AUSTRALIAN PRECIOUS METALS REVIEW
Conditions for Australian precious metals stocks over the past week have been choppy, although a late charge towards the close on Friday restored some respectability to the scoreboard. Investors were faced with a volatile gold price, increasing pressure on silver below $4.90 and periods where sellers launched wave after wave pounding some stocks into temporary submission. One of the trends I have noticed in this rally from an early stage has been the enthusiasm of many to welcome a lower NY close as a buying opportunity, rather than just cause to take the bat and ball and go home. In any new bull market you have to contend with stale bulls, short-term traders, and those that elect to play the devils advocate.
Australian Internet forum sites are quick to be littered with calls such as "gold is finished", or the one phrase that infuriates me the most, "I told you so". After trading through the various false alarms in the gold market since 1998, from the outset this one felt totally different, and at times I cannot blame many for becoming somewhat complacent as stocks retreat from yearly highs.
No Excitement! What Now?
After gold broke through the $300 level, many have become infatuated with watching the price on a 20/7 basis, as short-term trading opportunities became somewhat plentiful. I liken it to keeping a vigil on a newborn baby in their early stages or swooning over a new car until a wayward shopping trolley scratches it. Everyone is reporting the smallest movement in the gold price until the excitement level subsides and trading becomes more regular and less frantic.
The problem for many I noticed was that a number of stocks simply ran too far ahead of themselves in terms of the bullion price, and in the case of Croesus (CRS) in particular the stock had become tired after an almighty run from the mid 20's to 90c. Stocks that quickly become market darlings are your best friends on the way up, but when pressure mounts there are not enough exit doors (even those that may be behind you). A number of our major producers have also had a torrid week with fickle sentiment dictating the terms, with share prices generally weaker. Some stocks managed to buck the trend with Dominion (DOM) and Strategic Minerals (SMC) (encouraging exploration results) standing out in a sea of red.
More often than not the more explosive moves to the up and downside will occur once increasing numbers turn their back on precious metals, and start looking elsewhere for opportunities due to the belief that on the first sign of weakness the party is effectively over.
New Floats
The environment for new mining floats in Australia has improved dramatically and we are currently going through a period where the market is literally flooded with a mixture of companies each at varying stages of exploration and development. It would appear that the demand for those already or nearing production is greater than the grassroots explorers and as a result stock is becoming difficult to attain. (Abelle ABX and potentially East African Gold Mines). In order for the second wave of new companies to get off the ground we require another kick in the gold price and/or some further exploration success, as investors are becoming far more discerning during the current period of consolidation in the gold price.
We are yet to see mining stocks list at 200-500% premiums as witnessed during the Nasdaq boom and whilst conditions have somewhat improved for our mining stocks, it would appear that we are still a fair way off "speculative mania" or a "bubble".
Gold and Silver in the Mainstream Press
The bullish conditions for precious metals have spilled over into the mainstream press with the number of articles increasing significantly. In our papers we are seeing a greater focus on gold stocks with analysts individual selections and views on where the POG was heading. In today's Sunday Times (WA) the general consensus was that gold was seen as going higher to $350, then potentially $400 and even one suggesting $500. Articles such as this appearing in newspapers when the POG was languishing sub $280 would have been unheard of.
I also could not believe my eyes when on Bloomberg a whole page of quotes consisting of gold and silver stocks appeared. The attention given to precious metals stocks on both Bloomberg and CNBC has only just started to increase from the zero to "only when we have to level"
The underlying sentiment towards precious metals stocks in Australia remains generally positive, however with every decline in the POG we are seeing the usual selling pressure that can dominate during the early stages of a bull market. The selling pressure is not dissimilar to that witnessed in October-November 1999, prior to the great Nasdaq boom which captured both the imagination and wealth of many investors.
Tony Locantro
locantro@iinet.net.au
18 June 2002
Tony Locantro is a client advisor in Perth, Australia, and the author of "The Green Room", A Guide To Speculating on the Australian Stock Market. Tony was previously a major contributor to Australian Internet forums under the nick "Budfox" from 1998-2001.
Stocks mentioned in this article are for illustration purposes only and do not represent investment advice. The author has both direct and indirect interests in stocks mentioned in the article and these may change without notice.
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