OUTCROP

Gold: more questions than answers

YES, gold is soaring. But no, it's not necessarily a great investment. <b><i>The Outcrop</i> by Robin Bromby.</b>

MiningNews.Net

There was a bit of a flurry a few weeks ago when Epsilon Energy announced it was taking up uranium and gold projects in Guyana. The share price doubled on the announcement; however, it lost almost all that gain in the following trading sessions, before making a smaller bounce back.

Late last night, after the market closed, the company released further details of the West Omai gold project in the South American country.

The original Omai mine produced 3.7 million ounces, and it seems that a couple of million more ounces have been won by largely hand digging methods since 1971. The implication is that Epsilon thinks there's still a great deal of gold left to be dug up.

Also late yesterday, Indago Resources said it was spinning off its Tanzanian gold assets into a new company, Tusker Resources. A gold float! Wow, all is well apparently.

The point? For all the present enthusiasm for the yellow metal, gold stocks here, by and large, continue to lag the market. And not just here. US commentator Bill Fleckenstein put the situation thus: “Gold stocks trade as though an attack of the swine flu or worse will infect anyone buying them.“

This means that companies like Epsilon and Tusker face a potentially choppy ride even though they may have great, even world-class projects (and we never know that until after the last core sample has been assayed). When it comes to gold stocks, the market exhibits what might be called "irrational equivocation".

Overnight, meanwhile, gold futures in New York hit $US1118 an ounce.

And there are still 203 tonnes of International Monetary Fund gold overhanging the market. Surely, and even though India has put up its hand for half the IMF sell-off, this overhang would normally be cited by the sceptics as reason to doubt whether the high gold price can be maintained.

Fleckenstein makes another good point. He says that the doubters see the impending IMF sale as one brick in the gold war of worry.

Another is the argument that gold has topped the $US1000 mark only because Barrick Gold closed out its hedge position. But it turns out that is not the case; in fact, Barrick is still sitting on a 1.9Moz hedging position that has yet to be closed out. That’s quite a bit of yellow metal Barrick may need to lay its hands on.

Oh, and here’s another bit of news to send the anti-gold crowd scurrying back to their holes. There’s a good case to be made that high gold prices stifle demand in developing markets, especially India – right?

So how come India’s imports in October of 48 tonnes were up 45% on the same month in 2008? The reason being given for the surge is that both jewellery (note that!) and investment demand are growing in India.

Then there was the announcement on Monday out of Toronto by the Central Fund of Canada, shares in which are traded both in New York and Canada. This fund already holds 1.24Moz of gold and 62.11Moz of silver, and has now issued a prospectus which allows it to raise up to $US1 billion, with the money to be used to buy more gold and silver.

Take these items and put them together with the fact that many investors are now getting into physical gold either directly or through exchange traded funds, and you have a recipe for a real squeeze on the metal’s availability.

So, you would think, this means the big gold producers are breezing to the finish line. But no.

Read some of the latest gold reports and you see that the investor out there has apparently made a decision that gold itself is not the same thing as gold shares. Recently we’ve seen North American traders mark down gold stocks like Agnico-Eagle Mines and Newmont Mining, along with Barrick and Gold Fields. The first mentioned came in below expectations, the others above them. No matter, all their prices fell.

And that highly regarded South African commentator, Barry Sergeant, writes this: “Don’t be fooled by high dollar values, don’t be hoodwinked by flattering headlines from gold companies … The world’s major gold producers are sweating for free cash flow, the ultimate test for underlying performance.”

And, further down, he points out that the more dollar gold prices rise, the more gold majors need to raise cash from shareholders.

Well, here at home, we have seen very patchy dividend paying from Newcrest and Lihir.

So the gold investor is caught: holding the physical metal may be comforting but there are no returns, but buy the major gold stocks for leveraging on the metal’s price and you may still end up lagging the market.

Yet buy the juniors and you may end up being handed your head.

There are still gold explorers out there with potentially impressive projects (were we in the spruiking business, we could name a few) whose share prices are languishing and their stock may even be on the verge of becoming illiquid.

Here’s the bottom line: the gold price is up and strong. That’s the easy part. Finding a way to make a quid by betting on gold, well that’s quite another matter.

Neither MiningNews.net nor the writer implies any investment recommendation. Comments made in this article are of a speculative nature and are not intended to offer investment guidance. Investors should seek professional guidance.

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