Investors in gold stocks have taken profits in one of the best years for investing in the precious metal in more than a decade.
The high price of gold has been linked to the tensions with Iraq, but this is a red herring. Gold does rise and fall with geopolitical tension, but this spike and subsequent fall are masking a long-term bull market in gold that began with the collapse of the U.S. stock market. Investors should accumulate gold stocks on weakness as a long-term investment.
The last bull market in gold occurred in the early 1970s, when the precious metal climbed steadily to its summit of US$850 per oz. in 1980. Richard Nixon abandoned the gold standard in 1971 after keeping the price of gold artificially low against the U.S. dollar at US$35 per oz. much the same way a currency fixed to the U.S. dollar can be kept artificially low.
Once the price of gold was allowed to float freely, it rose strongly against the U.S. dollar to its equilibrium level. The U.S. dollar fell against the price of gold because inflationary U.S. economic policies at the time were not consistent with a fixed-exchange gold standard regime, and the U.S. was losing gold too quickly at its set price of $35 per oz.
High domestic inflation in the U.S. meant that the U.S. dollar would buy fewer goods domestically and should also buy less gold. At $35 per oz., gold was too cheap, and the U.S. treasury could not keep pace with investor demand for gold at that price. Eventually they had to allow the dollar price of gold to rise.
Inflation meant the dollar was worth less against other major currencies as well. The gold bull market of the 1970s was the mirror image of the U.S. dollar bear market of the same era. In 1970, one dollar bought around 3.5 German Deutschmarks, but by 1980 the same dollar bought only 1.7 Deutschmarks.
The rise in gold today is also strongly linked to the U.S. dollar. The dollar has entered a long-term bear market against the euro, which recalls its fall against the D-mark in the ’70s. This time the dollar is falling not because of inflation but because of the rising value of U.S. foreign borrowing. Currencies tend to fall for two reasons: high long-term inflation, which causes a real appreciation of a given currency, and high foreign debt, which reflects the degree to which a country consumes more than it produces.
The U.S. consumed more than it produced last year by approximately US$500 billion, evidenced by its massive trade deficit. Each dollar of the trade deficit must be funded by foreign money. That was not a problem in the 1990s, when foreigners were investing in the stock market, but it is causing problems for the dollar now that corporate earnings are in a bear market.
The U.S. dollar has been down more than 20% against the euro in the past year, less so on a trade-weighted basis. Investors should expect that the dollar will continue to fall over the next several years until there is a correction in the U.S. trade deficit. A weaker currency is a natural solution to this imbalance because as it falls it makes foreign goods dearer and causes an internal shift from foreign goods to domestic goods. It also lowers the cost of U.S. exports to foreigners.
As the dollar continues to fall, the price of gold quoted in U.S. dollars will rise, making gold stocks an excellent opportunity over the next few years. The recent weakness in the price of gold could continue over the next few months should the U.S. economy at last recover. Investors should use this weakness as an opportunity to invest in gold stocks.
Many speculative resource companies that have been highlighted by analysts at Independent Equity Research had a good run last year on the spike in gold prices. These companies are using the opportunity to raise money to finance their ongoing explorations, which are showing promising signs.
The company’s two other exploration projects are both in Nevada. They’ve been optioned to a third party, who can spend $3.6 million over three years to earn a half-interest. American Bonanza retains 50%, management of the projects, and the ability to buy-back to 70% interest. One property, Pamlico, is in the geologically productive Walker Lane, in western Nevada. The second, Gold Bar, is in central Nevada at the intersection of the Battle Mountain-Eureka mineral belt and the Cortez rift.
The company has assembled a proprietary database with information on virtually every known gold deposit in Nevada, as well as regional geological, structural, geochemical, and chronological data, at a cost of US$4 million. Utilizing this database, combined with three-dimensional software, the company has identified high-grade targets. These targets are in the same rock types that elsewhere in Nevada host some of the great gold deposits discovered in the modern era. In our opinion, the exploration potential of this property is exciting.
The company recently raised $1.5 million in a private placement in which management participated to the tune of 16%. This follows a public offering in May that raised $2 million. With these funds and the option agreement with the third party, the company has sufficient funds to advance Copperstone and test the targets generated on the Nevada properties.
— Monument Bay project — Joint-venture partner
— High Lake project — Fall drilling continued to extend both the B and D zones to depth. Recent surface exploration has outlined several potential zones similar to the original High Lake deposit. Work on these continues, with drilling planned for both the original deposits.
— The company has been extremely active in the Red Lake gold district, acquiring numerous properties in joint ventures with such parties as
Finally
In 1998, Aurizon purchased a stake in the Casa Berardi mine from TVX Gold and began a $10-million development program. In 2002, Aurizon exercised its right to acquire full ownership of the mine after discovering a significant reserve estimated at 1.5 million oz. gold. The company expects to mine 200,000 oz. annually by the second year at an average cost of US$145 per oz. and total production costs of US
$240 per oz. over the life of the mine.
Investors who are looking for long-term buying opportunities would be well-advised to regard the current weakness in gold as just that — current. The U.S. dollar is strongly linked to the price of gold, and investors should expect a resumption of the bear market in the currency over the next several months, which will, in turn, signal the resumption of the bull market in gold.
— Rob Reid is president of Independent Equity Research, the web-site for which is www.eresearch.ca. Levi Folk is a Toronto-based economist and writer on personal finance.
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