Fool's gold - Beware the Newcrest rally

What a day to announce an exit from Newcrest Mining.

Perennial Investment Partners' sell down of the accident-prone gold miner took place in June. But announcing it on a day when gold prices surged and Newcrest reversed its recent alarming slide was less than opportune timing.

Newcrest shares jumped 12% yesterday to $11.10 while many of its smaller listed gold peers leapt as much as 20% as gold prices rebounded off recent lows.

But is it all just a fool’s rally? For the fundamental forces driving gold prices lower haven’t altered. Inflation, rather than being a concern, has become a lofty goal for most central bankers, a situation that does not bode well for the precious metal or high-cost gold producers such as Newcrest (see Cliona' O'Dowd's Collected Wisdom).

A major driving force for gold in its surge towards $US1800 an ounce was fear that the unprecedented money printing programs underway in the US, Europe and Japan – to solve a debt crisis – ultimately would create a break-out in global inflation that would wreak havoc.

That still may happen. But there is no sign of an inflation problem emerging any time in the near future, or even the medium term, a situation that gradually began to dawn on traders in February and March.

US Federal Reserve chairman Ben Bernanke added fuel to the short-selling fire that had been lit earlier this year when it became clear the inflation genie was still firmly locked away and gold had overshot.

His comments in May that the stimulus program eventually would be wound back as the economy recovered, at a time when inflation was struggling to gain a foothold, saw an aggressive sell down of gold to $US1192 an ounce. That followed April’s historic drop from $US1550 to $US1380.

But the Bernanke bounce on global markets this week has seen short-sellers scrambling for cover, pushing prices sharply higher.

Wednesday night’s comments from the Fed chairman that monetary policy would remain easy has seen traders storm back towards the yellow metal, given the prospect US interest rates would remain at record lows.

When it comes to gold and gold miners, however, any recovery is likely to be short-lived.

Newcrest, now belatedly attempting to rein in costs in a low price gold environment, this week laid off scores of workers at its Telfer mine as outlined in its ill-fated June 7 announcement that sparked a furore over selective leaks to analysts.

In April, Newcrest was forking out $US1573 to produce an ounce of gold at Telfer. Laying off workers may be the first start to reducing costs. But it would appear the company’s problems extend far beyond wages.

Even after this week’s bounce, gold prices are sitting below $US1300 an ounce, indicating the company is still bleeding cash from its premier Australian property.