first majestic silver

Riding the Next Speculative Wave

August 19, 2002

The advent of the jet ski has revolutionised big wave riding, allowing surfers the opportunity to chase the monster waves in search of an adrenalin rush along with the potential for bonanza cash rewards courtesy of major organisations. The explosion in complex derivative products, combined with the general acceptance of margin lending and short selling has enabled many risk adverse traders and investors alike the ability to generate significant profits and losses that are magnified based on the performance of an underlying security and/or commodity.

The infamous Nasdaq bubble that was inflated in late 1999, has now deflated despite the fact that many continue to cling to the near-term hope that capital investment and investor interest will experience an upswing and that a bottom is firmly in place. With the benefit of hindsight a grab bag of technology stocks purchased during the mid 90's, and held through to the final encore in March 2000 would have provided the potential for the equivalent of a first division lotto win.

History has shown that despite the calls of a more "sophisticated" market the mechanics of each speculative wave are somewhat similar. This was evident though researching the tulip craze in 1637, through to Bre-X that gave Canada a massive dose of gold fever in 1997. As momentum builds so to does the inflow of speculative funds chasing the opportunity to ride the wave in search of financial reward and the self-gratification one musters as their win/loss ratio indicates they are clearly nearing "guru" status.

It is not a matter of "if" the next speculative wave builds, it is simply a matter of "when". For those that witnessed first hand the potential windfall gains the Nasdaq bubble provided, the key now is to allocate funds towards the sector they feel will be the next to take off and again suck in new investors like a powerful vacuum.


Amongst many investors gold would clearly rank as the sentimental favourite. The yellow metal has endured a painful 21 years after a vicious spike in excess of $800 in 1980, then a slide dominated by powerful short-term "bear market" rallies, central bank selling, short selling, hedging, and calls from mainstream analysts that it had lost its lustre in terms of its safe haven status. With the POG hovering between $298-$320oz, the gold bugs are finally starting to show some enthusiasm after countless false rallies that threatened to break the back of even the most hardened gold fan. The great gold bear market has coincided with one of the greatest bull markets in history that engulfed the Dow Jones, and resulted in a rush to US assets by overseas investors. Gold's negative correlation with the $US has provided the foundation for analysts to suggest that the metal is in fact in the infant stages of the long-term bull market and that the $US is about to experience a period of decline. The efforts of GATA have been well documented, along with the revelations of considerable exposure to gold-based derivatives that will run into difficulty based on a breach of the $354 level. Gold has the uncanny ability to send investors hearts racing, and at the first sniff of the next major discovery the junior sector could well again be ignited in similar fashion to the Gawler Craton boom in 1996.

Whilst the performance of gold and the companies involved in exploration and production is more widely covered in the mainstream media, I would expect silver to outperform gold on a percentage basis with the lack of viable investment opportunities in the Australian silver sector a key factor. I rate gold as a clear second favourite behind silver, despite the likelihood of a much more significant participant rate in gold that will be nullified by a vast array of investment alternatives.

The so called "poor man's gold" has had a torrid time along with its partner in crime, after the much publicised events surrounding the Hunt brothers which sent the POS to $52.50oz in 1980. Despite 11 years of deficit, and significant short positions relative to the entire silver market, the spot price continues to struggle despite a recent spike over $5.00oz. The US government has also signed a bill, where silver will be purchased on market to fund coinage programs based on the virtual exhaustion of the country's stockpile. It would be expected that silver would follow gold's lead, however more recently it has shown some tentative signs of disassociating itself with gold although the recent sell mirrored gold's near-term bout of the wobbles.

Silver rates highly in terms of compelling supply/demand fundamentals, combined with the potential for significant increases in investment demand as speculators seek a perceived cheaper alternative to gold-based investments. Silver is my number one selection, although a rising gold price is likely to be the initial catalyst. The current POS weakness (below $4.50) could well be with the benefit of hindsight an excellent entry point into physical or oversold silver equities. During the recent price spike, I noted a growing interest on Australian finance forums, and would expect the momentum to build significantly on any short-term rallies.

The PGM's enjoyed strong rallies from mid 1999 to early 2001, however the activity in Australia was somewhat limited due to the lack of investment opportunities. Whilst the share price of Aquarius Platinum (AQP) moved from below 50c to eventually peak at $10.95, the majority of PGM explorers arrived late at the party and could only catch the tail end of the price activity and renewed investor interest. Platinum's industrial uses as well as medical and jewellery could provide support, and there have been suggestions that it could in fact lead both gold and silver higher. Whilst a major rally across the PGM's cannot be discounted, the major factor going against it is the fact that prices only really came off the boil last year.

This is the sector that could yet provide the surprise packet, and take away some of the limelight from both gold and silver. With tantalum remaining weak, there has been some attention directed towards magnesium with major projects in Australia to come on stream. Growth in titanium minerals is expected to increase gradually in 2003, however the sector must rank as an outsider in terms of being part of the next speculative wave. A squeeze in uranium was widely tipped in 1998 to occur in the short-medium term, however in Australia apart from environmental and political issues there has not been any significant interest in the sector.

There could well be new uses discovered for relatively unknown commodities however it would take time for some companies to dust off old tenements and announce that they may indeed be prospective for a wider range of resources. There are very few companies in Australia that are focused on rare earths and other commodities as the majority tend to focus on the more conventional gold and base metals plays in terms of their diversity.

Some research into more non-conventional commodities and companies exploring and/or producing them could prove fruitful overtime, and if it is not gold and silver I would expect the next speculative wave to come from some of the lesser likes in terms of investor attention.

The diamond sector tends to be a hit and miss affair, as those companies that are successful in exploration are well rewarded with considerable profit margins and market capitalisations to match. The last significant diamond boom in Australia occurred in 1994 with Cambridge Gulf leading the charge of a number of junior hopefuls. There has since been a host of new entrants (producers in South Africa), whilst there has been some active pegging occurring in the Northern Territory in particular, and some new entrants waiting to list on the ASX. The sector as a whole is extremely unpredictable and could well be warming up to another burst of speculative fever. (It has been eight years after all).

The sector tends to be very unpopular with a fair percentage of speculative participants during quiet periods, however once a positive trend is established I would expect this situation to change quickly. Rates highly, however the sector has the ability to provide significant rewards or continue to bitterly disappoint the longer-term holders.

Whilst the oil price recovered strongly from the $11US level, the one ingredient missing in Australia was the major discoveries. Whilst the major producers were greeted with re-ratings, the junior sector failed to spark and as a result there were only a handful of significant discoveries and subsequent share price re-ratings. The current Middle East tension could well have a more immediate impact, however with the US economy struggling for momentum a high oil price would certainly not be on the agenda.

The speculative fever in the energy sector could well be related to more regional discoveries as opposed to the sector enjoying a broader based rally.

Whilst Eddy Murphy in "Trading Places" had great joy out of orange juice it would be hard to see a widespread boom engulfing the sector, unless of course there are new medical applications (dietary included), and everyone rushes to purchase the products, which provide financial windfalls to the manufacturers. There has been considerable interest in the cocoa market, and some apprehension as to whether or not the price of a "mars bar" would increase as a result.

Both of these have literally had bull markets to rival a "life sentence". Major bull market simply to not begin with P/E's in excess of 20X, and for many precious metals bugs it is a case of 'wake me up when they are sub 10".

There is an old saying that "The best investments are the ones the majority do not own", and this is certainly relevant to speculative investment as not everyone can become wealthy beyond their wildest imagination in a market "bubble". There always exist the potential for breakthroughs in medicine and technology, significant mineral discoveries and also the potential for derivatives disasters and attempts to corner certain markets. Stock market speculation is high risk/high reward, and for many the major obstacle is keeping the faith despite lengthy time periods between rallies, and price trends that tend to defy all fundamental reasoning. My rankings in order for the next speculative wave, will differ greatly from others, however a key theme that should remain constant is investing in quality companies and importantly people that will prosper in any market condition.

  1. Silver
  2. Gold
  3. Diamonds
  4. Platinum Group Metals
  5. Miscellaneous and Titanium Minerals
  6. Commodities (base metals)
  7. Oil and Energy
  8. Biotech and Healthcare
  9. Soft Commodities
  10. Technology Stocks
  11. Dow and S&P

According to the Talmud you should keep one-third of your assets each in land, business interests, and gold.
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