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The following is extracted from the November 2004-1 Issue of Resource Opportunities.
Four More Years Of The Same In U.S. Politics And Economics. The re-election of George Bush signals another four years of the same in U.S. politics and economics: budget deficits, trade deficits and mounting debts. The gold price has rallied since the election as at least a few investors are converting dollars into gold in anticipation of a continuing slide in the value of the U.S. currency. All in all, the gold market is likely to continue as it has over the past three and a half years: trending higher, but in fits and starts. I expect to see a modest pullback in the near term before the next leg up. Rather than getting into a lengthy discussion of why I believe that is likely, let me simply draw your attention to the gold price chart over the past three years. An upward move followed by a pull-back is a pattern that has now been repeated at least a dozen times. The equity prices have not yet reacted strongly to the last leg up in the bullion price, so they will probably not suffer much on the downside. If any weakness in equity prices does materialize, it would represent a buying opportunity. Gold is gaining increasing acceptance in the popular press. The brand names in the industry — the major and mid-tier producers — are already trading at big premiums to the current gold price. The current equity prices for those companies equates to 1.5 to two-times net asset value. That high valuation reflects investor expectations of a higher gold price. The big premiums in gold equities are also a reflection of the lack of size in the gold market. It is becoming more widely accepted that gold bullion and gold-based equities represent an excellent hedge against weakness in the dollar. The challenge for the managers of the multi-hundred billion dollar institutional funds is to find a large enough investment in the gold industry. An investor recently commented that he thought the entire gold industry was worth about the same as one company — Microsoft. I pointed out that the gold industry is actually worth little more than Bill Gates’ personal stake in Microsoft. Simply put, an institutional manager has few choices in the gold industry. By investing in the majors, he is faced with effectively pre-paying for a substantially higher gold price in order to participate in the gold market. The point is, as the gold industry gains greater popular acceptance, the inflow of money to the sector will ultimately cause serious distortions in values throughout the industry. We are fortunate as individual investors that we can still identify smaller companies that represent excellent value and highly leveraged exposure to the gold market. In due course (probably a couple of years or more out) we are likely to see a repeat of the 1996 scenario when stock prices became silly. That will be the time to beat a hasty exit. In the meantime, let’s continue to load up on gold stocks.
As exciting as the outlook for the gold market is, some of the smaller base metal companies are looking even more interesting. This issue and future issues will discuss some additional base metal opportunities. November will be another big travel month for me, starting with the New Orleans Investment Conference (November 10 to 14). In addition to my scheduled appearances, I will be doing another subscriber-only session. I look forward to seeing many of you there for a frank and candid discussion. After New Orleans, I will be going directly to Beijing, to participate in a big mining conference. While in China, I will also be looking at some gold projects. At the end of the month is the San Francisco Precious Metals Investment Conference. That event has always been very informative and this year’s program is shaping up to be the best ever. The next issues of the newsletter will include commentary from those three conferences and property visits, as well as some other interesting material that I am currently working on. By Lawrence Roulston
November 19, 2004
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