-- Posted Friday, 29 April 2005 | Digg This Article
VALUE INVESTORS, POSITION YOURSELVES FOR THE NEXT MOVE UP IN GOLD AND GOLD SHARES
Let’s face it - the financial markets are giving confusing signals:
· The signs that the global equity rally of the past two years has topped out are getting more obvious by the day as major stock indices are making new lows for the year.
· The US Dollar is finding technical relief in bouncing off long-term support, showing temporary strength against most other major currencies. But where is the greenback heading? And what are the implications for US asset markets?
· Economic indicators are a mixed bag, with both the retail and housing markets (the two most important sources of US economic growth over the past few quarters) in a shaky condition and GDP growth starting to slow down. The Chinese economy is showing uncanny signs of overinvestment and seems to be getting out of policymakers’ hands.
· On the corporate front, problems and scandals are arising with increasing frequency in some of the US’s foremost companies such as AIG, IBM, GM, GE, Fannie Mae, Citigroup and others. A clear sign of coming fundamental economic imbalances that does not bode well for the future…
· Bonds are range-bound and the interest rate outlook is blurred. The one million dollar question arises: Are foreign central banks willing (and will they be able) to continue buying up US treasuries in order to keep US interest rates low? In what direction will inflation expectations go? Will the US Fed tighten monetary supply in response to rising inflation expectations? Or on the opposite, will it soon start easing again to prevent an asset market meltdown?
· Commodity prices have been pushed up and are now in a correction phase. Nobody knows how sharp and how long the correction cycle will turn out to be.
· Finally, gold has been held in check by a temporarily resurgent dollar. The major gold mining indices just broke through important trendline supports. Long-term gold bulls are undecided whether a new up-turn is just about to start or the correction in the gold market that begun 18 months ago will continue for another couple of months and take major gold stocks to new lows.
So, what to do with your funds in this environment?
Regardless of what will occur in the short term, we are very confident that by far the best returns in the next couple of years will be made in quality junior precious metals stocks. To show you why, we will name five good reasons why we believe that now is a very good time to invest in this sector:
1. The prices of precious metals are influenced by factors different from those which affect other asset classes.
Returns on precious metals are little correlated with economic activity and interest rates, whereas returns on mainstream financial investments (equities, bonds) and most other commodities (especially crude oil and base metals) tend to be.
Precious metals investments should therefore be seen as a portfolio diversification, a hedge against inflation and/or deterioration of asset values. In brief, as an alternative form of money with a tendency to preserve its value (or appreciate) even in periods of economic stagnation and/or liquidity contraction.
2. Precious metals’ supply/demand fundamentals support higher prices.
Demand for gold has constantly risen over the last five years, courtesy of higher jewellery and investment demand in particular from East Asia and the Middle East. Silver demand has kept up, too. While the prices of both metals have risen around 70% in US$ terms from their depressed 1999 and 2001 lows, official sector gold sales (most notoriously by European central banks) to the tune of 20% of global annual production have subdued gold’s ascent.
A weakening US Dollar has furthermore erased most of the appreciation of the metals if measured versus strong currencies such as the Euro, the Swiss Franc, the Canadian, Australian and NZ Dollars as well as the South African Rand.
Because of this last fact, gold production in important supply countries like South Africa and Australia has been declining. In addition, rising steel and energy prices are squeezing marginal producers out of business, thus increasing the existing supply shortage. Last but not least, given the dismissal of proposed IMF gold sales and the fact that China has disposed of its historic silver reserves, we believe the potential for additional central banks to supply the market with precious metals is minimal.
3. Gold and gold stocks are in secular bull markets. The risk/reward ratio of investments in gold stocks has however not been as favourable as right now for a long while back.
The extremely powerful rally that took most gold stocks between 100% and 1000% higher from the year 2000 to 2003 /2004 had – with the benefit of hindsight – progressed too fast and too far. In fact, many intermediate and senior gold stocks had a gold price in excess of $400/oz factored in their prices when an ounce of gold was still trading at $325. Not surprisingly, the ensuing correction has taken prices of some precious metals shares back to important long-term support levels.
At present, the correction has been in progress for much longer than most gold share investors expected. Many gold bulls are frustrated with losses incurred on their gold stocks and are beginning to doubt the actual existence of a bull market. In this environment, many gold stocks have now come back to levels where they offer very good value at greatly reduced risk.
4. Gold stocks are nearing an oversold condition. We are certainly not far away from a resumption of the secular up-trend.
Below is a chart of the HUI/Gold ratio, comparing the performance of the AMEX Gold Bugs Index of Unhedged Gold Producers with the gold price. Note that with the violent drop we are currently witnessing in the HUI, this ratio has just broken down through its 200-week EMA (rising blue line), which we think will turn out to be a bear trap.
The maximum downside for this ratio lies in our opinion in the 0.37-0.38 range, which would be a normal point for an A-B-C correction from the Nov2003-high to end. Note that a drop to the mentioned support level does not necessarily have to be brought about by lower prices in gold stocks. In other words, a sharply rising gold price outperforming the major mining stocks in the weeks ahead (a scenario that could eventuate if there was a serious decline in the overall stock market) can equally cause this ratio to drop to the bottom of the green channel.
5. Compared with the major gold miners represented in the XAU and HUI indices, quality gold and silver juniors and intermediates offer a vastly superior potential to benefit from a future up-turn in the gold price.
In our view, the most reasonable strategy for a precious metals company in the current environment is to secure a mineral resource in the ground as sizeable as possible in order to be able to extract the metals at higher prices in the years ahead. However, many large producing mining companies are running out of gold, which they are now producing and selling for relatively low profit margins.
In order to replace their reserves, the majors will need a pipeline of high-resource gold projects ready to be taken to mining stage. The only way we can see the majors achieving this is by acquiring junior and intermediate gold companies. The prospect of increasing M&A activity in the junior gold sector and the fact that present market values of some juniors reflect their mineral resources only at a fraction of what value is attributed to comparable metal inventories of larger companies support our view that shares of gold and silver juniors/intermediates clearly represent a more promising investment than those of the majors.
Furthermore, the juniors, stellar performers during the rally, were the ones hit hardest during the correction. Recent weakness in some quality junior precious metals shares has been grossly exaggerated and was an obvious sign of panic in the market.
CONCLUSION
It only takes a small shift in investor sentiment towards precious metals investments and the prices of these stocks will rise violently. Nobody will be there to sell when strong demand from the broad investment community is crowding into this oversold market.
For the shrewd investor, this means that now is the time to be buying into these companies before the paradigm shift in financial markets towards hard assets and real value gets underway. As an investor, you might wonder how to invest in a portfolio of diversified high quality gold and silver shares without having to browse through dozens of charts and company websites.
In fact, we already have the answer to your question. You will find it in the enclosed fact sheet highlighting the advantages of investing in the TIMELESS Precious Metal Fund.
If you have any further questions, do not hesitate to contact us at the address listed below. It will be our pleasure to be of services to you.
Sincerely yours,
P. Zihlmann Investment Management AG
Asset Managers of The TIMELESS Precious Metal Fund SICAV PLC
Contact details:
Limmatquai 72 phone: +41 44 268 51 10
8001 Zurich/ Switzerland fax: +41 44 268 51 51
e-mail: info@timeless-gold.com website: www.timeless-gold.com
-- Posted Friday, 29 April 2005 | Digg This Article
