Golden Opportunities
Gold investors got quite a shock in late July 2002 when gold stocks took quite a hit along with the rest of the market. The Philadelphia Gold & Silver Index (XAU) was at one point down 38.4% from the early June highs. The iUnits S&P/TSX Gold Index (XGD-TSX) fell 42.4%. A nasty surprise for the gold bugs. But since then the XAU has rebounded 39% and the XGD is up 50%. Volatility remains forever present when it comes to gold stocks.
Yet there was one thing you could say about the gold bugs is that never let their eye leave the bouncing ball. It may have been a nasty shakeout but the recent rally quickly vindicated them. The shakedown had all the earmarks of a sharp correction within the context of a bull market. While the gold bugs may not be quite out of the woods just yet they have maintained their long-term prognosis. And that prognosis? This will be decade of gold. The cynic will say that gold bugs are always like that and were bulls even through the long winter of gold that lasted from its peak of over $800 in 1980 to the depths of the late nineties when it bottomed around $250. Brutes for punishment they have been.
Even today many mainstream analysts remain bearish or indifferent to gold. The hard-core gold bugs seem to be buried in numerous sites on the Internet. One very popular sight is www.gold-eagle.com. Worth a visit. There are many others too numerous to list. There are also some fine fundamental gold analysts we follow including Murray & Doug Pollit of Pollit & Co. Inc., John Ing of Maison Placements Canada Inc. two small Canadian brokerage firms and John Embry of RBC Funds Inc. who runs Royal Precious Metals, a mutual fund trust. All have been consistent in their call for gold to rise as the decade proceeds.
Gold is fairly cheap by most standards. Certainly in terms of the inflationary 1970's gold is cheap. Based on the CPI of 1982-84=100 gold today is worth about $170. This compares quite unfavourably to gold in the mid-1970's at $330 on the same basis. Gold is even cheap when compared to the same basis in the mid-1930's. Back then gold was pegged at $35/ounce. On the same CPI basis gold was equivalent to $255 then versus the current $170. That tells us that gold would have to get over $500 in today's prices just to be the equivalent of gold prices in the 1930's.
Even our other favourite commodity is cheap by comparison to earlier periods. Oil today is worth around $14.50 based on the 1982-84=100 CPI. In 1983 Oil was $32 telling us that oil needs to more than double just to reach the equivalent seen in the early 1980's. As we have pointed out before war in the mid-east has consistently had a negative impact on the price of oil. The pending war in Iraq, no it won't make any difference whether weapons inspectors are allowed back in or not, should be no different. Oil prices might be expected to spike to over $55, which incidentally would only be about the equivalent of the prices seen in the early 1980's.
This same depression is also seen in the prices of gold stocks. Newmont Mining Group (NEM-NYSE) (303-837-7414, www.newmont.com) is one of the world's largest gold mining companies. It trades at around $29. Yet in 1980 Newmont was trading at $24 and at one point was trading at over $80 in the late 1980's. Newmont was trading at $60 in 1996 when gold was over $400. The Philadelphia Gold & Silver Index (XAU) saw its price peak at around 157.00 back in 1987. Today it sits at less than half that price.
Gold has had a long time allure. Many today view it merely as a commodity. But traditionally gold was money. In August 1971 President Richard Nixon suspended US$ convertibility to gold. With US$ sloshing around the world because of the Marshal plan and the Vietnam War the US was forced to suspend convertibility when a large institution (central bank?) came to the US demanding gold for dollars. Effectively the US defaulted and rather than pay, changed the rules. Central bankers who were not fans because of the constraint the gold standard placed on their monetary mechanisms were now free to expand the money supply. It is no accident that since then that both money and debt have exploded.
Indeed it is the monetary and debt growth that is the real Achilles heel of our economy. The growth, as we have pointed out before has outpaced economic growth (GDP). The US has returned to budgetary deficits adding to an already average 6%-10% growth in both money and corporate and consumer debt (versus about 1%-2% economic growth). As demands grow to finance new government budgetary deficits to finance the war on terrorism and Iraq, interest rates will begin to rise and crowd out other borrowers. The consumer with no savings and a debt/income ratio in the US of around 135:100 is very vulnerable. Already foreclosures and bankruptcies are at record paces in both Canada and the US.
In the Kondratieff winter while stock prices fall, commodity prices and gold in particular rise. This was the observation of the last Kondratieff winter 1930-1949. Initially gold stocks fell along with the market but at the height of the depression Homestake Mining as an example had increased in value by over 200% from where it was at its 1929 peak while the Dow Jones Industrial was falling 80% plus. We have pointed out that gold performs well in the inflationary (summer) period of the Kondratieff cycle and as well in the deflationary (winter) of the cycle. In the summer cycle (1966-1982) the top three performers were gold, silver and oil. We expect them to be the leaders as well in the winter cycle.
Gold has always acted inversely to what is going on elsewhere. It is an asset class without any liability. The US with its record debt, record trade deficits and now moving back to budget deficits is ripe for a currency crisis. In every currency crisis over the past decade gold outperformed the local currency. And it will be no different with the US dollar. Gold is priced in US$ and as the US$ falls gold will rise.
We have seen recommendations lately from mainstream investment dealers that suggest that people should increase their weighting in gold bullion in their portfolio to roughly 5%. The most recent came from Morgan Stanley. Investors can accomplish this by holding either Central Fund of Canada (CEF.A-TSX) (www.centralfund.com, 905-648-7878) a closed end fund (note: when gold is in demand Central Fund can trade at substantial premium to net asset value) or the Millennium BullionFund * (www.bullionfund.com, 416-777-6691) a mutual fund trust.
There is a coming golden opportunity in gold and gold stocks and we might add silver and silver stocks. While there is still difficulty in breaking over $325 once we do we should quickly rise to $350/$360. In the interim opportunities to buy on pullbacks to the $300/$305 area where there now appears to be good support should be taken advantage of. Silver has been struggling in the $4.50 area and there is some outside risk that we could fall towards $4. But silver's demand/supply imbalance and a large silver short position demand that gold's junior partner should not be ignored. Indeed silver is better positioned to double before gold making holdings in silver or silver stocks potentially a better investment.
We would like to leave you with a few junior producers that have already performed very well and we believe could continue to perform well on the next leg up. Our four choices are Aurizon Mines Ltd. (ARZ-TSX) (www.aurizon.com, 604-687-6600), High River Gold Mines Ltd. (HRG-TSX) (www.hrg.ca, 416-947-1440), Golden Star Resources (GSC-TSX) (www.qsr.com, 303-830-9000) and a US silver producer Coeur d'Alene Mines Corp. (CDE-NYSE) (www.coeur.com, 208-667-3511) because we had to get a little bit of silver in here.
Our weekly charts of these stocks share some common characteristics. High River Gold and Golden Star Resources have both come off solid long-term bases. Coeur d'Alene also has a base although somewhat shorter in length. Aurizon Mines made a multi year rolling bottom. All are trading over their respective 40 week moving averages and all but Coeur d'Alene are trading over their four year moving average and their 40 week moving average has also crossed over the four year moving average. Of course all of them have been going through their first significant correction since rising from their bases. And thus far the key 40-week moving average has held. We expect it will.
Based on current price levels Aurizon is up over 600%, High River Gold up almost 800%, Golden Star up almost 500% and Coeur d'Alene up about 260%. Of the group Coeur d'Alene may have the biggest potential for a further percentage rise from here. Still as gold prices rise further these junior miners should chalk up some further impressive gains making the opportunity to pick them up at still bargain prices potentially golden.
* David Chapman is a director of the Millennium BullionFund.
September 19, 2002
Charts and technical commentary by David Chapman of Union Securities Ltd.
69 Yonge Street, Suite 600, Toronto, Ontario, M5E 1K3 (416) 604-0533, (416) 604-0557 (fax) 1-888-298-7405 (toll free) email david@davidchapman.com
The opinions, estimates and projections stated are those of David Chapman as of the date hereof and are subject to change without notice. David Chapman, as a registered representative of Union Securities Ltd. makes every effort to ensure that the contents have been compiled or derived from sources believed reliable and contain information and opinions, which are accurate and complete. Neither David Chapman nor Union Securities Ltd. take responsibility for errors or omissions which may be contained therein, nor accept responsibility for losses arising from any use or reliance on this report or its contents. Neither the information nor any opinion expressed constitutes a solicitation for the sale or purchase of securities. Union Securities Ltd. may act as a financial advisor and/or underwriter for certain of the corporations mentioned and may receive remuneration from them. David Chapman and Union Securities Ltd. and its respective officers or directors may acquire from time to time the securities mentioned herein as principal or agent. Union Securities Ltd. is an independent investment dealer and is a member of the Toronto Stock Exchange, the Canadian Venture Exchange, the Investment Dealers Association and the Canadian Investor Protection Fund.
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