THE CONTINUING DISBELIEF OF GOLD’S BULL MARKET OPENS A WINDOW OF OPPORTUNITY THAT MAY SHORTLY BE CLOSED
By Dr. Richard S. Appel
Feb 11, 2003
www.financialinsights.org
Gold began a major price advance during mid-December. It finally vaulted above the $330 price level that had halted three earlier rallies since its Bull Market began in August, 1999. To me, this extended period of backing and filling was part of the normal price action that has always accompanied primary Bull Markets. Gold’s rise above this critical junction confirmed my belief of the existence of a secular, gold Bull Market. Further, it set the stage for an explosive and extended rise in the price of the yellow metal.
The early stages of all Bull Markets are attended by disbelief. Humans are slow to change and even slower to acknowledge that conditions have changed around them. For most people, even if we believe that a sea change has occurred, we question if our analysis is accurate. It is more comforting to follow the herd. This is best illustrated by the actions of the legion of today’s investors. They refuse to accept the reality that the money that they lost in their common stock investments, will not be soon if ever recovered. These qualities cause even those investors, who are confident that a new Bull Market in gold has emerged, to become frightened and sell their stockholdings when each temporary correction arrives. Further, for most investors, who still believe that common stocks only move higher over time, the explanation for gold’s recent explosive rise is explained away as a reaction to our nation’s impending war with Iraq. The net result is the avoidance of gold stock purchases and their jettison at the first sign of impending danger.
The period from late 2000 to early-mid 2001 witnessed the emergence of the secular Bull Market in gold mining equities. The producing companies first arose from their Bear Market nadirs only to be later joined by the juniors. By June, 2002, most gold equities had made great advances bolstered by the steadily rising progress of gold. Again, when gold touched $330 in June, 2002, enormous selling pressure appeared and temporarily returned gold to $300. This in turn caused the evaporation of stock buyers, and an increase in selling pressure, from the entire gold stock complex. The major gold producers as well as the junior sector companies, suffered sustained, serious declines which terminated at their early December, 2002 lows. Most of the major producers retraced 25% to 40%, while the majority of the non-producers lost 50% to 70%, from their June high points. Only those steadfast individuals who recognized and believed in the presence of a gold Bull Market, the truly "strong hands", retained their shareholdings during this trying period.
After gold finally breached $330 in December, it quickly spurted higher. In only nine weeks, it touched $390 an ounce. However, throughout this time-frame, the gold mining complex responded with essentially a yawn! The majors and juniors alike, while most companies posted some gains, sported surprisingly few members that recorded new highs for this Bull Market. The forceful advance of gold failed to generate the expected price appreciation in the companies that mine and explore for the precious, yellow metal. All that was left were the various market watchers and analysts scratching their heads and searching for a reason for the gold mining complex’s poor price performance!
Numerous reasons for the lack of gold stock price advances given the great advance in gold were postulated. Experts questioned whether investors were reticent about purchasing any stocks. Some felt that it was because those who acquired the gold stocks instead of physical gold, foresaw a significant retreat in the gold price. How many times have we heard in the past few weeks that, "gold had a $30 to $50 or higher price premium built into it, due to the concerns associated with a war with Iraq or from the North Korean threat"? Others, retorted that the enormous short, speculative positions against many of the producing companies prevented higher share prices. Still others believed that a conspiracy existed among the central banks and the bullion banks. These entities were responsible for shorting the producing companies in an effort to sway buyers from purchasing gold. This tact, they postulated, was designed to frighten those possessing long gold positions. They would sell their holdings to avoid serious losses, as many would conclude that the stock purchasers correctly recognized that gold was destined to sharply decline.
It is inconsequential to this discussion to discern the reason why the stocks have significantly underperformed the recent, large, gold price advance. What is important is that an incredible buying opportunity has been generated in both the major mining and the junior gold companies. As long as we remain in secular gold and gold stock Bull Markets, one thing is certain. That is, that over time the price of gold and the producing as well as the important junior companies, will experience continuing higher prices. Today, I believe that this circumstance has offered an unusual opportunity to acquire a number of greatly undervalued gold equities for a fraction of their real, present values.
The gold producers profit from the amount that they receive for their gold sales, minus their production costs, their overhead, taxes etc. Because their various expenses are relatively fixed in any given time period, an increase in their receipts, resulting from a rising gold price, will drop to the producer’s bottom line before taxes. Thus, the rise in gold from the $320's to $380 resulted in almost a $50 per ounce increase to each producer’s profits. This is substantial! We are already beginning to learn of significantly higher non-hedged gold producer profits. I believe that these will be paled when 2003's first quarter profit results are announced.
The vast majority of small gold stocks, especially those which are in their exploration stages, will not fully benefit from the gold Bull Market until its third and final stage. I believe that this will not likely occur for a number of years. While all of the juniors have seriously suffered, a few of these companies have sustained substantial setbacks which I believe have driven their prices to levels far below their real values.
Junior companies that are guided by proven, dedicated and successful exploration geologists, have a great likelihood to make a mine. Few of the multitude of exploration companies possess such a potential! Most mines are made by individuals who have already met with mine finding success. These professionals are working in a period of the best of times for their industry, when their ability to raise capital will be among the easiest.
The ready availability of working capital is one of the most important ingredients to the success of any mining concern. In fact, it is the life’s blood of the industry! Without the ability to fund their activities the junior companies will be forced to return to the shells that they were, at the end of their earlier Bear Market. Today, there are a small number of well directed companies that are trading for less than a $10 C. million or even a $5 C. million market capitalization. If they even achieve a "sniff" of success, by announcing a good drill hole or by acquiring an important advanced project, they can easily soar to a capitalization of $25 C. or $50 C. million. If they are fortunate to define a gold, silver, copper or other resource worth $500 C. million or $1 C. billion, their market capitalizations can go ballistic. And, as gold further advances, the mining economics of its higher price make the possibility of this occurrence increasingly likely.
Dozens of juniors state that they have sizeable "gold resources". However, the existence of an ECONOMIC resource, referred to as a reserve, is far different from what many company directors claim. In order to bring a gold resource into production, a number of factors must exist. First, sufficient in-fill drilling must be performed to prove that the initial, widely spaced drill holes also have ore grade material between them Then, the project must have a clear title. Also, good road access, water and electrical power to the property must either be available or economically feasible to install. Next, they must acquire the various permits to allow them to construct the mine. They may have to post a sizeable surety bond guaranteeing that they will return the environment to its original condition when they are done. Further, their progress must not be impeded by wilderness, governmental or other restrictions. Great projects have been abandoned due to these issues. Additionally, the ability to recover the minerals from their host rocks may be impaired by a metallurgical problem. The gold may be efficiently recovered in the laboratory, but its cost might be prohibitive in a mining operation. Further, while proving up a resource, the company might run out of money before developing it to a bankable feasibility decision.
I truly can go on and on! This is the reason why the people that control the companies in which you invest are everything! Competent, proven mine makers are rare! They are successful because they possess a number of important attributes. They not only know how to acquire important grass roots or advanced projects, but they also have the ability to take those that contain significant mineral resources through the exploration phase and into production. They can raise working capital when needed because they have followings who know of their successes and will gladly finance them. These factors are shared by but a small fraction of companies that comprise the junior exploration mining universe.
The few juniors that have defined, economic deposits and are proceeding towards legitimate mining decisions, are among those which the recent gold advance has most benefitted! The higher gold price has only acted to enhance the economics of their projects. Yet, in many instances their share prices have suffered as greatly as those companies that possess and tout nothing more than "moose pasture". I believe that these companies will be the leaders in the approaching explosion of junior company prices. These, and other companies who are guided by the few truly competent and successful mining explorationists, are those that I try to ferret out and offer in Financial Insights. It is a difficult task and a great challenge. But, when met with success, the rewards are substantial.
I believe that the general disbelief that surrounds the Bull Markets in gold and the gold mining complex, is the greatest factor for the great lag in the gold stock prices compared to the strength in gold. Gold has enormous, world-wide support for the physical metal. Just as today’s investor is convinced that common stocks will recover and head higher, they are steadfast in their belief that gold is overpriced and that the gold producers and explorers will not move far higher in price. This has prevented a significant amount of investor money from entering the gold stock arena. Further, this pervasive mind-set makes investors quick to sell their shares whenever they suspect a gold price reversal.
I am already beginning to sense a drying up in the selling pressure and an increase in the number of waiting buyers, for many of the better junior companies. I am confident that once the overhead supply of stock is absorbed we will experience some breathtaking advances for numerous first tier junior companies. Further, I fully expect that the next sustained rise in gold will likely be accompanied by renewed and substantial strength in the vast majority of gold producing and exploration companies.
Currently, gold and gold stocks are in a corrective phase; a secondary correction in a secular Bull Market. I anticipate that gold will test $360 and possibly pierce the $350 level before the decline moves to its conclusion. If gold remains above $350 an ounce for even a few months, I anticipate a major price rise among the junior companies. In fact, it is likely that the gold stock complex will exhibit strength prior to gold’s next up-leg. I am confident that while their prices may temporarily weaken if gold further declines, that most gold equities will shortly make up for lost time and move sharply higher. This will allow them to fully discount their increased values which are attributable to the higher gold price. When this occurs those disciplined individuals who use this brief window of opportunity, will be richly rewarded! They will have acquired the better junior equities at levels that existed when gold was priced $50 lower, and will later sell them to the public when investors clamor for them. This, when gold stock prices fully reflect the benefit of the much higher price of gold.
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