EDITORIAL PAGE — Hedge your bets

Recently, a stock broker in Manitoba phoned our offices requesting information on the diamond stocks that are currently so hot. He admitted he wasn’t well-versed in speculative stocks; in fact, he deliberately avoided putting clients into junior stocks. Nor were his clients speculative types — that is, up until this year. But some clients had grown curious (greedy?) about the diamond plays, having heard that speculators were making huge sums on these stocks. And so, the broker had turned to The Northern Miner to glean any information he could.

The foregoing is offered as anecdotal evidence of the remarkable breadth and depth of the current market fever over diamond stocks. It’s a sure bet that brokers around the world, less attuned to penny mines than blue-chip investments (if there are such things at a time when IBM is shedding billions of dollars and the Reichmanns and Bronfmans are running into trouble), are fielding calls such as the one described above.

The situation is roughly analogous to the gold frenzy that grippped the world when the yellow metal hit US$850 an oz. in early 1980. People who hadn’t the slightest notion about gold investments were lining up outside bullion offices to buy the stuff. Naturally, many were burned, buying at the top and selling through the long slide to more “realistic” gold price levels. For diamond-stock investors who have been riding the market for some time, volatility is increasingly a concern.

For example, Dia Met Minerals, which with BHP has the most “senior” of plays and is the bellwether stock in the Northwest Territories diamond hunt, gained more than $9 to reach an all-time high of $62 last week. The rise was based on speculation that results from the latest sampling program (expected to be made public any day now) will further support mounting evidence that the Dia Met/BHP ground will spawn the world’s next diamond mine.

Only a few weeks earlier, the shares of Lytton Minerals tacked south, dropping precipitously to $4 from $6 in about two days. On fairly decent, but not spectacular, drill results, the stock shed more than $150 million in terms of market capitalization (stock price multiplied by shares outstanding). This is volatility. This is a hot, speculative market. This is an indication that the reigning emotions of any stock market — fear and greed — are both active, if not hyperactive, in the diamond stocks.

And it is certainly having an effect on Canadian markets. The Vancouver Stock Exchange resource index is at a high. And even the Toronto Stock Exchange, not the warmest of friends to junior exploration issues, has acknowledged the “diamond factor” in its rising index since the year began. In fact, both Dia Met and Lytton have been elevated to spots on the TSE 300 Composite Index — a remarkable achievement for a non-producing mining stock.

However, Fred Ketchen, the new chairman of the TSE, recently sounded a note of caution when he said: “I always worry that a few people will get carried away in the excitement.”

Indeed, human nature being what it is, some people will inevitably get carried away. But wise speculators (which is not a contradiction in terms) always try to hedge their bets. Are you listening, Mr. Broker from Manitoba?