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The Company's Eagle Gold Project in Yukon Canada hosts a National Instrument 43-101 compliant Reserve of 2.3 million ounces of gold.
Message: One of Best Reports on Outlook for Gold Anywhere IMO
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Gold Stock Underperformance Will it Change?“Certainly it did not in 2007, easily my worst year of the Precious Metalsbull market since I started investing in 2002. The good news is that goldis up 27% for the year, while the HUI and XAU indices are both upapproximately 18%. However, these indices represent the largest, mostliquid names in the Precious Metals universe (Newmont, Goldcorp, andBarrick, for example), and thus not reflective of the performance of theaverage gold/silver stock, which by my guesstimate has a market capcloser to around $50 million (there are currently around 1,000 PreciousMetal mining stocks).“The lack of understanding of this sector has caused nearly all newinvestments to go into the few big-cap stocks, as well as GDX, an ETFholding mostly large cap miners such as the aforementioned. This grouphas risen this year, but even so heavily under performed gold and silverprices. Moreover, just as the Dow (up 8%) does not reflect the experienceof the average stock this year (down), the main gold indices could not beless indicative of how the average mining stock has fared.“A better representation of how Precious Metal investors have done in2007 is the TSX Venture Exchange ($CDNX on stockcharts.com), anindex of smaller, more speculative companies, the majority of which arein the mining industry. This index is down about 6% for the year, and ifyou strip out the non-mining stocks, I’d bet the number is closer to down20%. In fact, literally dozens of such stocks are down 50% or more, inmany cases without any significant ³bad news² occurring within theunderlying companies.“By my experience, this is the third such period of stockunderperformance since the bull market began seven (next week eight!)years ago, the other two instances being mid-2002 to late-2002 and early2004 to mid-2005. However, this period of underperformance, whichstarted in mid-2006 and accelerated in the spring of this year, isapproaching the longest time, in duration, of the three. Also unique isthe fact that gold and silver have actually risen considerably during thislatest period of stock underperformance, unlike the mid-2002 to late-2002and early- 2004 to mid-2005 periods, when gold and silver did essentiallynothing while the Precious Metal mining stocks got trounced.“So what is different about the current period, and as the title of thismessage asks, (when) will it change?“As you all know, the reason I left the relative safety of the oil sector wasthe superior returns offered by the Precious Metals market over the nextdecade, in my view (off topic, it¹s funny to call that sector safe given thevolatility that plagued it from 1995-2005). The Oil bull market has manyyears to go, in my opinion, but is probably in the fifth inning by nowcompared to the second inning that the PM bull market is currently in(amazing, since we are nearly eight years into this bull market).Moreover, the oil sector is not likely to have the internet-type mania that Iforesee in the not so distant future for Precious Metals, as the forces offear, greed, and liquidity converge on one of the market¹s smallest, mostmisunderstood, and most unloved sectors.“However, the flip side of this trade-off is the NON-STOP war the U.S.government (among others) is waging against gold and silver to masktheir traditional roles as inflation barometer, harbinger of poor financialtimes, and, most importantly, REAL MONEY. Don¹t kid yourself, it is a24/7 coordinated effort to keep precious metals and mining stocks incheck, in order to prevent the masses from worrying too much about theaccelerating inflation and declining economic growth that are currentlyworsening. As a result, we have seen gold and silver prices underperformthe meteoric growth in the CRB Commodity Index, which yesterday hit anew all-time high. By the way, if you’re wondering why the cost ofliving is rising so much, take a look at some of the other, nonmanipulatedcommodities, including oil and agricultural products such aswheat, rice, corn, and soybeans. Then take a gander at your tuition,insurance, healthcare, and taxation increases, as well as the surge ofunexpected fees, levies, and surcharges that arepopping up everywhere, from private businesses to governments. And ifyou think your property taxes will be lowered due to falling housesprices, I’ve got a bridge in Brooklyn to sell you.“However, the problem with the manipulative ‘game’ that the CentralBanks are playing with the gold and silver markets is that a) they arerunning out of ammunition to keep the ruse going, b) other Central Banksof the world, particularly in China, India, Russia, and the Middle East, arebecoming significant buyers of physical gold and silver, and c) theinflationary spike in mining costs is causing a MASSIVE decline in goldand silver production, particularly gold where production peaked in 2004and is starting to really plummet. I would not be surprised to see goldproduction fall by 5%-10% next year, and perhaps 2009 as well if pricesdo not spike dramatically and soon (drawing a surge of much-neededinvestment capital into the sector).“The recent high profile blow-ups of mine costs at Novagold andGammon Lake are poster children of this trend, but unfortunately aremore representative of the rule than the exception. Nearly every miningcompany is experiencing the same problem these days, making industryreturns on investment close to 0% even with gold at $800/oz. Capital hasbeen strangled from the sector this year, making it likely that even moremine projects will be shelved, and thus the vicious circle will continueuntil gold is a MUCH higher price. Let me get this straight - $800 ISNOT A GREAT GOLD PRICE! In 1980, when the U.S. money supplywas roughly 15% what it was today (not including massive growth inother worldwide currencies), $800 was a good, if not great price. But intoday¹s world, $800 is the equivalent of roughly $30 oil (oil is currently$95/barrel), in other words a price level where few, if any projects haveany chance at material profitability. And, as investors know, stocks donot go up when an industry cannot operate profitably.“Now for the good news. In my view, much (if not all) of this negativityis discounted into the mining stocks as we speak. Despite $800 gold and$14.50 silver, on a scale of 1-10 I’d rate sentiment in the gold sector ataround a82. Plus, the December plunge in the TSX-Venture Exchange likelyreflects asignificant bout of tax-loss related selling which will end this week as wehead into the New Year. Oil just had a healthy 10% correction which isnow turning back up, the dollar had a dead-cat 5% bounce which is nowturning heavily overbought and starting to roll over, and even thesignificant base metals correction of the past few months appears to beending. These are all positives for the Precious Metals sector, whichitself is very heavily oversold at a time when the fundamentals for it andother commodities are surging.“To conclude, it is my view that the Cartel ‘game’ of holding the sectordown has now intruded too much into the real world. In other words theconstant pounding of the gold, silver, and mining stock prices has causedsevere dislocations in profitability, capital flows, and, ultimately, goldand silver production at a time when gold and silver demand areexploding worldwide (check any anecdotal or empirical data). Giventhese real-life (non-financial market) issues, as well as theaforementioned bullish technical states of oil, foreign (non-U.S.)currencies, base metals, and gold and silver themselves, I think the timefor the next major surge in gold and silver prices is upon us.And given the mining stock’s SEVERE underperformance over the pastyear, the aforementioned dramatic improvement in the fundamentals forgold and silver prices, the incredibly weak sentiment in the sector, and themassive under valuation caused by recent tax-loss selling activity, I thinkan even more impressive run in the mining stocks (particularly thesmaller ones) is about to commence.” End quote.[Andy Hoffman is a former oilfield service sell-side analyst whom hasdedicated his career to the precious metals sector since mid-2002. Hecurrently serves as VP of Corporate Development for EXMIN Resources(EXM.V), a junior gold/silver explorer/producer operating principally in
the Sierra Madre Region of Northern Mexico.]
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