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After shooting to more than $380 an ounce in February amid prospects of war with Iraq, gold prices finally hit the wall on Mar. 13. The April gold contract traded on Nymex plunged more than $10, to $336 an ounce, on reports that key Iraqi military officials may surrender without a fight.
We at Standard & Poor's see further near-term declines in gold prices and shares of gold-producing companies as the war premium fades rapidly. Nevertheless, S&P remains positive on shares of gold producers. The industry's long-term fundamentals are favorable. Erratic financial market returns should boost gold's attractiveness as an alternative investment. The U.S. dollar continue to be weak vs. other major currencies, making the dollar-denominated purchase of the metal attractive to non-U.S. investors. And the gap between global demand and production should widen, despite the higher prices seen recently.
Another factor working in the metal's favor: reduced hedge sales by major producers. A sharp decline in interest rates since January, 2001, has made short-selling by producers and market speculators less profitable. Short-selling has been a major negative for gold prices in the last several years.
GLOBAL EXPLOITS Rising commodity prices, reflecting consolidation in commodity-producing industries and a recovery in global economic growth, also augur well for the yellow metal. Through Mar. 13, the Bridge Commodity Research Bureau Commodity Price Index was up 2.5%, after a 23% rise in 2002. A rebound in the global economy and large increases in U.S. money supply should lift commodity prices in 2003. And that means inflation will still be a factor for investors to contend with -- playing to gold's traditional role as a hedge against rising prices for goods and services.
Our current favorite in the industry is Newmont Gold (NEM
). The world's largest gold company, considerably bulked up by its three-way merger with Normandy Mining and Franco-Nevada in February, 2002, should realize some compelling long-term benefits from the combination. Newmont has the greatest trading liquidity of the major gold producers and very low political risk, with 70% of production in North America and Australia. Having the smallest amount of gold hedged of any major producer, Newmont is well positioned to benefit from rising prices. We rank the stock 4 STARS (accumulate). Its lofty p-e multiple, however, holds us back from assigning it 5 STARS (buy).
Among other leading stocks in the group, we have a 4 STARS ranking on Barrick Gold (ABX
). It has been trimming its hedging activities, which makes it more attractive in a strong gold price environment. Like Newmont, the stock has a high p-e multiple. We're less positive on Placer Dome (PDG
), which carries a 3-STAR (hold) recommendation.
Analyst Larkin follows stocks of gold producers for Standard & Poor's
Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc.
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