Sunday, September 5, 2010

As Gold Climbs, So Do the Deals

In reading this article the use of the word "investors" is prevalent. My question is could "investors" be a substitute for the word speculators? Every time there is a run up there is a crash, I wonder when that time will come?


As Gold Climbs, So Do the Deals
Metal's Price, at Near-Record $1,249.20 an Ounce, Has Mining Companies Hunting for Prey.
Gold prices are edging up toward a high, triggering multibillion-dollar deals by miners doubling down on the staying power of bullion's nearly decadelong rally.

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The run-up is being driven by investors who bought more than half of all gold sold in the second quarter—only the second time that has happened since 1979, according to analysts. Normally the majority of gold is bought for jewelry and other uses.

Large gold miners seeking to feed that demand are gobbling up rivals. On Friday, Goldcorp Inc. said it would buy Andean Resources Ltd for $3.4 billion, a month after Kinross Gold Corp. agreed to pay $7.1 billion for Red Back Mining Inc.

Gold prices are responding, too. In August, gold futures prices rose 5.6% as investors added 20.2 metric tons to the holdings of the $52-billion SPDR Gold Shares, the world's largest gold exchange-traded fund. By contrast, investors liquidated 38.2 metric tons in July, and prices fell 5.1%.

On Friday, prices fell $2.30 per troy ounce, or 0.18%, to settle at $1,249.20 at Comex, the metals division of CME Group. They are now 0.64% below the Comex-high settlement price of $1,257.20, hit on June 18, but up 14.1% this year.

.Historically, investors accounted for a relatively small portion of gold demand, with the majority driven by demand by jewelers, dentists and electronics manufacturers.

When the World Gold Council, a trade group, started breaking out investor demand as a separate category in 1998, investors represented 6.9% of demand and during the tumultuous year of 2009, they accounted for 39% of demand. In the second quarter of this year, investors accounted for 51% of demand, second only to the first quarter of 2009, when the stock market was at its nadir and investors accounted for 60% of demand.

Now, investor demand increasingly overwhelms other fundamental factors, such as jewelry purchases and ore production. This spring, investors turned to gold as a haven against the threat of European sovereign-debt defaults, and this summer it benefited from fears of a double-dip recession.

"Gold is a multipurpose security blanket," said Kevin Norrish, managing director of commodities research at Barclays Capital, and the interest reflects "the lack of trust some investors have in governments and their abilities to solve their structural problems," he said.

At the same time, the rise of the investor in the gold market also means that bullion prices and gold-mining companies are increasingly subject to the same risk, that positive changes in the macroeconomic picture could lead investors to reverse course and sell gold in droves.

Jewelry owners are slow to sell due to an emotional tie with their gold, said John Stephenson, a portfolio manager at First Asset Investment Management, Inc. and author of "The Little Book of Commodity Investing."

Goldcorp's bid for Andean Resources topped a lower offer from Eldorado Gold Corp. The deal is the latest in a series of gold-sector tie-ups as producers vie to secure resources.

Especially tempting to miners are smaller exploration-focused companies like Andean that have proven themselves adept at the financially risky work of revealing new gold veins. Goldcorp was drawn by Andean's Cerro Negro project in Argentina, which the company said in July could produce up 285,000 ounces of gold a year over its first five years, starting in 2012.

Goldcorp CEO Chuck Jeannes called it "a truly exceptional asset by any reckoning," in a conference call with investors on Friday, saying such discoveries are "becoming exceedingly rare."

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The EurekaWest vein outcrop is seen at Andean Resources' Cerro Negro gold exploration project.
.Under the terms of the deal, each common share of Andean will be exchanged for either 0.14 share of Goldcorp or a cash payment of C$6.50 a share, up to C$1 billion in cash. The offer represents a 35% premium to Andean's Toronto-listed closing share price on Sept. 2. The transaction was unanimously approved by the boards of both companies, but requires majority Andean shareholder approval. Shareholders representing 21% of Andean's capital have already agreed to vote in favor of the deal.

Eldorado isn't giving up, however, saying Friday it will pursue its bid, valued at C$6.36 a share, with shareholders.

Shares of Andean were recently trading up 46% at $7.04 apiece on the Toronto Stock Exchange, indicating investors reckon another rival bid may be forthcoming.

While investors have assumed the dominant role in the gold market, jewelry-makers' sway is weakening. The demand for gold for fabrication plummeted by 40% from 1998 to 2009, and represented 38.5% of total demand from January to June of this year, according to World Gold Council data.

Investors have "swamped out some of the historic trading relationships in gold," said Mr. Stephenson.

Investor-led gold rallies often end in sorrow. In the first quarter of 2009, when the stock market hit a low amid the financial crisis and investor demand was at its recent peak, gold surged 24%. Prices then fell 13% in the following quarter.

A more-sustained run-up in gold prices will be driven by "sheer income growth" in emerging countries, said Martin Murenbeeld, chief economist of DundeeWealth Inc., a Canadian wealth manager that has about $70 billion in client assets.

Chinese and Indian investors are buying gold bars and coins at an unprecedented pace. During the second quarter, China's investment demand for gold jumped 187% in dollar terms to $1.4 billion, while India's rose 38% to $1.6 billion, according to the World Gold Council.

—Andy Georgiades contributed to this article

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