2003
Year of the Junior Gold Exploration Companies
Dreaming of astronomical profits the year ahead ? Dreaming of the investment of the century ? Well, here's your chance ! Profits of 100% to more than 1000% are in the pipeline next year if invested in high quality junior exploration companies!
Yes, I know, to make a profit of more than 100% on a yearly basis is extremely difficult, even for the most successful day traders, profits of 100+% a year is a rare occasion, so why should it be so easy this coming year to make a fortune?
First of all I want to make a disclaimer that neither I am a financial advisor nor unbiased (I'm heavily loaded with junior gold mining shares), so this writing shouldn't be used as a financial advise. Investment decisions should be based upon your own research!
My conclusion that the investment of the century will unfold itself in the very nearby future (still not to late to get on board !) is based merely on historical facts. Because gold investments were not on the radar screen for most investors during the last 5 years , we will go back in time just a little more and will examine what happened with the gold mining shares the last time gold hit 400 US$/ounce. (Also the years of 1979,1987,1990 could have used for this purpose)
XAU Gold Mining Index behavior in 1996
As shown in this graph in 1996 the XAU mining index rapidly ascended to 150. At that time the POG reached US$400 Although this rally seems impressive, please hold your seat when looking at the exploding junior companies at that time!
To give an impression of what could happen with any high quality junior exploration company in a rising gold environment I will just show an example of what can happen!
Example of the extremely high upward potential for the junior exploration companies in a rising gold environment!
The graph shown below shows the stellar performance of a typical junior exploration company during the run-up in the POG of 1996 ! When Gold hit US$400 the XAU mining index hit 150 this company increased in value more than 500%!
When looking at the rapid ascending POG just a few years earlier in 1993 from 325 to 375, this company even performed better. It really exploded to the upside and managed to increase in value more than 1000% ! Yes gentlemen, 1000%!
So what does this all really tell us?
I think it's quite easy ! A solid POG approaching US$400 makes the XAU Gold Mining Index run, it will make the high quality Junior Exploration Companies fly!
Is it all that easy?
Well, it all depends on the POG next year. Although I can't read the Newspapers of tomorrow there are plenty of reasons to assume that this bull-market in gold (JULY 1999 : POG US$252, DEC 2002 : POG US$345) has still a long way to go.
I will give a brief summary of certain critical drivers which are all pointing towards higher prices of Gold this coming year!
Dollar: Weak dollar due to extreme debt levels and deficit spending (450 billion US$ on war on terrorism / Iraq), foreigners withdrawing their US investments, extreme increase of M3 money supply, extremely weak economy, extreme low interest rates. Weak dollar à Strong Gold
Interest Rates: History tells us that negative real interest rates are one of the strongest drivers of a gold bull-market. Nowadays, real interest rates are negative!
Supply: Several studies are pointing towards a declining Gold production of more than 30% over the next 8 years ! (Source : World Bank & Beacon Group Advisors)
This means that production will drop to 2000 tonnes/year by 2010!
Note : Even a strong rising Gold price can't raise gold production in short term because it takes at least 5 years to replace existing gold reserves.
Demand: Demand nowadays approximately 4000 tonnes/year and increasing rapidly! Demand increase by: Producer dehedging which will accelerate when the POG rises. Producers dehedging will count for a minimum of 300 tonnes demand next year (if not more) according to press releases from AngloGold & Barrick Gold.
Chinese Gold Market: Chinese citizens do have permission now to invest in gold bars ! Estimates are that the Chinese Gold market will count for an increase of total Gold demand of 300 ton or more.
Initial sales of Gold Bars went extremely well:
See press release from Beijing:
http://service.china.org.cn/link/wcm/Show_Text?info_id=52156&p_qry=gold
Customers Queue for Gold Bullion
Customers lined up to buy investment-grade gold bullion yesterday, when it went on sale for the first time in Shanghai since 1949 -- making a mockery of retailers that refused to sell gold bars earlier this week, claiming there was no demand for it due to high world prices.
Responding to numerous phone calls from eager buyers, Shanghai Lao Feng Xiang Co. Ltd., the city's leading gold jewelry processor and retailer, decided to sell 15 kilograms of bullion on a trial basis. It's safe to say the trial was a success as almost all the gold bars were sold within two hours yesterday afternoon.
Introduction ETF's for physical Gold
Investors will be able to invest directly in physical Gold just by buying a share of the ETF which will be introduced somewhere next year. It's the same principal of investing in the Nasdaq index just by buying a QQQ share. This is really extremely good news for the Gold Market because till today investors didn't like to purchase physical Gold because of it's practical problems such as delivery/storage etc. The World Gold Council is looking into this even as James Turk of goldmoney.com!
Note: The physical Gold Market is very tight. CEO of Gold Corp Robert McEwen tested the Gold Market by taking delivery of 1 ton of Gold. It took the Bullion Bank weeks to deliver ! So wonder what the impact can be of a dramatic increase of demand for physical Gold ?? And if delivery of 1 ton of Gold is so difficult, where should the 15000 ton of Gold come from which has been loaned by the Central Banks to the Bullion Banks which sold it into the open Market?
Short Positions: Half of all Central Bank's Gold (15,000 tonnes) has been loaned out to the Bullion Banks. They sold it into the open Market and is hanging around the necks of Indian woman. This gold cannot find its way back to the vaults of the Central Banks anymore, so how are they going to solve this golden issue??
Numbers regarding the enormous short positions of 15,000 were more or less seen by the mainstream investors as science fiction stories published by a group called GATA ! Fact is that all evidence presented by GATA over the last couple of years has never been proven wrong ! Times are changing, GATA reputation is growing fast now all over the world. When in summer of 2002 John Embry of the Royal Bank of Canada issued a detailed report on Gold in which he endorsed the manipulation theory of GATA, it became harder for the mainstream investor to Ignore GATA. When on dec 4 , 2002 Reg Howe and Mike Bolser published their report "Gold Derivatives : Moving towards checkmate" , not only GATA's credibility raised substantially among the average (gold) investor but it seems that finally, the investment world is waking up and is paying attention now to the giant short positions among the Bullion Banks. Suddenly, the tune has changed from "gold is dead" to the "upcoming mother of all short squeezes", a squeeze which will launch the POG several hundreds of dollars higher than it is today (a possibility which John Embry also mentioned in his report on Gold!)
Gold Dinar: Gold is slowly crawling back into the monetary system. The strong desire to a dollar independent currency made the Malaysian government decide to introduce a new currency, a currency made of Gold and so 100% backed by Gold ! Introduction will be taken place somewhere in 2003 for international trading purposes and time will tell if it will succeed or not ! Maybe future history will point to this introduction as being one of the most important happenings in financial history!
Bear Markets: Three years of bear markets in equities. Still many investors remain optimistic about next year ! What will happen when this optimism evaporates due to never ending declining indexes, yes, optimism will turn into pessimism. Investors will seek alternatives to protect their (last ?) savings and will start to look at the best performers over 2001/2002!
The incredible stellar performance of the Gold sector (Mutual Fund top 10 2002 consists of 9 Gold Funds !!!!) will certainly not longer be unnoticed ! More and more investors will flee to the incredible performing gold sector, this will have an explosive upwards effect for the entire gold sector because the total market cap. of all goldmines together is just over 60 billion $. You don't have to be a rocket scientist to understand what even a small inflow of money can do to this sector!
Well, enough food for thought!
Summary
History tells us that an POG approaching US$400 will make the XAU Gold Mining Index run, and the high quality Junior Exploration Companies fly fly fly !!!!
POG will rise because of:
- weak dollar
- negative real interest rates
- declining gold supply
- increasing gold demand
- covering short positions
- recognition of gold as money
- flee from equities to hard assets
Wish you all a healthy (golden) 2003
Eric Hommelberg
(the Netherlands)
ehommelberg@planet.nl
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