Saturday, November 29, 2003
Copyright © Las Vegas Review-Journal

Nevada economists may grin when gold hits $400

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For Nevada's gold mining industry, 400 looks like the magic number.

Some think the prices of gold mining stocks and the metal itself will take off when investors see the price of the yellow metal break the $400 an ounce barrier and hold firm. It moved past $400 Wednesday but closed at $398.10. Major U.S. gold exchanges were closed Friday as part of the Thanksgiving holiday weekend.

"It's going to be a psychological number," and a major area of resistance, said Michele Ashby, chief executive officer of the Denver Gold Group, which promotes gold investments to institutional investors.

She believes investors have been waiting for a temporary pullback in gold mining stock prices so that they can invest in the sector. When the price of gold punches through $400 an ounce and holds, she thinks they will figure they are missing an opportunity and will stampede into the markets for gold and gold mining stocks.

Other analysts believe it's too late to start buying gold and gold stocks, but, if Ashby is correct, it's good news for Nevada as well as gold bugs.

Nevada is the world's third-largest gold producer behind South Africa and Australia. The state accounted for 80 percent of the total U.S. production in 2002, according to an annual economic review conducted by John Dobra, a professor at the University of Nevada, Reno, for the Nevada Mining Association.

When the price of gold rises, gold mining becomes dramatically more profitable, because its costs remain about the same. The Nevada mining industry, of which gold accounts for the biggest portion, paid $86.2 million in state and local taxes last year, Dobra said.

Although most gold mines are in rural, Northern Nevada, the urban areas of Las Vegas and Reno benefit from sales of goods and services to the mining companies, said Russ Fields, president of the Nevada Mining Association.

"It's not like a switch that gets turned on and off," Fields said.

"We've got a lot of people out in the hills exploring for gold," he added.

Although gold mining "explorers" are secretive, Fields has anecdotal evidence exploration activity has picked up.

"Elephants are found in elephant country," he said. "You look around, know gold occurrences, and there are many of these areas around Nevada. It will eventually translate into more employees. It will certainly translate to added taxes paid at the local and state level."

The mining industry employed 8,860 workers in Nevada last year with wages averaging $63,238 compared with the statewide average of $33,993 for all industries.

Given the typical lead time of five years or more for obtaining permits for a new gold mine, the higher price of gold won't immediately translate into big employment gains, Fields said.

Bob Bishop, editor of the Gold Mining Stock Report (www.goldminingstockreport.com), is also upbeat on Nevada gold mining exploration. He expects gold prices to continue going up for another three to five years.

Nevada, he said, is great place to be looking for gold. He is particularly encouraged about results from the Cortez Mine that Placer Dome operates 75 mines southwest of Elko.

Nevada mines also benefit from the declining exchange rate of the dollar, which helps reduce their costs, Bishop said.

In general, gold-mining stocks benefit from the decline in the value of the dollar, because investors use gold as a substitute currency.

"It's an alternate currency," Bishop said. "It's a proxy for wealth."

In addition, the Chinese have long had a fondness for the medal, and their wealth is increasing rapidly, Bishop said.

Yet, he thinks individual investors have generally ignored gold stocks.

"I don't see much evidence that the public is very much interested" in gold stocks yet, he said.

Nor are institutional investors, a category that includes mutual funds and pension funds, Ashby said.

"They are like putting their toes in the water," she said. "They want to get the temperature. The majority are about to jump into the pool."

When that happens, their buying can cause gold stock prices to spike, because the size of the gold mining stock segment is relatively small, she said.

This time, however, may be different. The World Gold Council has filed applications with the Securities and Exchange Commission for certificates in gold bullion, each one representing one-tenth of an ounce. This will give institutional investors a way to invest in gold without causing prices to jump when they start buying, she said. Australia already has a similar security, she said.

On the other hand, Don Cassidy, senior research analyst with Lipper, a mutual fund analysis firm, questions whether it's too late to speculate on gold.

Gold mutual funds are the top performing category so far this year with an average annual return of 76 percent, Lipper reports.

"What I'm concerned about is people moving (to gold stocks) late in the move," he said. Gold stocks, he said, are "not a new story."

He mentioned several factors that earlier pushed gold prices higher: worries about inflation (which he believes will be tame for the near term), oil price appreciation (which leads Middle Eastern oil barons to buy more gold), and fear of world crisis. This time, mergers and acquisitions have led to larger, more economically efficient mining companies, he added.

"What's left to drive it further?" Cassidy asked.

Cassidy urges investors to pick stock market sectors when they are out of favor, not when they are popular. Drug stocks are out of favor now.

Nor does Lipper believe the average investor needs to have a large part of his holdings in gold stocks. If an individual feels better with 2 percent to 5 percent of his portfolio in gold stocks, that would be OK, he said.

Company	Headquarters	Market Cap*	Year to date returnb>
Newmont Mining	Denver	$20.9 billion	66.5%
Barrick Gold	Toronto	11.9 billion (US)	46.6
AngloGold	Johannesburg, South Africa	10.7 billion (US)	45.4
Placer Dome	Vancouver, British Columbia	7.4 billion (US)	59.3
Glamis Gold	Reno	2.3 billion	53.4

SOURCE: Bloomberg

* Market cap or capitalization is the price of the stock multiplied times the number of shares outstanding.