From the Nasdaq bubble, to a mini gold bubble investors cannot take a trick, and whilst this continues property will tick along at a fair pace despite some horrendous storm clouds forming above. We are now being bombarded with advertisements for people to rush into depreciating assets funded by the astronomical rise in real estate prices, and I can see down the track it will be more like, "Bankruptcy Mate!" as the recreational boat is towed away into the sunset. It is the markets lacklustre performance that will eventually contribute to one heck of a burst, once rates eventually propel themselves in the other direction. The Australian economy has performed well above expectations in light of the US, however we were recently awarded the unwanted prize of having a population likely to suffer the most in the event of a severe economic downturn. Basically Australians have binged on a diet of credit and are being continually fed with "she'll be right mate, have another credit extension".

A return to the good old days?

With gold dropping heavily from a peak of $390, and a swag of new investors trapped in the exuberance of late January that failed to follow through, chances are that we could be returning to the days where resource stocks were for a select few. Those sitting on paper losses up to 40% and beyond in some cases, are hardly going to develop into PM bugs in the current environment, nor would they give glowing reports to friends of the sector that for the time being has crushed them.

Regardless of the public hype for PM stocks, those that have been able to announce significant discoveries and move into production have been re-rated and continue to perform in line with the sector. During previous exploration bubbles in Australia the stories tend to infiltrate the mainstream press just as they are about to burst, however you rarely heard stories of those that attained a "twenty-bagger" at the local pub. It seems the days of simply buying a popular gold stock without research are diminishing based on the simple fact that the market is in no mood for disappointment, and the gold sector is not moving in a similar fashion to the tech rubbish 3 ½ years ago.

The gold sector was recently infiltrated with chartists, quick buck artists and as per the usual the appearance of the "bullshit artist". With the benefit of hindsight popular magazines with gold adorning the front cover were obvious short-term sell signals, however it could be argued that the longer-term gold bulls were already moving out of the market darlings and into those stocks that had been largely ignored.

Gold Bull Anxiety

The performance of gold equities as I have covered in previous articles has been lacklustre in relation to the POG. This has created feelings of anxiety even amongst the most steadfast gold bulls that are fearful of a bubble failing to materialise and having their exit door blocked. It all boils down to your investment style and whether you are looking at an individual company's fundamentals and future or are simply buying a cheap option on the gold price.

Whilst the majority are desperate for another market bubble, the fact remains that around 97% of speculators after the event will be far worse off than they are now.

GOLD STOCKS WITHSTAND THE PRESSURE

Australian gold stocks were tested just after the open on Friday morning when the buy depths of a number of our majors were lucky to have 100,000 shares at each level. (Up to 1m previously). As key psychological levels were breached to the downside buying stepped in fairly quickly and the slides were arrested and some were even able to close in positive territory after a horrendous night for the POG.

AUSTRALIAN GOLD STOCK SCOREBOARD

From the table below it is apparent that Australian gold stocks on average have declined a further 8% from in three weeks. (Last table completed on February 20,2003 with a 30% average correction).

MY EXPECTATIONS GOING FORWARD

• The fall in the POG combined with severe corrections in major gold producers and mid caps has set the scene for gold equities to outperform the metal in the next phase of the PM bull market.
• Gold press coverage to continue to slide, and to become more "stock specific" in the near-term.
• Former market darlings of the gold sector to struggle under the weight of expectation and weak hands who pushed them during their previous run.
• A new batch of gold explorers and producers are showing the potential to outperform their more popular colleagues. At this stage of the PM bull market those that have enjoyed significant re-ratings are starting to exhaust their supply of "good news". The same also applies to growth stocks in other sectors where the current crop is starting to fall by the wayside.
• During periods of weakness I would expect that those companies possessing prudent hedging strategies would be seen in a different light. The recent rally in the $A gold price provided a number of opportunities for our producers to lock in premiums through call option sales.
• The more recent strength in silver should not be taken for granted, and I would expect the gold/silver ratio to gradually trend lower.
• Exploration budgets in Australia are starting to increase as companies mount major drilling campaigns to replenish dwindling resources/reserves. We are long overdue for a major discovery and the odds are this catalyst for the sector in general may not be terribly far away. Lightly explored regions such as the Musgrave are expecting a significant increase in activity once clearances are attained.
• The New England Fold Belt to attract further interest in relation to its silver potential, whilst Coolgardie could well become the backdrop for another bout of gold fever.
• Whilst the recovery in the broader market may be brief it is necessary to restore some confidence in gold equities. The current climate is not conducive to having a rapidly deflating DJIA and a strong gold price. In the rush for liquidity gold and mining equities have been heavily sold off, as investors tend to throw out their best performing stocks to hold onto the rubbish.
• The fundamentals that have supported both gold and silver remain, whilst there is every indication that the worst is yet to come in terms of economic conditions and the credit and real estate bubbles that are looming as potential threats in the short-medium term.
• Whilst the recent rallies in PM's, PGM's and commodities have been sporadic and limited to a select few, we could well be overdue for a broader commodities/PM rally. (Excluding soft commodities).

The correction in the gold price, combined with falling equity markets has resulted in stock market participation levels falling significantly after touching a record 52% in Australia. Whilst the greatest boom in financial history seemed to have captured the imagination of those that would have otherwise steered clear of the market, the current unwinding of a number of "financial bubbles" will only assist in returning the market to it's previous glory days where stocks were still able to rise several hundred percent despite the fact they were not pushed on Internet forums.

The speculative blow off in PM's may yet be months even years away, yet despite this the opportunities for significant profits remain. The correction in both the POG and related equities could well have wiped the slate clean for a new batch of stars to emerge with similar upside potential to the latest graduates. The key is to not only find them but also have the courage to load up when the vast majority chase the one that has already provided the bulk of it's upside. In pub talk the equivalent of "Going ugly early".

locantro@iinet.net.au

17 March 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.