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
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
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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