Reading through a number of Internet forums and financial publications there are suggestions that the current "gold bubble" was nearing its disastrous climax and some where warning investors to exit positions immediately. A simple response to these suggestions is "What bubble?" I discussed the activity of gold and mining stocks in 1986/1987 with a client who was active at the time and it is apparent that apart from a small number of companies, the sector is yet to undergo a broader re-rating. We have not witnessed 50c gold stocks explode to $10 and beyond, nor have mining IPO's hit the boards at 500% premiums for those fortunate enough to secure an allocation. Based on this discussion the client is now searching through old boxes to dig up a copy of the business pages from that period that every gold bug would love to see replicated.

Whilst colleagues at work are discussing gold stocks with clients more frequently it is apparent that many are waiting on the sidelines for some confirmation that this rally is somewhat sustainable before embarking on a buying spree. It could well be the "fear of missing out" that provides the fuel for the next stage of this PM bull market that has only captured a more mainstream following over the last two-three weeks.

The year kicked off in somewhat of a sedate fashion with the gold price struggling at $279US whilst silver was attracting some attention at $4.58US. Some highlights included,

• Kingsgate Consolidated (KCN) would have to rank as one of the major success stories of 2002 with the company's share price rising from a 12mth low of $1.22 to a high of $3.79. The company was able to generate a $33m profit from it's Chatree Gold Mine in Thailand, and declared a 15c dividend and was able to become an ASX 200 company in the process. A further expansion at Chatree from 1.25mtpa to 1.8mtpa was recently announced.
• Croesus Mining (CRS) after the initial share price wobbles post CNGC merger were able to become a standout performer in the Australian Gold Sector through an excellent production profile, strong financial position and continual exploration success. The company also were included in the ASX 200 and had a yearly trading range of $0.28 to $0.90.
• Normandy Mining (NDY) which ranked as one of the most frustrating gold stocks due to it's uncanny ability to trade below $1.00 in a tight range managed to peak at a healthy $2.40 before being gobbled up by Newmont.
• Aurion Gold (AOR) was the product of a merger between Delta Gold and Goldfields Ltd and became the subject of corporate activity shortly thereafter. The shares peaked at $5.00 ($2.57 low) before the shares were removed from quotation (Successful takeover by Placer).
• Dalrymple (DRE) announced their first gold pour from the aptly named "Thunderbox" deposit (a slang name for toilet in Australia). The mine could hardly be regarded as a "toilet" with the share price peaking at $1.99 after a 12mth low of $0.68. The deposit was discovered in 1999 with LionOre Mining International as a JV partner.
• Oxiana Resources (OXR) generated significant retail and institutional interest in their gradual development of the Sepon copper-gold deposit in Laos. The company moved from being a junior explorer to one with a market capitalisation in excess of $350m.

• Alkane Exploration (ALK) reported on December 23 2002, 75m at 10.4 g/t gold (Wyoming Project NSW), which saw the company's shares trade up to a high of 40c after sitting in the low-mid 20's.
• Herald Resources (HER) on the 30th October announced a bonanza intersection of 0.42m at 1017 g/t gold from their Empress Project in Coolgardie WA.
• Croesus Mining (CRS) announced encouraging exploration results throughout 2002 with the highlight being 7m at 67.4 g/t at their Gladstone Project (25th October 2002).
• Strategic Minerals (SMC) was the subject of considerable speculation and trading activity following promising results from the Woolgar Project in QLD. (5m at 18/28 g/t gold 5th July 2002).
• Macmin Silver (MMN) was able to upgrade resources/reserves at the Texas Silver Project. (Near NSW/Qld border). The stock became the subject of increasing volumes as a result of a renewed interest in silver, and trading between 4.7c and 15.5c.

• Companies that reported major discoveries and/or acquisitions up to five years ago were able to gradually bring a number of these projects into production during 2002. Whilst the share prices reacted to the initial discovery/acquisition phase they remained essentially dormant until major project milestones were achieved. (See Australian Resource Stock Selection for further information) http://www.gold-eagle.com/editorials_02/locantro061102.html
• Further corporate activity cannot be discounted in 2003 despite the fact that the Australian Gold Sector has been decimated at the hands of foreign predators. The next stage could well involve mergers that are aimed at assisting smaller companies attain institutional and overseas interest through a larger production profile and market capitalisation.
• Despite exploration expenditure near multi-year lows, the recent price activity in gold should assist in allowing access to capital raisings that should contribute to a significant increase in exploration next year.
• Whilst the major gold producers enjoyed significant share price increases during 2002, the money flow thus far has failed to infiltrate the mid-cap and junior sector. Further interest in the POG, POS and mining as an investment class could well provide a change in the fortunes of a number of smaller PM stocks in 2003.
• History is only a guide to what "could" happen as opposed to what many assume "will" happen. Figures suggested that December was a month where broader market indices enjoyed reasonable percentage gains, however at this stage the performance of the DJIA is shaping up as the worst since 1931. The PM markets possess the ability to surprise both to the upside/downside at any given time.
• The price predictions of a number of analysts/commentators with the more recent activity have been pretty much spot on. With increasing media attention there is the potential for a new breed of AJ Cohen's to emerge that could well have a material impact on the market once a certain level of credibility is attained. Could 2003 be the year of a species that was bordering on extinction? (The Gold Analyst).

• Exploration in the Coolgardie region WA. Previous assays released during 2002 were most encouraging, however they failed to coincide with the recent POG spike and the share price rallies were unsustainable as the significance of the results faded into the background. Norseman must also rate highly as a potential exploration hotspot, whilst the bars in Kalgoorlie could again become renowned for their gossip as opposed to the "skimpies".
• Rationalisation in Tanzania/Ghana and corporate moves by Lion Group Ltd (major holder in companies operating in the region).
• Assessing companies with projects in the feasibility stage, and their potential for significant share price re-ratings. Whilst the class of 2002 have enjoyed the benefits of rising PM prices, selecting candidates for the class of 2003 is a tricky affair based on the exploration slowdown and lack of major discoveries.
• Silver exploration in the New England Fold Belt (NSW), which is set to commence on January 18, 2003.
• The success/failure of new IPO's in early 2003 will provide further evidence of the retail investor's attitude towards PM's. Based on a lacklustre 2002 in terms of raisings, it would appear that the jury is still out.
• Gold stocks at this stage are not reacting, as one would expect in terms of volatility relative to movements in the spot price. Those wishing to sell on major up days are naturally disappointed with the lack of movement, whilst investors keen to buy the dips are not getting the panic selling a $6 drop would normally provide. Even a tiny shift in this pattern could well provide an excellent indication as to where the activity is heading on a near/short-term basis/

I would like to see gold test it's 1996 high of $418, and silver threaten the $7.20 level, which has not been seen since Buffet announced his silver purchase in February 1998. I would regard this as more of a wish list than my price forecast, as to be honest I would not have the faintest idea where gold will be trading in 12 months time. There are simply too many variables in play, and the hardest part is actually thinking like a "buyer", when my main focus now is preparing clients for stock rotation (playing with the rubbish when the time is right) and an eventual orderly exit for the majority of positions if things start to overheat. At this stage the environment for outright punting is not suitable due to the fickle nature of the major trading brokers, and the failure of a number of juniors to attain a sustainable re-rating based on encouraging drilling results. Despite the POG rally, it is still a period where research and accumulating undervalued situations prevails over launching oneself into a grab bag of promoters stocks trading at 10c or below.

Whilst the timeless movie "Wall Street" has been continually quoted since it's release there is one from Lou which I feel sums the whole situation up perfectly, "Quick buck artists come and go in every bull market, but it is the steady players that make it through the bear markets". At this stage of the cycle the "quick buck artists" have hardly made an appearance, whilst those still reeling from the events of April 2000 remain sceptical at the yellow metals rise, and probably view gold as a major barrier to having former market darlings recover and ultimately prosper.

"Success or failure in 2003 could well be linked to each individual's expectations and not the near-term direction of gold and silver. Those that are planning on becoming instant millionaires early next year are positioning themselves for a major fall, whilst those that elect to maintain their already successful investment philosophy will simply bide their time in order to be well positioned should the current bull market escalate into a full blown speculative mania"

Tony Locantro
locantro@iinet.net.au

1 January 2003

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.