Pru June 20 GG (G) report

Pru June 20 ABX report

I do agree that financial institutions are unloading goldminer shares as they hit any bid in a rally. So it appears there is more downside to come. But that's not to say that these portfolio managers are doing the right thing; it's just that they are concerned about higher operating costs (I agree) and lower selling prices for the gold (I disagree).

They are also getting advice from people like John Tumazos at Prudential.

And that is a mistake.

The Prudential Equity Group research under John Tumazos is wildly pessimistic on gold prices I think, so his earnings estimates are going to be out of whack with mine. Tumazos is forecasting a $450 average gold price for the next 4 or 5 years.

I say that Gold will trade in the $750 to $1,000 range from within a year to the end of 2010 (i.e., foreseeable future).

Given that few gold miners can make much money under say $580 per ounce (all costs in), and the demand is much greater than supply from miners, I guess Tumazos is counting on a lot of central bank sales of bullion (through Prudential maybe?).

I mean, give me a break.

The notion that gold bullion is going to be priced at $450 into the year 2011 is so ridiculous that I figure Tumazos must be angling for Dino Kos' job at the Fed. :-)

The goldminers are in a state of flux.

There has been a lot of gold financings done in the past year or two on what I consider to be over-hyped properties that are now coming into production or may soon go into production, but I feel for only a short time.

The corporate finance teams of the broker-dealers who did some of this financing ought to have their head examined. As bad as Tumazos has forecasted gold prices (in my view), I think the financing teams on the Street have under-estimated operating and administration costs of the miners.

So what is happening here I think is that some additional gold production will be done by operators who will start to panic over low prices, and they will hedge, which will keep the gold price from shooting high like the past year. But the bulk of mining is being done by the professional managers of the larger cap companies, and these companies will not mine and sell their gold so quickly. That withholding of production, and the depreciating value of paper money, will generally put upward pressure on prices.

As central banks in North America and Europe continue to sell gold in order to buy their bonds and hold interest rates down, the buyer will be central banks of Russia and China and other countries that do not want to hold more USD or Euro.

Increasingly, however, I believe that central banks will be less of a factor in the gold market.

In the short-term, it could be that gold stays in the $550-$580 trading range as the UBS analysts believe, but I do not believe it will go back to $450 (as says Prudential). In fact I am on the record as opining that gold will trade at $700 before $500.

I hold the belief that the U.S. Administration and Congress will not manage to hold the line on spending, and will not raise taxes, and a slowing economy will depress future cash flows to government, so the USD is headed lower.

I also believe that Tumazos ought to spend some time with John Embry at Sprott Asset Management, who could teach him a thing or two.

Ah, but this polar opposite opinion is what makes a good market.

Btw, John Tumazos previously downgraded ABX from Hold to Neutral on Sept 8, 2003 ($20.25), and down again from Neutral to Under-Perform (i.e., sell) on July 27, 2004 ($20.18). ABX closed June 20, 2006 at $27.64. The 52-week high-low is $23.35 - $36.03. To follow his advice would have been a bad mistake.

He downgraded GG (G) from Over-weight to Neutral on Dec. 27, 2004 ($15.13), and then down again from Neutral to Under-Perform (i.e., sell) on Nov. 9, 2005 ($19.33). GG closed June 20, 2006 at $26.51. The 52-week high-low is $15.01 - $41.06. This one would have been a bigger mistake.

I'll let you make up your own mind after you review the Tumazos reports and these charts (I marked the ratings downgrades with arrows). But I think Prudential Equity Group needs to hire a new gold analyst. I think the current one is pathetic.

As readers know, my track record on Goldminers and Gold is a little better than Prudential/Tumazos.