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Newcrest lacks Midas Touch

James Kirby
February 26, 2006
Australia's most disappointing company, gold miner Newcrest, has staggered over the line with another poor result - and this time investors will not have to take any more excuses from chief executive Tony Palmer.

By the close of trade on Friday, Newcrest shares, at $20.89, had fallen more than than 10 per cent in two days and Newcrest was looking for a new boss after the unlucky Palmer announced he was hanging up his gold-plated boots to do nothing for a while.

Newcrest is Australia's biggest gold mining stock and the gold price is trading close to a 30-year high. Newcrest should be a winner but endless production problems mean this Perth-based company is a perennial loser in the gold mining game.

Even after the price plunge Newcrest shares remain highly valued - but it's got little to do with the company and everything to do with its gold assets and because it's a takeover target.

It makes you wonder whether Newcrest investors might not have been better off if Palmer and his team had decided to do nothing about two years ago. They could have played golf every day instead of going to work and Newcrest's gold reserves alone would have pushed the stock price higher.

Which goes to show that just because the underlying price of a commodity is going through the roof, it does not mean every company in the sector is going to be successful. Newcrest is probably the most spectacular example but there are dozens more gold stocks - including Lihir - that face similar challenges.

Gold is a unique commodity because it carries a reputation as a safe haven in times of trouble. This reputation has been questioned in recent years but Michael Knox, the chief economist at ABM Amro Morgan, has determined that in the 55 years from 1950 gold really did serve as a haven. With an annualised inflation adjusted return of 2.7 per cent, gold was better than bonds.

Many commodity experts expect gold will continue to trend upwards. After hitting $US572 an ounce it's slipped to about $US550 this month. Forecasts are widely variable, generally ranging up to $US750. I've seen one forecast for $US2000 - that's for what's known as a price spike but it's a genuine forecast and it's been made in Europe by Cheuvrex, the broking arm of respected French bank Credit Agricole.

There are 20 different reasons why the gold price is rising - China, inflation fears and so on. But the pivotal point is that many of the world's central banks sold gold in the last boom and the gold price slumped. Will it happen again? The bears say it will, it happens every time. The bulls say "this time is different" because the central banks do not have as much gold in the vaults as they had. Needless to say the central banks aren't telling.

Either way, there is compelling evidence gold is a sound long-term investment and gold is most likely to rise further. But don't buy those gold explorers, buy gold instead - there are index funds and pure gold funds listed on the ASX. You can even buy gold itself from the government-owned Perth Mint: at least then you won't be paying for management that might serve you better on the golf course.

James Kirby is the editor of Eureka Report at eurekareport.com.au


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