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|  | OCTOBER 29, 2003
 SAM STOVALL'S SECTOR WATCH By Sam Stovall Beyond Some Bumps for Gold S&P sees some trouble near-term, but the further out, the future looks good. Favorites include Barrick Gold and Newmont Mining Gold-mining stocks have made frequent appearances on the Industry Momentum portfolio -- the roster of industries with top S&P Relative Strength rankings -- in recent months. The 45% year-to-date (through Oct. 24) run-up in the S&P Gold subindex, vs. an 18% rise for the S&P Super 1500 (the combined S&P 500, S&P MidCap 400, and S&P SmallCap 600), reflects the strong rally in prices for the yellow metal itself. Leo Larkin, the S&P analyst who follows the industry, wouldn't be surprised to see a sell-off in the metal -- and in gold-mining stocks as well. He cites a key technical factor: the inability of gold to close above the highest level of the current rally -- $389 an ounce, reached in February, 2003 -- based on prices in the spot market. Larkin says this failure, in the face of multiyear lows in the trade-weighted U.S dollar index, is a negative for gold in the near term. Still, Larkin notes that gold's positive long-term fundamentals remain intact. He thinks investors continue to believe that equity markets are less likely to offer as much competition for investment demand as they did in the late 1990s, when double-digit annual rates of return were the norm. While the stock market has had a positive return so far in 2003, S&P anticipates that financial assets in general will be less rewarding compared to the 1990s. Larkin thinks erratic returns in the overall market may boost demand for gold and the mining stocks. SHRINKING OUTPUT. Also, S&P forecasts higher commodity prices, reflecting consolidation in commodity-producing industries and a recovery in global economic growth. After declining 16.3% in 2001, reflecting a slower growing world economy, the Bridge Commodity Research Bureau (CRB) Commodity Price Index rose 23% in 2002. S&P thinks a rebound in the global economy and large increases in the U.S. money supply should lift commodity prices in 2003 and 2004. (Through mid-October 2003, the CRB was up 6.0%.) 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. In addition, the deficit between production and consumption should widen as output declines and physical demand for the metal likely increases. Larkin believes the low level of gold prices over the past few years has led to sharply reduced exploration and will likely result in lower production even if the metal price rises dramatically. IN THE HOLE. Another plus for the yellow metal: The agreement by the world's main central banks to limit gold sales through September, 2004, to 2,000 tons per year removes an uncertainty, in S&P's view, that plagued the market during the late 1990s. The industry's major consolidation in recent years is a positive factor for stocks of gold-mining companies. Barrick Gold (ABX , trading around $19 as of Oct. 28) acquired Homestake Mining in 2001, and Newmont Mining (NEM , trading around $42 as of Oct. 28) acquired Australia's Normandy Mining in early 2002. According to Larkin, mergers should result in larger market capitalizations and more trading liquidity in the stocks. He believes this will make the group more attractive to institutional investors. Larkin's current favorites in the group? He has a 4-STARS (accumulate) ranking on both Barrick and Newmont. He thinks both companies, with their low-cost mines, are well-positioned to capitalize on further price gains for the metal. Industry Momentum List Update For regular readers of the Sector Watch column, here's this week's list of the 11 industries in the S&P Super 1500 with Relative Strength Rankings of "5" (price performances in the past 12 months that were among the top 10% of the industries in the S&P 1500) as of October 24, 2003.
* S&P's stock appreciation ranking system for the coming 6- to 12-month period: 5 STARS (buy), 4 STARS (accumulate), 3 STARS (hold), 2 STARS (avoid), 1 STAR (sell).  Stovall is chief investment strategist for Standard & Poor's All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is or will be, directly or indirectly related to the specific recommendations or views expressed in this research report. Standard & Poor's Regulatory Disclosure 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.
BW MALL
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