Are we ready for a correction?
March 19, 2004
When the gold price peaked in 1996, attendance at
the Prospectors and Developers Conference in Toronto set a new record.
That record was broken this year when more than ten thousand people
showed up at the Toronto Convention Centre. Is that a sign of the
top?
Gold stocks are certainly not cheap. Just this week
I had a meeting with a fellow who had been bar-tending for the past
few years but decided it was time to get back into the exploration
business -- now that things are heating up again. I met several
people in Toronto with similar stories. They were around in the
early Nineties, couldn’t make it during the tough years, but
now they’re back.
Many old projects that didn’t quite make it
during the last cycle have been dusted off, renamed, and repackaged
into new companies. Investors are eager to invest and any company
that can mention the words gold, silver, copper, uranium or nickel
and ‘project’ in the same sentence qualifies.
A few weeks ago I made the point in my newsletter
that recent financings have become rather extreme. Looking at the
amount of money being raised in comparison to the quality of the
projects, and the terms of the financings that are available, it
appears investors are no longer concerned with the return of their
capital, never mind a return on their capital. All they care about
is not missing the next hot deal.
These are all signs that we have to be more cautious.
I don’t know if Warren Buffet actually said this or not, but
he is credited with saying investors should be brave when others
are scared and scared when other are brave. Well, most investors
in the market today seem very brave. If you feel like sending me
an email explaining just what a sissy I am, or chastising me for
not having any “faith” in the gold bull market, then
you’re one of the brave I am talking about.
I believe gold is money, and its price is a function
of its role as money. I also believe that we are likely to see gold
trade over a thousand dollars an ounce before too long (see previous
columns). But I also think the market is getting ahead of itself
judging by the quality of the deals I am seeing and the prices they
command.
So what, you may say. So what if the gold stocks appear
expensive. If the gold price doubles from its current level then
all these stocks are dirt cheap at their current prices, and they
are all likely to increase ten-fold from where they are now. Perhaps,
but not necessarily.
If you look at last week’s chart you’ll
notice that the actual gold price in constant 1990 dollars is currently
above the theoretical gold price. That indicates gold is currently
overpriced (if we compensate for the US dollar’s exchange
rate since 1990). It also means that for gold to increase significantly
from here the US dollar must devalue.
Ultimately the United States has to balance its trade
account. That means the currencies of China, Japan, Canada, Mexico,
Venezuela, Korea and Europe -- the United States’ largest
trading partners -- are the ones against which the dollar is most
likely to weaken the most. That’s not to say the dollar will
not decline against currencies such as the South African rand or
the Australian dollar. It is very likely that the dollar will be
weak across the board.
As the dollar weakens, almost everything the United
States imports will cost more in dollars. Metals, oil, uranium and
gold will increase in dollar terms because their prices are set
on international markets and not on domestic markets. The prices
of these commodities, and of gold, are therefore a function of exchange
rates.
If the gold price in other currencies does not increase
nearly as much as it does in US dollars, then gold mining and exploration
stocks may well be over-extended since most of the companies operate
internationally, outside the US.
The best place to be invested for leverage to the
gold bull market, which is really just a dollar bear market, is
the good ol’ US of A. The problem is finding quality companies
at reasonable prices to invest in. I have identified a few (that
I own and regularly discuss in my newsletter) but, given that most
junior exploration companies (predominantly what I invest in) are
quite expensive at the moment I have been looking for alternative
places to put capital.
Since the world is not going to use less energy in
the future I am quite interested in that sector. I already own a
few uranium exploration companies, but that market is both small
and has become expensive; it seems like every investment banker
I meet wants to do a uranium deal. That notwithstanding, uranium
may actually be one of the better commodity plays, especially given
Cameco’s (world’s larges uranium producer) predictions
about the uranium market.
There is a real push in the United States to find
alternative energy sources, especially renewable forms of energy.
One kind in particular seems very attractive: geothermal power generation.
I have devoted almost a decade to understanding mineral exploration;
geothermal development is similar to mineral exploration in many
respects. Even the potential rewards of proving up a viable geothermal
project are comparable to finding an economic mineral deposit.
There is a small Canadian company developing a geothermal
project close to the mining operations in north-central Nevada.
The project is close to infrastructure, the mines need power, Nevada
has many existing geothermal power plants – so we are dealing
with proven technology – and there is a demand for renewable
energy.
I will discuss this company in today’s email
to subscribers. If you’re interested in finding out what I
personally invest in go to www.paulvaneeden.com
and subscribe.
Paul van Eeden
Paul van Eeden works primarily to find investments for his
own portfolio and shares his investment ideas with subscribers to his weekly
investment publication. For more information please visit his website (www.paulvaneeden.com)
or contact his publisher at (800) 528-0559 or (602) 252-4477.
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