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Investment demand will break central bank gold cartel

Section: Daily Dispatches

A Summer Tip for Arabian Investors: Gold shares

From AME Info, Dubai
Wednesday, July 26, 2006

Barrick Gold has paid $1.3 billion to buy the much smaller gold mining company Nova Gold which was one of the six stocks tipped for 2006 by James Saks in this column last December. Investors in NovaGold have clearly made a quick buck, but what does it say about the outlook for gold mining stocks?

It means gold shares are still cheap, and likely to rise far higher. It means the biggest and one of the brightest in the industry is a buyer of gold companies. Should the average investor not take the hint and buy shares in other gold companies likely to be bought?

Indeed, Barrick Gold has chosen its moment well. Summer is traditionally a quiet period for the gold price which, despite a sensational surge in the first half of 2006, is presently well off its $730 high at around $620 an ounce. That makes it a good moment to buy a gold necklace, or for that matter a fast growing young gold company like Nova Gold.

The only chagrin for Nova Gold shareholders -- and they may yet reject this offer -- is that they could feel that their well-managed company is being sold for less than it will be worth very soon if the gold price really lifts off. In fact all the ingredients are in place for a surge in the gold price as early as this autumn. Let us review the factors.

... Geopolitics and oil

First, unstable geopolitics and a flight to a safe haven like gold. Nobody expected a war in the Lebanon this month, who knows what will happen next month with Iran. Certainly the current conflict has raised geopolitical risk and that will continue to impact on oil and gold prices this autumn.

Secondly, the previously favored asset classes of global equities and real estate have taken a bashing this year and with interest rates higher the risk remains to the downside, with a serious financial crisis possible, particularly if oil prices spike.

Meantime, there remains considerable excess liquidity in the global financial system and again gold remains a safe haven and protection against inflation which is already rising.

Thirdly, the gold market is a tight one and traded only by a handful of professionals and the central banks, with the latter suspected of widespread collusion. But as gold grows in popularity this will break a cartel-like situation and send the central bank shorts running for cover, releasing a parabolic upsurge in gold prices.

For gold has not shared in the commodites boom to anything like the same degree as other commodities, and it is the turn of gold to revalue to a more appropriate level. Can it really be true that gold today costs less than it did in 1980? What other asset class is more depressed and better value for the investor?

... Great upside potential

Barrick Gold is not delivering this message to shareholders. Its message is more subdued and talks about gold prices in the $700-800 range. But the important point for investors is that gold has a limited downside risk and the possibility of very high upside performance. What other asset class in the world today can offer that potential?

Last December AME Info published an article reviewing the outlook for smaller gold companies and we highlighted a selection from James Saks, a Canadian researcher. Aside from picking NovaGold, Mr. Saks highlighted: Glencairn Gold, Avino Gold & Silver, Linux Gold, Skyharbour Resources, and Teryl Resources.

One has to wonder which gold company on this list will be the next to be bought by a major gold company. But the message for Arabian investors is very clear, if you want to make serious money like the shareholders in NovaGold, buy and hold gold and gold related assets and do so now before prices go up.