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SmallCapMedia's First Gold Pick Heads Higher (Up As Much As 118%)

By Marc Davis, Managing Editor
September, 2002

In a daily sea of red ticker quotes, is there anywhere that relatively cheap stocks can be found with near-term upside potential? Later on in this article, you will see that SmallCapMedia is already on the right track. However, let's first look at gold and its relationship to gold stocks, some of which are edging higher, benefiting from a climate of political and economic worry.

Let us consider the upward trend line in spot bullion prices to discern why they are helping to drive so many gold equities higher. Historically, gold has been so cherished by virtually every culture on the planet because it always presents itself as a haven for uncertain times. Unlike the dollar or the Euro, this fabled metal is a hard asset with intrinsic value. This quality makes gold appealing during political and economic crises. And there's plenty of reason for investors to be unnerved right now.

Where do we start? Well, as President Bush keep reminding us all at every given opportunity, there's the prospect of further terrorist strikes in the U.S. Then again, there's the crusade by Bush to overthrow his arch nemesis Saddam Hussein, making the threat of Desert Storm (The Sequel) all the more ominous. Elsewhere in the Middle East, there's continued hostilities between Israel and the Palestinians. On the home front, a weak U.S. dollar, stumbling corporate profits and related multi-billon dollar accounting scandals, are combining to depress investors even further.

So is there a silver (or more appropriately 'gold') lining to all of this doom and gloom? Well, yes! It all makes for a great springboard for gold and gold stocks. Already, gold has risen to the occasion with a 30 per cent move from a low of $252 in April of 2001 to a high of $328 in June (a high that is again being tested by September gold prices). And the prospect of a sustained rally that could see gold top $400 within the next year is a distinct reality, according to numerous market pundits.

Indeed, there are other fundamental factors in place that should continue to support gold's steady climb out of the gutter after a five-year precious metals bear market. And these are far more tangible than President Bush's worry mongering over Bin Laden and his crumbling terrorist network.

I'm talking about a faltering U.S. dollar and a continuation with low interest rates as a means to stimulate the economy. Many leading economists suggest that the greenback is greatly overvalued and is destined for further jarring corrections. As it continues its slide, it will display an inverse relationship to gold spot prices with the latter offering a great deal more luster to foreign investors. Also, the Japanese are increasingly getting into gold as a hedge against the Japanese government's new policy of no longer insuring personal bank deposits. Finally, European central banks have at last wised up to the notion that if they keep dumping bullion and suppressing gold prices, it may just bury the gold mining industry. So, they have now implemented a cap on how much gold they can unload - 400 tonnes per year - which is helping to dry up supply.

So where does this all leave mining stocks? SmallCapMedia believes that a recent much- needed resurgence in exploration activity is boosting equity prices after the $5 billion Bre-X gold mining scam of 1997 combined with falling bullion prices to kill off the exploration sector for several years. During that time, even mid to large cap mining companies struggled to stay afloat and therefore seriously curtailed their exploration projects and mining activity. But with hardly anyone looking for new gold deposits during these lean years, the industry now has to deal with the fact that existing mines are rapidly being depleted. That is why plenty of money has been flowing back into the junior mining sector for the past 12 months as the need for new discoveries becomes more pressing. And this has set the stage for a new exploration boom. Having said that, gold needs to convincingly break through the all-important $330 psychological resistance level for a bull market in gold stocks to truly manifest itself.

Meanwhile, Subscribers of SmallCapMedia will note in the investment bulletin dated July 01 that AMEX-listed Vista Gold was profiled at U.S. $2.62. It has since traded as high as U.S. $5.70 (a 118% appreciation) and is now trading in the $5 to $5.50 range.

Vista Gold has been SmallCapMedia's only gold investment pick to date. However, other gold juniors with strong upside potential will be profiled in the coming months, beginning in October.