WORLD GOLD
45 Victoria Rd., South Woodford, London, E18 1LJ, United Kingdom.
Monthly, 1 year, $660. www.worldgold.net.
Despite increased capex, Minefinders is
ready to start construction of Dolores.
Paul Burton: "Minefinders Corp. (TSX MFL) expects to start construction of its wholly owned Dolores gold-silver mine, in Chihuahua State Mexico, later this year, following the receipt of a positive 'bankable' feasibility study and an initial optimization study for the project.
Discovered in 1996, most of the 27,000 ha Dolores property is underlain by a sequence of andestic volcanic rocks locally intruded by a series of northwest-trending latite dikes and plugs.
Gold-silver mineralisation occurs in stockwork veins, breccias, and sheeted-vein zones within the structurally prepared latite dikes and andestic rocks.
Between 1996 and October 2004, Minefinders completed 347 diamond drill core holes and 218 RC holes at Dolores for a total of 137,070 m, and outlined a measured and indicated resource of 101.1 Mt at an average grade of 0.84 g/t gold (2.73 Moz contained gold) and 40.8 g/t silver (132.7 Moz contained silver).
The 'bankable' feasibility study (the 'base study'), representing an unoptimised, technically feasible design for Dolores and forming the basis of the initial optimization study undertaken by Kappes Cassiday and Associates (KCA), assumes a large-scale, open-pit operation incorporating three-stage crushing and heap leaching, followed by Merrill Crowe recovery of gold and silver.
The study contemplates a production rate of 9.0 Mt/y, at a life-of-mine strip ratio of 3.3:1, with average production of approximately 160,000 oz/y of gold and 5.8 Moz/y of silver, based on a proven and probable reserve of approximately 78.7 Mt of ore averaging 0.77 g/t gold (1.95 Moz contained gold) and 41.1 g/t silver (104.1 Moz contained silver), using a gold price of US$375/oz and a silver price of US$5.75/oz.
It is anticipated that additional resources currently outside the proposed mine plan will be converted into underground and/or surface mineable reserves with further drilling.
At an estimated capital cost of US$209.2 million (which includes sustaining capital of US$37 million over the life of the mine) and forecast total production costs of US$230/oz gold equivalent, the base study projects an IRR of 13.5%.
Concurrent with the completion of the base study, Minefinders engaged KCA in March this year to provide an initial optimization of the Dolores project but on a smaller-scale mine plan than envisaged in the base study.
The optimsation study, which is based on an 18,000 t/d throughput (6.48 Mt/y) is predicted upon minimization of capital costs through reduction of daily production quotas, additional phasing, optimization of mine facilities, and the acquisition of more conventional and readily available mine fleets and equipment.
Under the alternative scenario, KCA projects the recovery of 1.45 Moz of gold and 53.2 Moz of silver over a 12-year mine life, based on a reserve of 72.5 Mt at a slightly higher grade of 0.84 g/t gold and 44.5 g/t silver. The strip ratio would also increase slightly to 3.7:1.
Initial project economics for the 18,000 t/d mine plan forecast total capital costs of US$163.4 million (including sustaining capital of US$32.2 million) and a total production cost of US$218/oz gold equivalent. This would generate an IRR of 20.5%.
Although the KCA study contains some, initial, mine plan optimization, project economics are expected to be further enhanced as additional optimization and detailed engineering proceeds.
It has taken the company 5 years to progress from a soaring study to a bankable feasibility study, a fact which has probably as much to do with poor market conditions in the early-2000s than with any inherent deficiencies in the project design.
That said the mine design has gone through numerous iterations before settling on a valley-fill leach.
Comparing the latest optimized study with that of 2000, the capex has increased by 60% to US$131 million; average gold production has decreased by 13% to 120,000 oz/y; average silver production has decreased by 30% to 4.4 Moz/y; the average gold-equivalent cash cost has increased by 18% to US$218/oz.
The IRR has decreased from 26% to 21% despite using higher metal prices of US$375/oz (originally US$300/oz) for gold and US$5.75/oz (US$5.00/oz).
Barrick brings Lagunas Norte on stream
Barrick Gold Corp. (TSX ABX) has brought the Lagunas Norte operation on stream ahead of the original third quarter schedule, and within its US$340 million budget.
According to Barrick, its second mine in Peru and the gold industry's largest greenfield discovery in a decade, will be a "significant" contributor to gold production, with output of 545,000-550,000 oz of gold at total cash cost of US$110-120/oz for the remainder of 2005.
Two of Barrick's four new mines have now entered production. Tulawaka, in Tanzania, commenced operations in the first quarter of 2005 and Lagunas Norte in Peru in the second quarter.
The third mine, Veladero, in Argentina, is targeted to pour its first gold in the fourth quarter of this year and the fourth mine, Cowal in Australia, is expected to commence operations in the first quarter of 2006.
For 2005, Barrick expects to produce between 5.4-5.5 Moz of gold at total cash costs around the top end of its original estimate of US$220-230/oz."
Richard C. Young's INTELLIGENCE REPORT
9420 Key West Ave., Rockville, MD 20850.
Monthly, 1 year, $249.
BHP Billiton moves up a notch
Richard C. Young: "BHP Billiton (NYSE BHP), the world's largest miner, has won control of Australia's WMC Resources (NYSE WMC). With WMC, BHP Billiton moves up a notch to become the world's third-biggest nickel producer, behind Russia's Norilsk, and solidifies its #2 ranking in copper, behind Chile's Codelco. China needs millions of tons of raw materials for road, home, and office building. And Australia/BHP Billiton, with its resource base and proximity advantage, versus South American competitors, is in the catbird's seat. WMC also gives BHP Billiton exposure to uranium via the giant Olympic Dam mine in South Australia, which geological green-eye shaders believe holds over one-third of the world's known uranium reserves. BHP Billiton and WMC are sure not found in the S&P 500 index funds, but they are both found in the top 10 of the intuitive, impressive Vanguard Precious Metals & Mining Fund. BHP Billiton is a two-decade core global portfolio holding."
INTERINVEST REVIEW & OUTLOOK
P.O. Box 51462, Boston, MA 02205.
Monthly, 1 year, $125.
Accumulate on any bouts of weakness
Dr. Hans Black: "The price of gold bullion has continued to meander around the $425 mark. At times it trades quite poorly due to generally bullish sentiment about the dollar, but at other times gold seems to be showing signs of life - trading up on days that oil is stronger and on any hint of geopolitical unrest. Recent events bear this out, notably the bombings in London, which caused the geopolitical temperature to rise dramatically, and have propelled gold higher. As we have been saying for what seems like months, this see-saw in price action between $380 and $450 should eventually resolve itself to the upside.
As we have mentioned before, gold stocks have also been acting better, led by companies such as Newmont, Eldorado, Cambior, and particularly Southwestern Resources. We would recommend continued accumulation of all of these on any bouts of weakness."
THE MONEYPAPER
555 Theodore Fremd Ave., Ste. B-103, Rye, NY 10580.
Monthly, 1 year $108.
Vita Nelson: "For many years, gold was considered to be a non-functioning asset. It cost money to store it and it didn't provide an annual return. Then, from 2002 to 2004, the price of gold moved up from around $275 to $450 per ounce. Now, with gold having fallen to about $430, people are wondering whether this is a buying opportunity.
Gold stocks may be strong when the broad stock market is weak, so a small allocation to gold (say, about 5% of your total assets) might cushion future stocks in stocks. With fears of inflation, terrorism, and a weak dollar, such a commitment may add to your level of comfort as an investor.
If your allocation to gold is lacking, don't attempt to right that situation immediately. Think long-term and set up a schedule of investing on a regular basis over a period of years (in other words, dollar-cost average).
Assuming that you're interested, how should you hold your gold investments? Recently, your options have increased.
• For example, you can buy "GoldMoney" at www.goldmoney.com. The gold you buy is stored in London at the vault owned and operated by VIA MAT International Ltd., which is, according to the company, a well-known and trusted precious metals repository. It also says that your gold is insured with Lloyd's of London and provides a link for you to see the insurance certificate.
In essence, GoldMoney acts like a bank account, denominated in gold. You can make online payments to fund your account by transferring an appropriate number of grams, at the current price. Or you can move the value of some gold into your regular bank account, which can be denominated in U.S. currency or any of several other currencies.
According to the company, investing in gold this way not only is convenient, it's also less expensive and time-consuming than storing and shipping gold. And, you're promised a better purchase price than you'd pay for fabricated coins or bars.
• Another option is to invest in an Exchange-Traded Fund (ETF) that holds gold. In the United States., entries include StreetTracks Gold Shares (Symbol: GLS) and iShares Comex Gold Trust Symbol (symbol: IAU).
These ETFs hold the metal, rather than mining stocks. Expenses are low: around 0.4% of assets per year. Thus, ETFs may provide a practical way to include gold in a diversified portfolio. You might prefer other hard assets, which would fulfill the same purpose: silver or other commodities. There is even talk now of ETFs that will be based on copper or aluminum.
Whenever you invest directly in commodities, though, there's a catch. Like artwork, they don't get favorable treatment from the IRS. Therefore, after a one-year holding period, any capital gains from these ETFs will be taxed at 28%, not at the 15% rate on long-term capital gains from most securities.
• Yet another alternative is to buy gold futures options, which are traded on commodity exchanges. Buying an option gives you the right to take possession of the gold at some specified future date - at a price that is fixed now. You pay a premium and transaction costs, which are likely to be less than the transaction cost to purchase the commodity.
• Or you can buy the stocks of mining companies. This gives you more leverage on the price of gold. To illustrate: Suppose a company's cost of mining gold is $200 per ounce. At a $275 price, it makes $75 per ounce. If the price goes up to $450 per ounce, profits are now $250 per ounce (assuming the cost stay the same). Thus, while gold prices went up by about 65%, profits more than tripled, in this hypothetical example.
This type of leverage can send gold shares up by huge amounts, in a good year. On the other hand, falling gold prices can result in large losses. Thus, investing in gold stocks can be much more volatile than investing directly in the metal. The tax treatment is better, though - profits on shares of mining companies can qualify for the favorable rate of long-term gains."
ECONOMIC ADVICE
3910 N.E. 26th Ave., Lighthouse Point, FL 33064.
Monthly, 1 year, $129. E-mail, 1 year, $89. www.economicadviceinc.com.
Jump all over General Maritime
James Rapholz: "Take a good long look at General Maritime Corporation (NYSE GMR) which is a leading provider of international seaborne crude oil transportation services, by owning and operating one of the largest double hulled tanker fleets in the world. I've done my homework on this one (for a change) and it looks real good to me! So - if you're hunting for income, safety and a strong probability of a capital gain - you'd be well advised to jump all over this one!
GMR is selling for $36.70 today and pays dividend of $1.77 each quarter or $7.08 per year - which gives you a yield of 19.29%. And - keep in mind that GMR is one of the largest oil shippers in the world, with a tremendous income and very little debt.
Number of Institutional shareholders: 162, Percentage of Stock Held by Institutions: 61.9%.
That percent of stock held by institutions is nothing but - fantastic! Institutions are not known for throwing their money away and for the most part only invest in the safest of equities.
The following brokerage houses have issued a buy signal for General Maritime within the last ninety days: Banc of America Securities, Dahlman Rose Weiss, Hibernia Southcoast Capital, J.P. Morgan, Jeffries & Company, Morgan Stanley and Smith Barney Citigroup.
The stock is priced way below the industry average of 11.6 - it's cheap folks!
For more information on General Maritime contact: Peter Georgiopoulos, CEO/President, 299 Park Ave., 2nd Flr, New York, NY 10171. (212) 763-5600, www.generalmaritimecorp.com."
THE CHARTIST
P.O. Box 758, Seal Beach, CA 90740.
Monthly, 1 year, $175.
Energy companies showing
strong relative strength
Dan Sullivan: "Burlington Resources (BR) Higher energy production and higher energy prices helped boost second quarter net earnings for Burlington Resources Inc. The company reported second-quarter net earnings of $537 million, up from $379 million in the year-ago period. Revenue for the three months ended June 30 rose to $1.69 billion, up from $1.33 billion. The company's independent U.S. oil and gas company's total production reached a quarterly volume record, increasing 4% to 2.789 billion cubic feet equivalent of natural gas versus 2.758 billion cfe in the year-ago period. To ensure that its output growth will continue to grow, the company's board approved raising capital spending on oil and gas drilling and new exploration leases by 20% in 2005 to $2.4 billion. That's on top of the already $200 million worth of acquisitions already in the spending pipeline.
Transocean (RIG) offshore drilling was profitable across the board, with Transocean posting significant earnings increases during the second quarter. Net earnings shot up nearly sixfold to $301.8 million, up from $48 million in the year-ago period. Revenue climbed to $727.4 million, up from $633.2 million in the year-ago period. The company reported a profit of $0.38 per share (excluding asset and stock sales.) Fleet utilization is expected to be greater than 90% for the rest of 2005 and the first half of 2006, with continued improvements in dayrates for its rigs. The company is generating so much cash that management is looking into ways that it can return that cash to shareholders. The company's biggest challenge is managing its deepwater assets to satisfy as many customers' needs as possible.
Valero Energy (VLO) experienced a historical second quarter, as it watched its net profits rise 34%, thanks to high refining margins and wider sour crude discounts. Net income rose to $847 million, up from $633 million in the year-ago period. This is the highest net income in the company's history. Valero is still awaiting regulatory approval for its planned $6.9 billion takeover of Premcor Inc. The company expects the deal to close by the end of the third quarter. The takeover would make Valero the largest refiner in North America. Valero is predicting that its 2006 year will be even better, thanks to the Premcor deal and to dramatic changes in fuel specifications that the industry is facing."
CHANGEWAVE INVESTING
9420 Key West Ave., Rockville, MD 20850.
Monthly, 1 year, $598.
Tobin Smith: "Along with $60 oil has come a rewriting of the basic rules of the oil industry pricing model.
In the old days of oil (before 2004), the weekly levels of oil, natural gas and refined products told everyone how tight inventory levels were and how futures contracts should be priced.
Today this relationship between current inventory and futures prices has broken down.
And basically No One knows what the price of oil or natural gas "should be."
The industry figures out "days of forward demand" coverage (i.e., how many days of energy were in storage divided by daily demand metrics) and then, in past years, used high levels of forward demand coverage (58-60 days, in the oil glut times in 1998-1999) to cut prices and tight days coverage (50.3 in April) to raise prices.
Today we are at 52.4. Not a glut, but not as tight as April - yet prices are one-third higher as I write this.
What's the answer to this riddle?
It's the death of OPEC.
So Long, OPEC - Don't Let The
Door Hit You On The Way Out
OPEC's historic backlog of inventory that could hit the markets like a ton of bricks and turn shortages into gluts no longer exists.
We know traditional safety valve no longer works because if OPEC (read: Saudi Arabia) could break the logjam on pricing, they would have.
In short, what we have is such a tight relationship between global supply of crude/refining capability and extra barrels of oil to make up for lost daily production, that any severe storm, labor unrest, refinery outage, production facility attack, etc. makes large energy consumers buy now and ask questions later.
Now the possibility of too much storage in the natural gas world is an issue since we hit the limits of physical capacity last November, according to the natural gas experts I've talked with.
Without the constitution of additional storage, we are basically at the mercy of the seasons.
We need more storage for oil and distillates as well - lots more storage.
And let's not bring refining capacity into this discussion.
Now is the reduction of gas and oil price supports in China (gasoline sells in Beijing for $1.63 a gallon) cuts demand significantly, we could see a price collapse in oil.
But the drop in second-quarter oil demand in China (1% drop vs. 15.4% increase in 2004 and 11% in 2003) is now on my radar.
Sometimes energy prices take on a life of their own. And China is expected to announce the construction of the first of many huge storage tanks for building a strategic reserve.
But it seems unlikely they would start to fill this reserve with oil at the high end of its trading range.
So we will watch the Chinese economy and energy intensive industries like steel and cement, as well as other construction-sensitive commodities to get a handle on whether this is a slowing trend or just a statistical blip.
Oil's Well - If You Know
Where To Invest
An oil price pop would hurt heavily oil-dominated players like Occidental Petroleum or Conoco more than most stocks, but all exploration and production stocks would take a 20% or so hit with news for sustained declines in Chinese importation of oil.
But that's not the case for oil services. One energy analyst I trust figures that oil would have to go to $32 a barrel before a 10% cut in drilling would happen.
With so many old drilling services contracts coming up for renewal and such a limited number of rigs and people to work the increasing need for well drilling, look for oil services stocks to be calmer.
If we got a sell-off in oil services with oil down to $48, we would be BIG buyers of Patterson-UTI Energy, BJ Services, Halliburton, etc."
Editor's Note: Tobin Smith is founder of ChangeWave Research. Smith is also a contributing market analyst for Fox News Channel and a regular panelist on the network's "Bulls & Bears" weekly financial program. Prior to joining Phillips in 1995, he worked as a marketing executive for more than 15 years in the investment banking and financial services industries. For a Special Subscription Offer visit the web site at www.ChangeWave.com.
CMI'S STOCK OPTIONS TRADER
P.O. Box 5379, Destin, FL 32540.
1 year, 26 issues, $595.
Gretchen Marszalk: "During the past several weeks, as the price of oil was approaching $70, the din on Wall Street about what the high price of energy would do to the economy and the stock market increased proportionally. Many gurus were predicting $100 oil by the end of the year. Everybody talked about increased demand from China and India - the main culprits for the higher prices.
However, it was more an exception than the rule when the other major culprit was mentioned: the oil refiners and distributors.
Considering the fact that the price of oil at the wellhead is about $3-$5 in the Middle East (with the prices triple that at the deep sea wells) and the price at the gasoline pump is 10-15 cents per gallon in Iraq and Venezuela - even if it may be somewhat subsidized at that level. So where does the rest of the money go? This OPEC tax is levied by the non-OPEC producers - all of which represents a humongous transfer of wealth. And since we are the largest consumers of oil, we pay the lion's share of that tax. The problem is that in the short run nobody can do anything about it.
In May 2004 we wrote, "...if one were to take the price of gasoline in the mid-continent markets in the early 1950s that sold at 23-28 cents per gallon, and adjust it by the rise in the CPI, the current constant-dollar price would be in the $1.80-$2.10 per gallon range." You can consider that almost anything above that range is the OPEC tax...
In spite of the prevailing propaganda, consideration should be given to the fact that there is absolutely no incentive for oil producers to produce more oil so they could sell it at a lower price, when they can produce less and charge more for it - as all cartels are inclined to do.
The same goes for the oil refiners: Why build more refineries and create oversupply of the product when they can run the old equipment full bore and charge all that the traffic will bear - while blaming environmental rules for their reluctance and self-interest. Furthermore, using the FIFO (first-in-first-out) inventory accounting during rapidly increasing prices they reap huge inventory profits. So where is the incentive?
There have been many soothing noises made by the talking heads that this will not affect the economy, since on an inflation adjusted basis things were much worse in 1973. Except they also fail to mention that in 1974 the market suffered the worst decline since 1932. We don't believe that this time around we will get away scott-free either..."
Editor's Note: CMI's Stock Options Trader monitors a group of optioned stocks with acceptable liquidity. Once a signal is generated for a given stock option, that position is usually held for only a short time. The focus is on buying the options at depressed prices and selling them when they become overpriced due to increased demand. www.TheOptionTrader.com.
THE PERSONAL CAPITALIST
6911 S 66th E Ave., Ste. 301, Tulsa, OK 74133.
1 year, 24 issues, $195.
"With oil topping $67 per barrel. We still consider valuations attractive on a long-term view, as earnings momentum continues. We are, however, wary of risks presented by a commodity led rally lacking compelling fundamental support. OPEC continues to be a major factor. Doug Leggate, Smith Barney's oil analyst, now sees support at $45-$55 per barrel. Demand seems to be softening, in both the U.S. and Asia, creating near risk. Our energy stocks: WMB, XTO, CRT, XOM, and PKD all look great long-term. Since the middle of May, these stocks have had great performance. These stocks can continue to have good earnings, even if oil drops to $40 per barrel. We will hold our positions for now. The energy bill just signed by the President bodes well for our fuel cell stocks PLUG and HYGS. After signing the bill, he spoke about the use of fuel cells in everything from autos to computers. His goal is to have every child born today driving a fuel cell vehicle when they go to get their driver's license. There is a huge focus on alternative fuels as we look into the future. PLUG just floated a secondary issue of shares giving the company an infusion of cash ($68.75 million), but causing the price to go lower. PLUG is a compelling buy between $6-$7, and HYGS below $4. We continue to feel strongly that the coming hydrogen economy will benefit both of our stocks. Our near-term goal for PLUG is $11 and $7.50 for HYGS. We carefully watch the Hydrogen Fuel Cell Institute web site: www.h2fuelcells.org. New items continue to pile up about the many uses of fuel cells today. The hydrogen economy is definitely coming and we all need to be "on board." Every subscriber should own both of these stocks.
Still favors precious metals
Copper shoots up on supply fears making FDX look great. Gold is doing better because of the weak dollar and strong investment demand. We like precious metals a lot and will hold our shares."
STOCK TRADER'S ALMANAC INVESTOR
79 Main St., Ste. 3, Nyack, NY 10960.
Monthly, 1 year, $295.
Updates: Energy and select growth
stocks are where the action is
Robert Cardwell: "The energy bears used to think there was a $12 to $15 "war premium" in crude oil. That was when oil traded around $40 or less. The Iraq situation and related unrest had artificially inflated the price, they maintained. The same people must now believe the war, or terror, premium is $30 or more, as they are still bearish.
Of course, we are not quite serious. There was no premium at $40 - with hindsight, oil was cheap then. If you want to say there's a "premium" - then it's a more or less permanent premium. The world's major oil exporting regions happen to be riven with unrest and political uncertainty that is likely to continue for years.
Then look at natural gas. In the last couple of weeks, natural gas has about caught up with oil in price per BTU. It's not a question of war premiums - most of our gas is produced in North America. It's a matter of supply and demand. So we would continue to hold energy stocks, and use the inevitable corrections for new buying.
American Oil & Gas (AEZ) is a case in point. The stock gave us a 321% gain, peaking recently on splendid initial results from the Fetter project. Now the stock is taking a hit - in our opinion a normal pullback. There have been no company developments. This still looks like one of the highest-potential energy situations around. While it's up a lot, AEZ remains cheap in relation to the potential. We would buy here.
Parallel Petroleum (PLLL) has continued to rack up steady gains despite what at first glance looked like lackluster results for the second quarter. The company earned 4 cents a share, flat versus last year. However, this is after subtracting some hedging losses and it's on 8.6 million more shares outstanding following the conversion of a preferred stock issue.
Production volumes were up 27% in the quarter, and most of the new volume came on line late in the quarter. The rest of the year should see a continuing production build, and that is what the market is looking at. A year ago, the main story here was a couple of large but elderly oil fields where Parallel was working on enhanced recovery. Thos projects are going well, but the company had the good fortune to get involved in some natural gas discoveries that are the market's main focus now. In New Mexico, the company is a partner in several projects that have drilled modest to very productive wells in the Wolfcamp formation. Parallel owns 32,000 additional net acres adjoining these discoveries, where it is the operator and has just started working. Developments there will be very important. PLLL recently participated in a very successful south Texas well and has a small but strategic interest in the Barnett Shale (currently a focus of market enthusiasm). In addition, there is a large (138,000-plus acre) coalbed methane (CBM) project in Utah-Colorado - though it's early days for that and the first test well will be drilled later this year. These are just the highlights; see the company's recent releases for details. We wouldn't chase Parallel but would be grateful buyers on a significant pullback.
Vintage Petroleum (VPI) has been making new all-time highs amid good quarterly results, some recent acquisitions of producing assets, and hopes for exploration projects. Second quarter income was 86 cents per share, up 66%. Cash flow climbed 58% and was almost double net earnings. Production from continuing operations improved by 17%, with higher prices accounting for the rest of the gains. The company will be testing two wells on the Palo Duro Basin shale project, so we may soon know a lot more about the potential there.
Bankers Petroleum (BNK.V) is acting well, though it remains below the speculative March high. Production is growing steadily at the company's Albanian operation, but that is now over shadowed by the Palo Duro. Bankers is still acquiring leases there and now controls 255,000 acres, making it by far the landholder in the play. A drilling rig has been secured and the first well scheduled to spud in October. Management is not quite betting the company on Palo Duro, but close to it. This will be a big stock if the bet succeeds, but the risk is obvious."
OTC GROWTH STOCK WATCH
300 Chestnut St., Ste. 200, Needham, MA 02492.
Monthly, 1 year, $299.
Geoffrey Eiten: "Believe it or not, oil prices are not at an inflation adjusted, all-time high. Back in 1980, oil prices were the equivalent of what would be today's price of $94 a barrel! So does that mean that oil prices are not finished going up?
PERSONAL FINANCE
1750 Old Meadow Rd., Ste. 301, McLean VA 22102.
1 year, 24 issues, $97.
Precious metals stocks are nototiously volatile. Below, we look at how long-term investors can manage the volatility of their precious metals exposure.
Ivan Martchev: "We've seen it one too many times: The precious metals market gets hot, the stocks start zooming higher, investors pile in and the next time the market takes a breath they get badly burned.
The best performers on the upside become the biggest dogs on the downside, and sometimes they tend to decline 60 to 70 percent. And then the cycle repeats.
Like it or not, most investors aren't traders. They have little clue about when to bail if a sector becomes overheated. And investors like to chase the high-flyers, the smaller penny mining and exploration companies that may strike gold (but they forget that these companies may not.)
Below, we take a look at how you can keep exposure to the precious metals market without being shaken out on every pullback. From a purely mathematical perspective, the lowest volatility exposure to precious metals is with the precious metals themselves.
That means that actual gold bullion and silver will lose the least on the selloffs, but it also mean that they'll gain the least on rallies. Off the 2000-01 lows, gold bullion has rallied 70 percent; gold stocks, as measured by the PHLX Gold and Silver Index (XAU), have rallied about 130 percent; and smaller gold-mining stocks that don't hedge a lot of their production - as measured by the Amex Gold Bugs Index (HUI) - have rallied 470 percent.
Before you declare that HUI is the way to go, consider that on the last correction off the December high in gold bullion, HUI lost 34 percent. XAU lost 30 percent and gold bullion lost 10.9 percent.
It's easy to say gold stocks are in a bull market and "just hold on." But it's an entirely different thing to actually hold on through 30 percent-plus selloffs, of which there have been at least five of similar magnitudes since the 2000 bottom.
Why are gold stocks so volatile?
An impeccably managed mining company, such as Barrick Gold, made money consistently though the bear market for precious metals in 1996-2000 due to forward selling of gold at a substantial premium to the declining cash price. But there are many gold stocks that nearly went bankrupt.
The worst-managed mining stocks actually saw the biggest improvement in their operational performance as precious metals prices recovered. And those same secondary mining stocks tend to see the biggest selloffs when gold prices have even a mild 10-percent correction.
In the past, investing in gold bullion was difficult and costly. That's no longer the case, though, as the streetTRACKS Gold Trust Shares track the performance of the precious metal at one-tenth the price per ounce. That's with only a 0.4 percent expense ratio, which is lower than any precious metals fund and lower than keeping the gold in a vault yourself. For more information visit www.streettracksgoldshares.com.
The best way to ride the corrections and not get shaken out is to be diversified. A gold mutual fund can do that for you and allow you to ride out the correction with monthly investments, which is what we've been recommending for the past four years. Still, there are misperceptions about precious metals funds.
One of the least-volatile and best-managed funds in the sector is Vanguard Precious Metals (VGPMX), which was the original fund we had in the Mutual Fund Portfolio before it closed to new investors a few years ago. We replaced it with American Century Global Gold (BGEIX). Vanguard fund is less volatile because it invests in diversified mining companies - not just precious metals.
We've often heard that funds like Tocqueville Gold (TGLDX) are better, since they have had much higher returns in years when precious metals were hot. Tocqueville is a well-managed fund.
But the simple truth: Off the major bottom in precious metals stocks in 2000, Vanguard Precious metals appreciated 31.3 percent a year, Tocqueville 30.6 percent a year and American Century Global Gold 28 percent a year.
Keep in mind that the above returns compare the funds at a time when gold stocks are still substantially below their 2004 highs and haven't yet delivered one of their notorious bull runs.
If we compare the funds after a big rally, American Century and Tocqueville funds will be showing better relative performance, while Vanguard will be lagging slightly. Still, the best way to maintain exposure to the sector is through diversification of gold bullion, major producers and funds. And to spice things up, invest in the secondary mining stocks that everyone loves, but which tend to consistently disappoint.
Editor's Note: Ivan Martchev is associate editor of Personal Finance and editor of Wall Street Winners. To sign up for his free weekly e-mail Global Viewpoints, go to www.globalviewpoints.com.
Ian McAvity's DELIBERATIONS on World Markets
P.O. Box 40097, Tucson, AZ 85717.
1 year, 18 issues, $225.
Ian McAvity: "The latest Dollar dip/gold up tick produced a rush of queries as to whether or not my views had changed. They have not. I continue to view the 2001/03 run up by gold shares and gold which ran an extra year to top out in Dec'; 04, in a cyclical context: they broke the secular downtrend but need a further correction to undo the excesses of that run, to set the stage for the next up cycle.
The next upturn will be an important one, as that is when gold should challenge and hopefully take out the critical resistance levels around $500, dating from the 1983 and 1987 post bubble rebound tops. I've pointed at that area for years as the range that is likely to substantially broaden out the audience of players within the world of gold.
Is it possible that this corrective phase could be accomplished by the sideways grind we've already suffered for nearly two years? I'm asked that a lot, and must agree it is possible... but could only be confirmed by a powerful breakout from the 2004/05 ranges. I'm skeptical in part because of persistently high bullish Market Value sentiment data that suggests the small population of players are still over-anxiously pouncing on every upturn.
Scanning down the individual major stocks, there are some positive leadership signs emerging. Barrick Gold (ABX), the gold stock gold bugs love to hate because of their hedge book, is at new multi-year highs.
Goldcorp (GG), headed by Ian Telfer following the merger with Wheaton River, made a new high above its Dec. '03 peak. Wheaton added a lot of profitable copper cash flow, and Telfer is no slouch at doing deals. GG is a very different company now, but this superior relative performance effectively puts the market on notice that it will be a trend leader in the next bull run.
Glamis (GLG) and Meridian (MDG) are probing their highs to signal leadership intentions when the sector gets some wind in its sails.
I'm not partial to the South Africans, because of the Rand, aggressive labor unions and government spokes-people who too often suggest industry changes that confuse or threaten non-resident shareholders. Harmony is still the walking wounded after the ill-fated attempt on Goldfields. I don't need or want added political risks."
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