Appel: The Junior gold mining bull market resumes,
and what it may mean for gold
Dr Richard Appel -- Financial Insights
June 27, 2003
321gold.com
After suffering a severe correction that began in late May, 2002, the junior exploration companies may have finally resumed their Bull Market advances. During the past year there were a few periods of junior strength which temporarily awakened the small mineral exploration companies. These occurred whenever gold strongly rose. However, after each subsequent decline in the price of gold, the typical junior company gave back all of its short-lived gains. Today, numerous companies are at levels that mirror those of last July and August. That was the time when the majority of junior companies had fallen to their correction low points. Finally, the tide appears to have turned.
The past few weeks have begun to show a metamorphosis of the price action of numerous junior mining companies. One by one, one company after another, they have begun to experience renewed strength and upward price movements. Importantly, this has been accompanied by an increase in volume. These conditions represent a renewed inflow of capital into this minuscule market.
An aberration has attended the increased demand for junior gold companies. That is, during this period the price of gold has basically worked between $350 and $364; it has been going sideways. Whenever this state occurred during the past year it fostered a weakening in price for the majority of juniors. Today, it is as though the resource companies are focusing upon other factors.
The last period in which the junior stocks were priced at their current levels occurred when gold was trading in the $300-315 range. Today, after having approached $390, the yellow metal has successfully retested the $320-$330 level which was previously an area of extreme resistance. This now places $320-$330 as a zone of important support. Further, gold, after surviving the test of the $320-$330 area, has risen and appears to have firmly ensconced itself above $350. This is of major significance as it alters the outlook for all exploration and developmental gold companies. Now, lower grade deposits may be profitably exploited.
The past year has allowed juniors with projects of merit, sufficient the time to advance them. The passage of time has given them the opportunity to add value to their companies, without the expected share price increases. Some companies have been developing their resources towards economic ore reserves. When gold was priced in the low $300 area their projects may have been marginal at best. Another group of companies is similarly affected by the acceptance of a new, higher price for gold. These are the juniors who have amassed a portfolio of projects that need $375-$400 or higher gold to become economic. These companies are now nearing a point where they may boast great, economic gold deposits.
I believe that the recent strength among the junior segment of gold companies is telling us that the market is beginning to accept $350+ gold! This is drawing investors to the junior exploration sector, as the values that numerous of these companies now offer has become exceptional.
Another reason why the junior exploration companies are beginning to exhibit increased demand can be attributed to the continuing deterioration in confidence in the dollar and the undeterred resilience of gold. Both our nation's balance of payments and federal deficits continue to grow in the neighborhood of $500 billion a year. Further, our country is waging a worldwide war which must ultimately consume our wealth and strength. Foreigners are beginning to question if our nation can remain the world's leading power. This is why we are hearing increasing talk of the movement away from the dollar as either a reserve currency or as the pricing mechanism for oil. For these and other reasons I believe that an increasing number of American investors sense that problems are worsening and desire to protect themselves. Some will buy gold but others will accumulate gold stocks.
A final factor behind the resurgence in the demand and strength of the junior sector can also be attributed to gold. It has not always been the case but gold stocks often led the metal at important turning points in Bull Markets. Time and again during the 1970's, again in 1993 and 2001,and at other periods, the stocks first bottomed and resumed their advances prior to gold. It was as though the more sophisticated investors first acquired the shares, knowing that they would obtain a greater return, before turning to the yellow metal. It is for this reason that I believe both the junior and major gold companies have shown determined strength while gold painfully but methodically has plodded higher.
I am becoming increasingly confident that the correction in junior mining companies has run its course. It has been a terribly trying period for those who believe in the gold Bull Market. Time after time gold and the junior shares have moved sharply higher only to be again beaten lower in price. We have all had to lick our wounds from these recurring bouts of weakness in these markets. However, I believe that conditions have reversed in favor of both the junior companies and the price of the yellow metal. If the junior and major gold companies continue to build on their present advances it is only a matter of time, likely weeks rather than months, when the entire gold complex moves explosively higher. When that occurs, investors that exhibited confidence in their judgement, and patience to retain their investment positions, will be richly rewarded.
THE GOLD MARKET
Gold continues to work above $350 an ounce. However, each time that it probes higher, and subsequently experiences a set-back, enormous buying appears and again carries it northward. It is as though there are very powerful sources that are desirous of seriously increasing their gold holdings.
June 1, witnessed the Chinese government allowing their citizens to own gold. This is the first time in over five decades when the Chinese people have had this freedom. Historically, the Chinese have been ardent believers and owners of the yellow metal. As time passes I am confident that China will become an important component on the demand side of gold's supply-demand equation. Not only will the Chinese people purchase gold but also will their government. It appears obvious that the Chinese government is determined to elevate their nation's position in the world economy. To do this they must have a stable currency that foreigners will want to own. In time, I anticipate that the Chinese yuan will be gold-backed and help facilitate this desire.
The World Gold Council is poised to launch its gold exchange traded fund (ETF). Its subsidiary, World Gold Trust Services, LLC, will allow anyone desirous of owning gold to readily achieve that end. The gold will be traded in one-tenth ounce increments. This will be the most effective effort to date to "securitize" gold. Individuals, companies and funds will be able to instantly buy and sell their ETF shares without taking possession of the yellow metal. The ETF will enormously simplify the process for gold ownership. No longer will one have to purchase the physical metal and worry about insuring and safeguarding it. All that they will have to do is pick up a telephone and call their broker. The gold, backing the securities of the World Gold Trust Service's ETFs, is to be stored and guaranteed by HSBC Bank USA. I believe that this security will have an enormously positive impact upon gold's price. It will open the door for millions upon millions of investors to easily and cheaply acquire gold in an effortless fashion. Further, I would not be surprised if the World Gold Council's fund will consume far more gold than most would believe possible.
I believe that the primary reason that one should acquire gold is for insurance purposes. For that reason I have always suggested that individuals take physical possession of their gold purchases. Despite the integrity and honesty of those with whom you entrust your gold, things can happen. For any of a number of reasons the trustee may fail or they may not be able to deliver you your gold. However, despite my concerns I am confident that the vast majority of investors will view the ETFs as a panacea. It will allow them to mindlessly and fearlessly acquire gold, and they will be drawn to it. Ultimately, this will enormously increase investor gold demand and will help drive its price higher.
The above was excerpted from the July 2003 issue of Financial Insights ©2003
I publish Financial Insights. It is a monthly newsletter in which I discuss gold, the financial markets, as well as various junior resource stocks that I believe offer great price appreciation potential.
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