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What You See Is What You Get

By Lawrence Roulston, Managing Editor, www.resourceopportunities.com
September, 2003

The longer term story of gold, in a word, is that the solid fundamentals of the gold market are pushing the price progressively higher. That longer term fundamental perspective should take precedence over the day by day volatility in the gold price.

The short-term picture is explained as an on-going see-saw between two of the major groups that control the gold market: The investors/speculators on the one hand and the buyers of the physical metal on the other.

The focus at the moment on the investor side is the currency issue. The falling value of the U.S. dollar works on gold in a couple of ways. On the most simplistic level, the falling value of the dollar leads to a nominal re-pricing of bullion. That is, to those outside of the United States, the gold price does not change just because one measuring stick is shrinking. In India, for example (which is the largest market for gold) bullion is traded in rupees. The U.S. dollar price of the metal is of secondary interest.

On a more fundamental level, the falling dollar is leading to a decline of confidence among many investors in paper assets in general. Those people are choosing to transfer a portion of their wealth from paper assets into hard assets, one of which is gold. The resulting increase in demand for gold coming from investors helps to push up the real price of gold.

There are many reasons to believe that the U.S. dollar will continue to decline in value: the mounting trade deficit, the growing government and private debt load, the anaemic economic performance, the declining confidence in the U.S. government to name a few.

There has already been a significant adjustment downward in the value of the U.S. currency relative to other major world currencies over the past year. But, it is extremely important to bear in mind that most other regions in the world also have economic problems. At present, half of the Euro-zone is in recession. The strong Euro, and its effects on exports is named as the major cause. Japan's economy hasn't exactly perked up yet either. The only really strong economy is China.

There may be some further adjustment in relative values of the major currencies, but there isn't going to be a wholesale shift away from the U.S. dollar.

With regard to the short-term swings in the gold price, it is the same story over and over. Investors jump into the market, pushing up the price. The rising price attracts other investors who perceive the upward momentum as a signal that the gold is finally on its way to the moon. They jump on board, adding to the momentum.

However, as the gold price rises, the professional traders and the industrial buyers (in particular the jewellery manufacturers), which purchase 90% of physical gold, simply step back from the market.

The industrial group stops buying when the gold price spikes for two important reasons. First, they've seen the pattern repeated often enough to know that by simply waiting a bit, they will able to rebuild inventories at a better price. Secondly, the retail buyers of gold jewellery are quite price sensitive. Retail sales slow very substantially with a rising gold price.

Looking again at the gold price chart, it is evident that it is not the spikes that matter. As I noted above, those spikes are artificial. The troughs are the important points on the gold price chart. You can see that nearly every pullback has been to a higher level than that of the previous trough.

In short, the gold price is volatile in the short term, but fundamentally very strong. Nimble traders can make some profits by selling into the spikes and buying back after the pullback.

Overall, more investors are recognizing the fundamental strength in the gold sector. In a previous issue, I pointed out that in the month of June, a half billion Canadian dollars of new money came into the junior and mid-sized sector of the mining industry, in that one month.

I don't have a tally for July, but the money continues to flow into the industry very strongly. It is also interesting to note that some of the recent financing has been done by way of "bought deals". That means that the brokerage firm commits to take down the financing at the time of signing, rather than simply agreeing to act as an agent and attempting to find investors. It would seem that some of the brokerage firms sense a strong demand from institutional investors and are looking for suitable investments to fill that demand.

As I noted in that earlier issue, the injection of new money into the mining industry has cranked up the level of activity to a pace that I have not seen for at least seven years. That pace of activity will inevitably generate results that will be factored into share prices. Indeed, there is already a strong flow of news that is pushing up many share prices, and that process will continue to accelerate as the process feeds on itself. News generates investor interest. Additional investment money leads to more activity.

This issue of Resource Opportunities includes some comments from projects of four different companies that I visited over the past couple of weeks. Also included in this issue is an update on a region that is rapidly emerging as one of the most important gold producing regions in the world.

Please note that we will soon be raising the U.S. dollar price to US$165 to maintain parity with the Canadian dollar price (C$225). We will continue accepting the US$149 price until the end of September. You can also pay for your subscription using Gold Money, which Resource Opportunities readily accepts. Please see www.goldmoney.com for details.

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