If It's Got To Do With Gold - Buy It!

Friday, February 03, 2006

Not much time today as I am busy with an ebay garage sale (turns things that would otherwise go into the dumpster into hard cash.)
But looking at the weak stock market and the even weaker mining shares I feel tempted to load up with more gold (and silver) miners.
The Amex Gold Bugs Index today experiences its first correction in a while after it rocketed virtually uninterrupted from 250 to 348 points. Today it is down 3.6% at the time of writing although gold holds steady above $570.
If you need a couple of reasons why to buy anything related to gold I strongly recommend you download Chevreux' 56-page report on gold (pdf) which is a thrilling read and also the first time that a major (French) bank recommends to start hoarding gold as they see a remonetization of the yellow metal (hat tip to Mover Mike.)
As I have made a few ounces - I have begun to price things not in $ or Euros but in the universally accepted currency of the last 6,000 years - I see no reason why I should not tout my own holdings as listed below. Take note that I bought all these shares - and the bullion - between 2003 and April 2005. All stocks mentioned are strategic holdings that will not be sold in the foreseeable future. I am still adding to my bullion stake though as I see gold going way above $1,000 in the next 2 or 3 years too, mostly for the reasons stated in the Chevreux report.
Goldcorp: I bought the share last year around $14 because the company was then debt free and it is the lowest-cost gold producer I know. Goldcorp has added debt since for aquisitions which will allow the company to stay on a strong expansion course. I plan to add more.
DRD Gold: This is a turnaround play and the miner with the deepest mines in the world. So they have the knowhow to undig the yellow metal from anywhere - as long as it is there.
Redback Mining: My biggest bet. Redback is an Australian company, listed in Toronto, that turned from explorer into miner only last November and owns major claims in Ghana. I follow this company since 2 years and they have constantly overshot all the targets they had set themselves. Their calculations were based on a gold price of $375 per ounce.
Royal Gold: Although this is no miner I like their strategy. Royal Gold arranges the financing for miners and gets royalties on a sliding scale. The company last year made it the second time on the Forbes list of 100 junior stocks. The shares doubled recently but are favored by fund managers.
Western Silver: At $18 the company has proven and probable silver reserves of more than $70 per share. Any more arguments needed?
NOTE: Never buy a share without doing your own research.
Now, after baring my investing soul, come the key points from the Chevreux report, written by Paul Mylchreest:
We are raising our mid-cycle gold price estimate to USD900/oz from USD750/oz and see the possibility of a spike to USD2,000, or higher. Covert selling (via central bank lending) has artificially depressed the price for a decade.
Central banks have 10,000-15,000 tonnes of gold less than their officially reported reserves of 31,000. This gold has been lent to bullion banks and their counterparties and has already been sold for jewelry, etc. Non-gold producers account for most and may be unable to cover shorts without causing a spike in the gold price.
There is a supply deficit in the gold market of around 1,300 tonnes per year before any central bank selling and perhaps 700 tonnes per year after 'official' sales but before covert selling. This compares with world gold mine output of only 2,500 tonnes per year. Some central banks, notably Russia, are starting to buy gold.
Gold acts as an early warning of potential crisis such rising inflationary/deflationary pressures and general confidence in paper currency, especially the U.S. dollar. A strongly rising gold price could have severe consequences for U.S. monetary policy and the U.S.dollar. History suggests that gold always wins against an inflating paper currency (that is, one subject to excessive supply growth).
Gold and gold mining stocks are poised for an unprecedented rise in prices and profile. Investors in UK/European equities need to assess the implications for their portfolios..
I still recommend to read the whole thing. A worthwhile read for your weekend, definitely.

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