By David Galland, Casey Research

May 20, 2008

Wonder what’s happening with the gold market lately? So has David Galland, of Casey Research. (publishers of Casey’s International Speculator) Here he offers some insights into the current state of the precious metal… and the companies that mine it.

But so far, other than a small handful that appear to hold the stuff, there has only been one legitimate elephant bagged; by the team of Aurelian (T.ARU). Unfortunately, the carcass of that particular elephant rests entirely within the sketchy outlines of the nation of Ecuador where the locals are currently circling like a pack of hungry hyenas.

So far, we have had (1) and we are beginning to see (2), but (3) has proved remarkably elusive.

Now, don’t misunderstand. You can have a whopper of a bull market in these stocks without the discovery – that was the case in the 1970s bull market. But a discovery that fires the imagination can jump-start things in a big way, no question about it.
Evidence of that statement is provided by the gold share bull market of the mid-1990s, the most powerful to date, which occurred against a back drop of flat to falling gold prices. In case some of the big winners from that market have slipped from your memory, they include returns such as; Cartaway, up 26,040%; Pacific Amber, up 4,376%; Arequipa, up 5,692%, and so on and so forth.

So, What’s Going On?

According to MineWeb, Peter Munk, the somewhat unpopular chairman and acting CEO of Barrick Gold, the world’s largest gold producer, stated at the company’s recent AGM that there have been “virtually no new discoveries.”

Viewed from the perspective of an investor in the junior resource sector, this lack of discoveries means the fuse is lit – starting with straight-up supply and demand fundamentals – for a rocket shot tomorrow. Adding boosters to the rocket, we have a commodities bull market that shows no sign of ending anytime soon and, while the U.S. dollar will periodically rebound, it is not going to somehow reinvent itself as sound money in our lifetime.
Importantly, as you can clearly read between the lines in Chairman Munk’s words, once the majors get cashed up and serious about replacing their reserves, they are going to have to look downstream to the juniors with discoveries… even if those discoveries are below the 5-million-ounce threshold they previously required to even consider taking an ore body into production.

A Risk and an Opportunity

Of course, lowering the threshold on deposit size will require trade-offs. For example, in order to be considered for an acquisition, a smaller deposit will almost certainly have to be near surface and open-pittable. It will also have to be near good infrastructure, and located in a jurisdiction with good laws and reasonable taxation. There is, in this situation, an opportunity and a risk.

In other words, take the opportunity in these down markets to focus on getting positioned ahead of the majors… that’s where the big money will be made as things gather steam again going forward.

This entry was posted on Monday, May 26th, 2008 at 10:51 am and is filed under current news articles. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.