Yorkton's Gold Outlook .....
YORKTON SECURITIES
MINING RESEARCH
January 30, 2001
Art Ettlinger, Ph.D., P. Geo, Calgary, AB.
Where We Stand on Gold
Over the past few months we have shifted our
position on gold from outright bullishness to that of a
near-term bear. Investor fatigue with gold shares
that do not move when exploration progress is
announced and developing opportunities in the base
and platinum group metals are strong motivators for
our change in attitude. From a technical
perspective, the twenty-year downtrend in bullion
price has been relentless with no signs of abating in
the near term. Indeed, the brightest outlook for gold
comes from its role as commodity and supply and
demand fundamentals. There has been persistent
shortfalls in new mine production versus
consumption which will eventually work in favour of
the commodity price. The timing for this is
impossible to predict because of the large overhang
of approximately 30,500 tonnes held by the official
sector, namely central banks, and due to the
continued hedging of gold by gold mining
companies.
For nearly four years we have recommended
speculative investors take a buy and hold approach
on selected gold exploration projects. These were
viewed as being exceptional in terms of discovery
potential and corporate management. Time horizons
for speculative investors however, have now
diminished beyond the time it takes to complete the
typical Phase I exploration program, largely
because of the rapid returns experienced during the
dot.com bull market. Consequently, the gradual
return of speculative interest we are now seeing in
mining is largely focused on the base and platinum
group metals, both of which have strong and
compelling fundaments. There is no clearer
evidence of this then in the current prices for
palladium and platinum, which are US$1,050.00 and
US$603.50 per ounce, respectively. In base metals,
commodities such as aluminum, nickel and zinc are
all at or near decade lows in LME inventory. While
much recent media attention has focused on a
potential crisis in copper supply, amplified by the
CEO of Freeport McMoRan Copper and Gold in a
televised interview a couple of weeks ago.
The first chart below shows the 20-year price history
of gold. Volatility in the commodity price has been
steadily declining since the late 1980’s and the
onset of the remarkable economic expansion led
by the United States during the 1990’s. It is our
view that gold will first test the 20-year support
line indicated below before a new bull market in
this commodity begins. This means that gold will
drop precipitously to the $225-$235 per ounce
level in testing this support. We don’t know when
this will happen, but when it does it will be quick
and mining companies will not have time to
respond, as the price will begin to recover sharply.
The second chart below illustrates the supply
deficit, in tonnes per year, between new mine
production and consumption during the 1990’s.
During this period, there was a cumulative deficit
in new production of approximately 12,700
tonnes. This is roughly 40% of the overhang in
central bank vaults, a not inconsequential amount.
In summary, we have changed our near-term view
on gold. Because of the strong 20-year downtrend
in gold price there is too much opportunity cost in
over-speculating in gold for now. The rush to
platinum group metals in Ontario and Quebec, and
the consistent interest we are seeing in base metals
gives too many opportunities for our clients to profit
in these non-gold sectors. Eventually, new
discoveries will be made in these commodities
which the market will amply reward. New gold
discoveries however, such as we’ve witnessed in
Guatemala with Francisco Gold and Radius
Explorations, show muted market response. The
share price gains realized upon announcement of
these two discoveries are not commensurate with
the risks involved in speculating in junior mining
companies.
ADE, Calgary, AB January 30, 2001 |
