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Australian Precious Metals Review

October 22, 2002

One of the most intriguing battles I have witnessed in my years following the market is currently in full swing. The gap between those bullish and bearish on the direction of the market has widened significantly, along with the perceptions relating to precious metals market. After every significant "dead cat bounce" or "bear rally" in the Dow, NASDAQ and S&P500 I have noted renewed calls from colleagues and some clients that "gold looks beaten again and will sink well below $300". I view the action in the US as being perfectly normal for a market where we have witnessed substantial declines across the board, and any sign of good news is being met with a mixture of renewed buying and panic short covering from those expecting the Dow to slip into the 6000 range.

From viewing a number of pay TV channels it is apparent that those with a bearish view are starting to fade into the background in terms of publicity, and it was amazing to note that some putting forward a bullish stance even went on to say that the market is "not cheap by any valuation method", however they were recommending that now was the time to move into the market.


As from my previous articles on, I have made it perfectly clear that I am not a believer in technical analysis, however I would be crazy not to accept that it will in fact have a significant impact from time to time on the commodities and equities I am investing and trading in. The positive fundamentals for gold and silver have been well documented on this site, however there is always the risk that precious metals enthusiasts could be swayed into switching camps based on a level to the downside being breached. My investment approach is based on finding companies that are fundamentally undervalued in the current climate, and then later dreaming of what may eventuate should we indeed experience another crazy period to rival 1999-early 2000. In order to prepare for such a period it is necessary to look at the peak market capitalisations of some of the former dotcom darlings then try to envisage a similar result across only a handful of stocks. The results of this can be quite staggering, however if we go through an extended period of limited volatility, precious metals investments require at the minimum some fundamental support (either through a resource of cash position) to justify and maintain their market capitalisations.


The major producers such as Croesus (CRS), Lihir (LHG), Newcrest (NCM) and Sons Of Gwalia (SGW) up until the last week were holding relatively well against a backdrop of a higher DJIA and a lower spot price. Over the last few sessions we had CRS break below 70c, LHG slip below $1.10 under a barrage of institutional selling, and SGW lose around 1/3 of its value through not meeting expectations. Corrections such as these can go a long way in eroding investor confidence, however we have had two companies, Sipa (SRI) and Croesus (CRS) announce that they would be making returns of capital to shareholders. This indicates that projects are hard to come by on the market, and excess cash is best used to support share prices, and provide an incentive for investors to hang in there. If anything these moves could well entice others to make opportunistic takeover attempts as rationalisation again gathers some momentum.


Much to this disbelief of colleagues and investors, we have recently witnessed a sector of the market that has literally exploded. It was not in technology or PM's but rather in two companies that were the subject of IPO's where the funds raised is being used to acquire childcare centres. One company, which listed at $1.00, saw its share price peak at $3.98, and another 55c issue did its best impersonation of a tech IPO in 2000 and hit the boards at $1.42. This indicates that there are funds out there seeking the next 'boom sector", and based on this alone it is certainly a positive for the number of junior exploration companies out there drilling away in search of the next "elephant deposit".


From my own client base and others I have noticed that last week marked resurgence in the placing of "cheeky" out of the market bids designed specifically to pick up loose stock from the panic merchants. As a result many juniors and mid-caps have found renewed levels of support, and whilst volumes are essentially light, there have been only pockets of the capitulation phase many were hoping would be more widespread.

For many involved in the mining industry and the market in general the current period has been the worst many have seen for a number of years. Volumes have tapered off along with investor interest, however there always lurks those with sufficient capital to hit the market at the first sign of a "major mineral discovery" or another sector to grab the IPO limelight. Whilst further rationalisation across a number of sectors and the financial industry is likely I view the current market as an opportunity that could yet rival October 1999 in its own special way. The message I have been relaying to clients has been fairly simple, "Hang in there, and pick off the cheapies as they arise". As with commodity prices when they turn around the rallies in the PM sector have been nothing short of spectacular and well worth the effort and patience.

The first use of gold as money occurred around 700 B.C., when Lydian merchants (western Turkey) produced the first coins
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