Junior Launch Time ?
Eric Hommelberg
In my Article "Declining Gold reserves benefit Juniors" I strongly suggested that the better Junior Exploration Companies will be in the spotlight soon due to the increasing appetite for new gold reserves by the large Gold companies. Due to the lack of exploration during the last 5 years (exploration budgets cut by 67%) the Gold producers are facing a tremendous challenge in order to replace their exhausting gold reserves.
(For details see : www.gold-eagle.com/editorials_03/hommelberg042303.html)
Barrick VP Exploration Alex Davidson : (March 2003)
"Big mining companies need to spend more on exploration, or else, at current annual production rates, reserves will be depleted in 10 years, he said. It can take six to eight years between making a discovery and starting mine production, and "we're not currently funding exploration at a level required to replace reserves," Davidson said."
Newmont CEO Pierre Lassonde : (August 31, 2003)
"The 20-year bear market in gold has weeded out marginal gold producers and significantly curbed exploration and production.
"If gold was $1,000 an ounce, it still takes four to seven years to open a mine," he said."
www.denverpost.com/Stories/0,1413,36~130~1600280,00.html
It becomes clear that replacing exhausted gold reserves with new gold reserves in short term is just a mission impossible for the big gold producers unless they turn to the better junior exploration companies.
What happens to a junior when a senior company shows its interest ?
Well, see the performance of some Junior Companies Year-to-Date below (published on Mineweb August 8) and especially the reason given for the strong appreciation of the number one performer.
"AIM listed Oxus has gained 239% to 48 US cents this year after finishing last year at an uninspired 14 cents. Part of the run-up may come from unconfirmed speculation that Randgold [GOLD] is interested in its assets."
http://www.mips1.net/mgjr.nsf/UNID/TWOD-5Q7V85?OpenDocument
You see ? If even unconfirmed speculation that a senior Gold Producer is interested in the assets of a Junior sky-rockets the company shares, what will happen if there is some serious interest from several senior companies? I don't know, but it seems to me that the way of least resistance for the junior shares is up, up, up and up !
Declining Gold reserves are not the only pillar propping up the Junior shares. The other pillar is of course the POG ! Remember what a rapid rising POG approaching $400 did to the Junior Gold shares back in 1996 ? Yes, they appreciated in the 100-1000% range !
For some examples and a detailed overview see : "2003-Year of the Juniors"
www.gold-eagle.com/editorials_02/hommelberg123102.html
Many of the better Juniors appreciated already more than 100-200% this year and I expect to see some real fireworks when we're approaching the $400 mark in Gold.
So is Gold headed for $400 in short term ?
Although nobody can read tomorrow's newspaper, there are some strong indications that we can see a POG exceeding $400 by October.
For a price projection based on the popular 8 week trading cycle in Gold see :
www.gold-eagle.com/editorials_03/hommelberg071803.html
Again, nobody can predict future movements, but if this rally won't succeed to topple the $400 mark, I'm convinced it will do later on anyhow. The fundamentals are simply just too strong.
Here are some updates regarding the case for a higher POG which are mentioned in "Year of the Juniors"
Higher POG 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
Weak Dollar
Current Account deficit exceeding 5% of GDP isn't really a strong pillar for the dollar ! Just see what Stephen Roach of Morgan Stanley recently said :
Global: Warning Shot
August 1, 2003
Stephen Roach (New York)
There comes a point in every current account deterioration when enough is enough -- when foreign investors demand a premium to keep funding a saving-short economy. History tells us that such a breaking point usually occurs when the current account deficit hits 5% of GDP. That's the threshold that typically triggers the classic current account adjustment process -- characterized by a weaker currency, higher real interest rates, and slower domestic demand that sparks a rebuilding of national saving (see Caroline L. Freund, "Current Account Adjustment in Industrialized Countries," Board of Governors of the Federal Reserve System International Finance Discussion paper #692, December 2000). America is at that threshold right now. Its current account deficit hit 5.1% of GDP in 1Q03; in dollar terms, that equates to some $544 billion annualized, requiring foreign capital inflows of around $2 billion per business day. Moreover, the outlook is even more disconcerting. Courtesy of large and expanding federal government budgets deficits, the US external gap seems likely to rise into the 6.5% to 7.0% range by the end of 2004; that would require capital inflows of nearly $3 billion per business day.
www.morganstanley.com/GEFdata/digests/20030801-fri.html
Or see what the IMF recently said :
"IMF draft sees potential for more dollar depreciation"
Wednesday August 27, 5:25 am ET
"MILAN, Aug 27 (Reuters) - The International Monetary Fund sees further potential for a depreciation of the U.S. dollar due to the high U.S. current account deficit, according to a draft IMF report obtained by Reuters."
"The IMF sees further potential for a depreciation of the dollar given the high current account deficit", the draft report said."
"It sees the U.S. budget deficit reaching 6.1 percent of gross domestic product in 2003, with a structural deficit of 5.2 percent of GDP, and only expects a slight decline in 2004, according to the draft World Economic Outlook due to be submitted at the annual meetings of the IMF and World Bank (News - Websites) in Dubai in September."
The Economist August 30th edition :
US Current Account Deficit is headed in all probability to an historic 7% of GDP in 2004.
Conclusion
Dollar Depreciation seems inevitable ! Dollar Down 
Gold Up !
Increasing Demand for Gold
According to the World Gold Council, the actual demand for Gold is Approximately 4000 ton/year.
Put this in perspective to the gold production of 2500 ton/year and declining to 2000 ton/year by 2010 ! The current deficit of 1500 ton/year has been filled for years by Central Bank sales/leasing, producer forward selling and scrap supply.
Is this sustainable ? Answer = No !
Demand for Gold will grow substantially (imo) due to the following :
- Producer Dehedging
- Introduction ETF's for Gold
- Deregulation of Chinese Gold Market
- Increase of use by Industrial Applications
Producer Dehedging
Gold Producers turned to net dehedgers this year and according to Newmont CEO Pierre Lassonde dehedging will continue at the rate of 300-400 ton/year thereby supporting the Bull Market in Gold.
Although some analysts may argue that producers will be stepping up their hedging activities again soon because of the rise in POG, the opposite is true.
Just read the following press releases concerning hedging activities and judge yourself :
Newmont CEO Pierre Lassonde
Producer dehedging also featured high on the list of bullish indicators for the gold market, which he said was likely to continue at the rate of about 300-400t a year.
Lassonde expected gold price elasticity of about US$5/oz (increase) for every 100t of hedges closed out. He said the last of the 9.4 million ounces of hedged production Newmont inherited from Normandy would be closed out inside of 18 months.
www.mips1.net/C2256D78003ACE46/0/80256D7800445A6642256D78004823E3?Open&Highlight=2,lassonde
Australia's WMC exits gold hedge positions
Tue August 12, 2003 08:56 PM ET
SYDNEY, Aug 13 (Reuters) - Australia's WMC Resources Ltd said on Wednesday it had closed out hedge positions covering 370,200 ounces of gold in the half year to June 30, joining a legion of mining houses seeking greater exposure to world bullion prices.
"There is no doubt that hedging is falling among the mining companies," JP Morgan Securities Australia analyst Geoff Breen said."
"World number two gold miner AngloGold Ltd removed about 800,000 ounces of gold from its hedge book in the last quarter, but still holds 8.3 million ounces pre-sold, although it continues to unwind its positions."
http://reuters.com/financeArticle.jhtml?storyID=3267256&newsType=usGoldRpt&menuType=markets
Cambior, once burned, aims to slash gold hedging
TORONTO, Aug 12 (Reuters) -
Cambior Inc. (CA:CBJ) said on Tuesday it will all but wipe out its gold hedging program by the end of 2004 while the Rosebel project in Suriname is on schedule to sharply boost production early next year.
The mid-tier producer, whose hedging program nearly pushed the company into bankruptcy when gold prices surged in 2000, said it will slash its hedging to 50,000 ounces by the end of 2004 by accelerating deliveries and buying back positions.
In a conference call with analysts, the Montreal-based company said it has a new policy of not allowing additional gold hedging, unless funds are needed to be earmarked for future project financing.
AngloGold likely to reduce Ashanti gold hedges fast
Tuesday August 5, 6:14 am ET
By James Regan
KALGOORLIE, Australia, Aug 5 (Reuters) - South Africa's AngloGold Ltd (ANGJ.J) said on Tuesday it was likely to act fast to reduce Ashanti Goldfields Ltd's (AGC.GH) gold hedge book if it succeeded in buying the Ghanian mining house -- a move that analysts and traders expect to support the gold price.
"We would be likely to move quickly to reduce their hedge book, as we are doing with our own," an AngloGold spokeswoman told Reuters."
http://biz.yahoo.com/rm/030805/minerals_anglogold_ashanti_4.html
Worldwide gold hedging falls 7 pct in Q2-GFMS
Friday August 22, 12:35 am ET
SYDNEY, Aug 22 (Reuters) - The number of gold hedges worldwide was cut by 5.2 million ounces in the second quarter, underpinning a rally in bullion markets, consultants Gold Fields Mineral Services Ltd (GFMS) said.
http://biz.yahoo.com/rm/030822/minerals_gold_hedges_1.html
Conclusion
Producer dehedging will create an additional demand for Gold of 300-400 ton/year for the next coming years !
Introduction ETF's for Gold
In March the first ETF (Exchange Traded Fund) for Gold (Gold Bullion Limited) was introduced at the ASX stock exchange. This introduction makes it easier for investors to own physical Gold, listings in Europe and US will follow soon.
www.goldbullion.com.au/news/media_release_030819.pdf
The Fund started on March 26 with approximately 1,000 ounces of Gold. In just five month time the Gold holdings increased to 131,073 ounces of Gold.
For a detailed overview of the gold allotment see :
www.goldbullion.com.au/holdings/GOLD_allotment.xls
Trend is obvious and is going upwards.
A simple calculation will learn that if the US ETF for Gold will perform in a similar way as the AU fund, we can expect an additional demand for Gold in the order of 200 ton/year.
Prorated for a U.S. population that is 15 times as large as Australia's, the proposed NYSE product could spark demand of 205 tonnes, or about 6.6 million ounces, says Smith, a well-known gold analyst. That's about the yearly production of a dozen or so mid-tier producers of the metal.
http://cbs.marketwatch.com/news/story.asp?guid=%7BAB923689%2D6B45%2D4A7A%2DBFA9%2D935DFF2000CA%7D&siteid=mktw
Conclusion
Introduction ETF's for Gold will create an additional demand for Gold by at least 200 ton/year
Chinese Deregulation of Gold Market
Chinese citizens do have permission now to invest in physical Gold.
Do the Chinese have an appetite for Gold ?
Well, last year when the first trial took place regarding Gold bar sales, it just took two hours to sell the 15 kg of Gold bars leaving many with empty hands.
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.
Also the appetite for Gold mining shares is tremendous.
Two Chinese Gold Mining companies who went public lately (August 2003) experienced a tremendous investor demand for their shares. Both received much more orders than the amount of stock available ! Zhongjin received 824 times more orders than stock available and Shandong Gold received 2171 times more orders than stock available !
"Gold mining companies like Shandong and Zhongjin are favored by investors as they are assured of stable earnings as gold will always be in demand," said Fang Binyin, a trader at Guotai Junan Securities. "
So what to expect from the Chinese Gold Market coming years ?
According to Newmont CEO Pierre Lassonde the Chinese Gold Market will be the biggest Gold Market in just a few years time !
"Lassonde said the 1 June deregulation of the Chinese gold market was an epoch making event for the gold market. He said China had the potential to become the biggest consumer of gold over the next three years, overtaking India at around 600-700 tonnes a year. "We'll see the impact of that in a year or two … China will surpass India in a short time as the largest gold market in the world," he said."
In an Interview with the Denver Post he said : (August 31, 2003)
Then there's China, where after years of communist controls, the government is deregulating gold, allowing gold companies to have initial public stock offerings, creating a gold exchange and even allowing its citizens to buy gold at market rates.
That's 1.3 billion people who now are permitted to buy gold at market rates as they participate in their fast-growing economy.
"China by itself could become 40 percent of the entire gold market," Lassonde said. "That is the most important thing that's happened to the gold market in the last five years, and yet very few people have picked up on it."
www.denverpost.com/Stories/0,1413,36~130~1600280,00.html
Conclusion
Chinese deregulation of the Gold Market will create an additional demand for Gold of 300-400 ton/year.
Increase of use by Industrial applications
Excerpts from the Mining weekly
"The long-standing role of gold as a store of wealth, and its use in jewellery, has largely overshadowed its industrial uses - this although the metal has important uses in electronics, dentistry, and in some pharmaceutical products. Department of Minerals and Energy gold and platinum group metals chief mineral economist Alex Conradie tells Mining Weekly that new technologies have allowed gold to be used in new ways, including some that can save lives."
"World gold consumption is set to increase by 300 to 400 tons a year over the next five to ten years, as a result of new industrial applications of the metal, according to the World Gold Council, concludes Conradie."
www.miningweekly.co.za/min/utilities/search/?show=38507
The Vancouver Gold 2003 seminar (Sept 28 till Oct 1) organized by the World Gold Council is completely focused on Gold and its industrial applications.
www.cim.org/mce/gold2003/introEn.cfm
Conclusion
New industrial applications will create an additional demand for Gold of 300/400 ton/year.
Summary
Current demand for Gold approximately 4000 ton/year.
Demand will increase due to :
Producer degehding 300-400 ton/year
Introduction ETF's 200 ton/year
Deregulation Chinese Gold Market 300-400 ton/year
New Industrial Applications 300-400 ton/year
Current Gold production approximately 2500 ton/year.
This level is not sustainable and will drop the next coming years due to lack of exploration efforts during the past 5 years.
You don't have to be a rocket scientist to see that the demand/supply deficit is only to grow bigger upcoming years. So with a demand for Gold approaching 5000 ton/year, who's going to supply the Gold ? Yes, people will realize soon that Gold is precious and hard to find !
It's therefore my strong believe that the high quality Junior Exploration Companies will unfold themselves as an investment opportunity of a lifetime.
Many juniors already appreciated by more than 100-200% this year. Although this seems impressive, you ain't seen nothing yet (imo)!
Important critical drivers for Gold such as the Chinese Gold market do have a long term impact on Gold and therefore supporting a long term Bull Market in Gold.
Just repeat once again what Newmont CEO Pierre Lassonde said regarding China and Gold :
"China by itself could become 40 percent of the entire gold market," Lassonde said. "That is the most important thing that's happened to the gold market in the last five years, and yet very few people have picked up on it."
Yet very few people have picked up on it, hope you will !
Eric Hommelberg
September 4, 2003
Comments are welcome at :
ehommelberg@planet.nl
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