

Yet gold mining stocks slowly are perking up, with many large companies exceeding profit expectations and dramatically improving their operating cash flows, thanks to the highest average gold prices in more than six years. Small producers, such as Wheaton River Minerals (WHT: news, chart, profile) and Iamgold (IAG: news, chart, profile), meanwhile, are trying to prove they deserve to be considered growth stocks in a world where most investors steer clear of anything related to natural resources.

"I think gold companies like Wheaton River will show investors they can consistently lower costs and raise production levels, and money managers will start to view them as true growth vehicles at bargain prices," says Frank Holmes, chief executive of $1.2 billion asset manager and gold specialist U.S. Global Investors.

There are some, including this writer, who see the gold group doubling in price, and more, in the second-half of 2003 -- even as the small-cap stock rally continues to thrive. For more on the small-cap rally, complete with Watch and Recommended Lists, see: The Calandra Report.

"The XAU hit 152.70 on Feb. 5, 1996, the day gold hit its last high of $414.80," says John C. Doody of Gold Stock Analyst. "Now the XAU is around 77. While the stocks in the index (Newmont Mining (NEM: news, chart, profile), Gold Fields (GFI: news, chart, profile) and so on) have changed, I still expect the XAU to double when gold climbs to around $415. So I expect the XAU will much more than double in 2003."

The mining stocks, of course, depend on the gold price to boost their returns. After reaching $390 an ounce in February, gold took a dive. Investors fled the metal after the successful invasion of Iraq. Talk of deflating economies, and global prices for goods and services, also took the wind out of gold's sails.

John Hathaway, a New York City-based mutual fund manager, has become one of the metal's strongest Wall Street believers in an explosive rally for bullion's price.

"The title of my talk is Gold for Dummies," Hathaway of Tocqueville Gold Fund (TGLDX: news, chart, profile) told me about his appearance next week at the San Francisco gathering. "The premise is that the bull market in gold is nearly 5 years old but a well kept secret thanks to the financial media."

Hathaway believes gold will rise sharply as the Federal Reserve dilutes the value of America's currency, the dollar, in a bid to alter deflationary expectations and boost U.S. exports. He also sees an upcoming exchange-traded fund for gold, Equity Gold Trust (GLD: news, chart, profile), adding hundreds of tonnes of demand for the metal when it lists this summer on the New York Stock Exchange.

The upcoming listing of the exchange-traded fund, a first for a commodity in North America, has hedge funds (and individual investors) licking their chops as they anticipate a flood of interest for owning gold directly through a NYSE-traded stock. See: Paper gold to spark investment demand.

The first gold trust to list as an exchange-traded fund, Gold Bullion Ltd. (AU:GOLD: news, chart, profile), trades in Australia and has sold almost 100,000 ounces of the metal since its listing earlier in the spring. Exchange-traded funds, like the Nasdaq 100's QQQs, change hands in real time and represent a basket of holdings. In the case of the new wave of commodity ETFs, those holdings are physical gold held in sanctioned vaults.

Institutions are bringing other paper-gold products to market as well. One of them, Central Gold Trust, would trade in Canada as a closed-end fund -- at a premium or discount to its gold holdings. "Investors pay a premium to purchase gold, typically receive a discount upon disposition, have delivery and storage charges as well as potentially facing assay charges if selling physical bars," says J. C. Stefan Spicer, the Canadian executive who would help to manage Central Gold Trust.

Central Gold Trust would resemble Central Fund of Canada (CEF: news, chart, profile), a closed-end gold and silver fund that trades in Toronto and on the American Stock Exchange. Spicer is the chief executive of Central Fund of Canada.

For the hedge funds that have been taking early positions in gold mining companies, the search these days is for companies whose stocks could triple and quadruple if gold's price were to rise $60 from its current level.

Some of those companies, such as Crystallex International (KRY: news, chart, profile) and Canyon Resources (CAU: news, chart, profile), face uphill battles in Venezuela and Montana, respectively, where they are vying to mine rich bullion deposits that could improve their financial results dramatically.

Others, such as Wheaton River, which mines gold and silver largely in Mexico, are steadily raising their production levels. And still others, such as Nevsun Resources (CA:NSU: news, chart, profile), are trying to convince investors their exploration efforts in far-flung corners of the globe, in Nevsun's case in Mali and Eritrea, Africa, will bear fruit.

"Nevsun's Bisha project, in Eritrea, has delivered results to rival any high-grade project currently under way in the world," says Robert Bishop of Gold Mining Stock Report. Nevsun was the world's biggest gold-stock gainer in 2002 but has seen its shares stall on the Toronto Stock Exchange after one of its geologists was murdered in April.

For more on the San Francisco Gold Forum, see www.denvergold.org.

For more on the small-cap stock rally and the latest additions to The Calandra Report, see: The Calandra Report. Thom Calandra's StockWatch is CBS MarketWatch's flagship column. The regular report is in its eighth year at CBS.MarketWatch.com. Thom Calandra is also author of subscription service The Calandra Report.

More THOM CALANDRA'S STOCKWATCH •Crystallex, gold miner, to see light of day 1:19pm ET 06/13/03 •Crystallex executive says shares are cheap 2:15pm ET 06/10/03 •Small-cap rally to get boost from liquidity, low costs 12:07pm ET 06/09/03 •Price swings have investors itching to buy small-caps 11:13am ET 06/04/03 •Thom Calandra: Events and why they move stocks 12:01am ET 06/02/03

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