oz gold & silver review .. budfox's article

  1. dub
    33,892 Posts.
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    This article can be seen properly (ie with table of Australian companies in place) at

    But in short, here 'tis:


    In my last article (January 21, 2003) "Gold and silver stocks behaving badly" the major focus was on the underperformance of equities relative to the POG and POS. Shortly after the article was published, the Australian major producers were allowed more rein and we were faced with a potential break to the upside as a number of companies were able to attain 12-mth highs with very little resistance.

    What followed could well be regarded as bouts of panic buying in the physical, whilst equities began to buckle under severe selling pressure as stocks failed to hold their impressive gains. Apart from a brief period in May-June 2002, and January 23-25 2003, the trading activity for major producers, mid-caps and speculative issues has been bitterly disappointing and no doubt has again contributed to investors losing the faith somewhat in precious metals investment.

    Whilst the POG rise to $390 was spectacular, albeit brief the sheer nature of the recent sell off down to the $341 level did not offer much in the way of stock assessment and provided only limited opportunities to accumulate stocks at bargain levels. After complaining about the poor performance of their stocks during the spike, I have noticed now clients commenting on how well their stocks are performing relative to the activity in the POG. I guess the message here is that there is always something to worry about and investors will be just as depressed if not more about a stock they paid 25c trading at 90c with gold at $385, than the same stock trading at 77c when the POG is $345.

    One of the main points I have noted during the current correction has been the severe reduction in anxiety levels shown by clients. Basically during the rise there is a feeling that they were positioned in the wrong stocks, and began to doubt their investments in PM's full stop. Now that the continual watching of the POG has slowed to a trickle, there is time to assess fundamentals, adjust portfolios and concentrate on those that may offer exceptional leverage during the next bout of "panic buying" regardless of its duration. If anything it is a "reality check" when investors can again realise that there is no such thing as a quick buck, and once the bull market beer goggles are removed rational as opposed to emotional decisions can be made.


    I felt like a true contrarian recommending the purchase of silver stocks, amidst a mini scramble for pure gold plays. The silver stocks despite a fairly nasty correction in the POS managed to hold on reasonably well, although discussion on local Internet forums was virtually non-existent. The fundamental outlook as far as I am concerned has only been enhanced and if anything gold's slip up could well be an opportunity rather than a threat for silver as the risk/reward profiles of both are taken into further consideration.

    The response from clients in relation to the news from Barrick in relation to their silver hedging was overwhelming and was the first real dose of good news in silver since lease rates took off in late 2001/early 2002.


    My last scorecard showed the percentage rise in Australian listed gold producers from their rolling 12mth lows, which could well have provided a confusing picture. A number of stocks had bounced off some nasty lows caused by poor production reports, lacklustre exploration results and problems in their other divisions (coal and tantalum in particular).

    (Table of Oz companies appears here. dub)

    The two top performers from 2002, Croesus and Kingsgate have continued to perform well with both stocks recently touching 12 mth highs before correcting (below sector average corrections).
    Stock selection remains critical despite the resurgence in the gold sector.
    The market is "news driven" and companies that report below par results or flag potential problems down the track are being punished in line with other sectors.
    Those with operations/based overseas have performed poorly in line with their Australian counterparts.
    The recent rally and subsequent correction in the POG and equities has now created a new breed of "stale bull". Whilst longer-term gold investors may not have contributed to the spike in a number of stocks, the fact remains that many newcomers were trapped in the whitewash and will be looking for a "break even" sale when the next opportunity avails itself.


    Australia's most popular mainstream investment magazine, which was released last Friday, carried the sensational headline, "New Gold Rush", then to the right hand side, "Bullion at 6 year high". I doubt whether the presses could be stopped in time to reflect the sudden increase in volatility and panic selling. Many would have argued had the magazine been released earlier they would have treated it as a short-term sell signal, however the fact remains that those that may have ignored it thinking they had "missed the boat" have now been provided with another opportunity and could well react positively to the magazines content.


    On February 24/25th I am attending a mining seminar, which comprises one of the strongest line-ups of Australian mid-caps and speculative stocks available. Previous seminars in Australia have been low-key affairs, however with the activity in gold and hope emerging for selected base metals (nickel in particular) this could well be a livelier affair.


    When conditions are more favourable I have no doubt that I will be involved in the adrenaline that is the short-term punting of mining stocks. Till then I have elected to maintain and increase positions in companies that exhibit signs of attaining multiples of their current share price over the medium-longer term. In the event of a speculative bubble forming, one would be crazy not to accept the possibility of extreme overvaluations occurring and hence these welcomed events should be considered when assessing a company's potential.

    The major downfall of liquidating fundamentally sound companies in favour of a grab bag of promoters' rubbish is that once you are hooked it is extremely difficult to switch back to investing. Many find the stocks they hold undergo more reconstructions without the ability to blow $10m on anything that takes their fancy during an ego trip.

    Tony Locantro
    [email protected]

    20 February 2003


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