Toronto Stock Exchange Oil price shock may foreshadow gold rally

Neither fear of a Mid-East war nor a sharp increase in the price of crude oil could engender much enthusiasm for gold stocks on The Toronto Stock Exchange during the week ended Oct. 9. But, in the current environment gold still offers the best risk-reward relationship among the precious metals, says Peter Cavelti. He sees the expansion of America’s banking crisis as likely to support higher gold prices in the future.

Although oil prices topped US$40 per barrel during the report period, gold bullion failed to follow oil’s lead closing at US$391.80 per oz. on London’s second fix. That’s a gain of only $1.95 from last week’s closing price of US$389.85 per oz.

Analysts attribute gold’s weakness to selling pressure from various sources including Japan and the Mid-East. Rumors have also been circulating that the Soviet Union may be considering more gold sales to raise hard currency, and that put a further damper on the bullion price.

Even the Bank of Canada has been selling gold in recent years to reduce the country’s deficit. In 1984, the government of Canada owned 21 million oz. of gold, but that amount has dwindled by 28% to 15.2 million oz. in 1990.

The TSE 300 composite index closed down 29.63 points at 3,109.87 points, while 12 of the 14 main subgroups also declined. The Metals and Minerals index was down 102.85 points to close at 2,708.95, while Gold and Silver was down 22.43 points to 6,006.20.

Top volume trader during the report period was Corona which saw more than three million of its shares change hands. The issue closed at $6.75 for a gain of 50 cents on the week. The increase was spurred in part by rumors that a corporate restructuring plan may be in the works to simplify the Corona’s share structure.

A spokesman for Corona called the recent price increase “not unusual considering the stock’s volatility in recent months.” He said the market may be “starting to recognize that Corona’s share price is undervalued.” Recent favorable reports by investment firm Bunting Warburg may also be helping Corona. President Peter Steen also announced plans to sell the company’s interest in Poco Petroleums (TSE) to fund Corona’s share of mine development costs at Eskay Creek, B.C.

Meanwhile, conservative gold mining giant Placer Dome traded 1.2 million shares to close down 50 cents at $19.18, while American Barrick slipped to $24.38.

With nearly a billion in cash on hand, Placer Dome is currently reviewing its spending options which could include new acquisitions, a special dividend or even a share buyback program. The company recently announced plans to spend $24 million to eliminate sulphur dioxide gas emissions at its flagship Campbell Red Lake gold mine in northwestern Ontario.

Base metal stocks were also lacklustre during the report period as investors remained uncertain about the long-term effects of the Mid-East crisis on oil prices. Despite the fact that most base metal prices remain strong, shares of Inco, the western world’s largest nickel producer, shed $1.87 to close at $28.88.

Often considered as a barometer of Canada’s mining industry, Inco is closely watched by industry observers. The company recently concluded a new labor agreement with its workers at Thompson, Man., where the new 3-year contract will see average wages rise to $22 per hour from $17.50 currently.

Meanwhile, diversified resource giant Noranda slipped 75 cents lower to $15.75 as high interest rates and a strong Canadian dollar continue to put downward pressure on its shares. Debt problems at other Bronfman companies spilled over to affect Noranda which in the 1982 recession saw its share price fall to a low of $11.50. However, mining analysts at Levesque Beaubien Geoffrion think an impending decline in the Canadian dollar makes Noranda a buy at current price levels. Noranda also has a history of not cutting dividends in economic bad times.

Shares of Aur Resources were active at $3.20 level as the company prepared to put out a progress report on the latest activity at its Louvicourt base metal project near Val d’Or, Que.

Breakwater Resources benefited from speculation that Corona may be eyeing it as a possible takeover target. Breakwater traded nearly a million shares to close at 83 cents.

Junior nickel producer Timmins Nickel was steady at 58 cents following the company’s announcement that it plans to double output at its underground mining operations near Timmins, Ont.

Elsewhere on the junior mining scene, shares of Dayton Development shed 25 cents to close at $3. The company, which recently began trading on the TSE, expects to begin production at its Andacollo gold mine in Chile at a rate of 100,000 oz. per year in 1992. Analysts say Dayton’s shares are undervalued at current price levels and predict a rise to more than $6 in the year ahead.