AUSTRALIAN PRECIOUS METALS REVIEW
Precious metals stocks in Australia have come under considerable selling pressure, as negative sentiment began to take hold. Whilst gold struggled under the weight of long liquidation and reported selling from Japanese investors, silver at one stage looked likely to breach the $5.00 oz level (US), but drifted lower to $4.91.
Gold Discussion Slowing
I have noted a significant decrease in gold discussion and stock recommendations on a number of Australian Internet forums. As the price rose to the $330 oz level, forums were clogged with questions on hedging, drilling programs and corporate activity. The retreating gold price along with a mild recovery in US markets has resulted in an increase in price of industrial and technology stocks. Once the share prices of numerous gold stocks buckled under the pressure, those with a negative viewpoint on gold emerged and there were renewed calls that the "bull market is about to come to an abrupt end".
Market Still Rewarding Results
Dwindling share prices and interest can benefit those companies that can report excellent drilling results as speculative funds chase those stocks showing strength and increasing volumes. On Friday Strategic Minerals (SMC) reported encouraging gold intersections and the share price rallied from a previous close of 22c to at one stage 29c. From ASX announcements and company updates, drilling activity in Australia is on the verge of a significant increase and results will flow through August and September.
New Floats Struggling
During the week we saw two new gold hopefuls hit the boards, and both struggled below their issue price. (Although in the case of De Grey the option issue cushioned the impact). The number of new issues has literally exploded, and no doubt investors will become more discerning until the gold price shows signs of another rally. There has also been an increase in companies purchasing non-core assets from larger companies or privately owned entities and as a result the producer ranks will witness an increase mainly through acquisition than new discoveries.
Producers Rallied Late On Friday
After a week of heavy selling, a number of Australian gold producers saw their share prices kick late in trading on Friday. The major rises came from both (CRS) and Newcrest (NCM). The mid-caps and juniors continue to struggle as stocks come off their yearly highs.
Superannuation Returns Falling
From the AFR today it is apparent that only two of the thirty-four top superannuation funds were able to provide a positive return to participants. The median return was a negative 4.1%, and this reflects the difficult nature of markets we have experienced over the last financial year. Could these returns be bolstered this financial year with some diversification into precious metals?
Sentiment Neutral-Negative
From speaking to clients and other participants the sentiment towards gold has shifted in line with a retreating price. There have been signs of "buying the dips", however confidence levels appear lower compared to previous corrections. The situation has not been assisted with a flood of new floats, and mixture of analyst's views provided.
In order for sentiment to shift back to positive a stabilisation and rally in the POG would be required along with further signs of corporate activity and/or further encouraging results from the juniors or a major in an exploration hotspot.
I remain bullish on precious metals (in particular silver), and am using the current weakness across a number of stocks to strengthen our holdings. I have also selected a small number of stocks that have a mixture of gold and base metals to diversify away from pure gold plays whilst the near-term direction is established. Positions in explorers are being taken prior to drilling campaigns as the POG weakness has provided some decent opportunities to accumulate those companies that offer leverage without the significant downside risk associated with a more mature bull market. The bear market rallies in the Dow Jones and Nasdaq could well ensure that the "window of opportunity" remains open for an extended period of time.
Tony Locantro
locantro@iinet.net.au
8 July 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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