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TORONTO STAR
Dianne Maley October 28th 2005
Junior Golds Could Shine
All that's needed is for 'real' gold price to rise.
Analyst uses charts dating back to 1700s
Goldbugs, start glowing. Junior mines, so popular with speculators, are about to take off. They'll do so whether or not gold hits new highs. All we need is a recession.
So says Bob Hoye, editor of Institutional Advisors newsletter in Vancouver and a student of financial history.
Hoye is no goldbug. He charts price trends going back to the 1700s to make his point. His charts show the "real" price of gold, relative to prices for commodities such as
oil and base metals, falls in boom times and rebounds in the ensuing bust.
Recessions bring better operating margins for miners because their cost of doing business goes down, Hoye says. Gold miners prospered in the Great Depression. An unusual
theory? "It's not a theory," Hoye says impatiently. "It's what happens."
As he sees it, the stock market is heading for a cliff. If a bear market sets in, prices of senior gold producers — Newmont, Barrick and Placer — could be dragged down by
the sheer weight of falling stock markets. "The senior golds are vulnerable," Hoye says. But if the real price of gold holds steady or rises slightly, "a lot of junior mines will do well. If any one of those companies comes up with something
exciting, it could be a big play."
Hoye points to the Gold Colony index of 50 exploration stocks, and to the first company on the list, Almaden Minerals Ltd., as an example
www.goldcolony.com
Almaden has a portfolio of gold exploration properties in Mexico, where it has grassroots exploration deals with BHP Billiton and Japan Oil, Gas and Metals National
Corp., as well as properties in British Columbia, the Yukon and the Northwest Territories. Junior miners such as Almaden hope to discover mineral deposits, get big companies interested in developing them and keep a good-sized share of the
profits.
In real terms, gold is in a strong uptrend, Hoye says. The one conclusive sign he's waiting for that a roaring bull market in gold is coming is a steepening of the yield
curve; the difference between long and short-term interest rates, which would signal a tightening of credit that would tip the economy into recession. Most forecasters are not calling for a recession any time soon.
Hoye tends to welcome setbacks in the nominal price of gold because they "shake out overwrought goldbugs who have been buying for the wrong reason," he wrote in a recent
newsletter. "The proper reason to buy golds is to take advantage of the one sector that consistently performs in a post-bubble contraction." He is referring to the tech bubble that peaked in 2000 then exploded.
Mind you, it doesn't hurt Hoye's argument if the nominal price of gold is headed higher, as a growing number of forecasters believe. Both the nominal price and the real
price peaked in mid-October. Gold broke through $480 (U.S.) an ounce on Oct. 11 and closed at $477.10, its highest since early 1988.
The real price, measured by Hoye's gold/commodities index, has bounced from a cyclical low index reading of 185 in June to a high of 231 on Oct. 11. Both the nominal
price and the gold/commodities index have since slipped back a bit.
For the past year, gold's trading pattern has been one of higher highs and lower lows, "the best kind of rally," Bill O'Neill of Logic Advisors, told Dow Jones Newswires.
Pierre Lassonde, the former Franco-Nevada president who is now president of Newmont Mining Corp., told the Denver Gold Forum in September that he is sticking to his
forecast of $525 gold by early next year. "There is falling supply and rising demand; it's that simple," Lassonde said.
Institutional Advisors' technical charts indicate gold's next target is $542.
Mary Anne and Pamela Aden, goldbugs of some renown, believe the gold bull market is just beginning; even though gold has risen nearly 90 per cent over the past few years.
The Adens foresee a new investment era "fuelled by massive government spending, the largest debts and deficits (American) the world has ever known, the war on terror, record high oil prices, a 25-year high in commodity prices, growing
uncertainty, and the booming growth and demand out of China as well as other emerging countries."
Then there's gold's role as a currency. While paper monies have come and gone, gold "has a 5,000-year track record," the Adens wrote in a
recent market commentary. Gold's next resistance point is $500, they said. "Once gold is able to rise above that level, it's off to the races." Gold will climb back to its 1980s high of more than $800 an ounce, the Adens predicted.
But then, they're goldbugs. The appeal of Hoye's forecast is that it doesn't depend on skyrocketing gold prices, which may not come to pass given low inflation. And it's
supported by charts and graphs dating back hundreds of years.
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