Where the New Money Is: A Snapshot of Gold and Silver Futures
Where the New Money Is: A Snapshot of Gold and Silver Futures
Kinross Gold Corp., Canarc Resource Corp., Endeavour Silver
Corp. and Pan American Silver Corp. Share Market Perspectives
By Jennifer Lee February, 2006
There's no doubt about it, gold and silver are on the rise. Gold
futures were sitting at a 25 year high by mid January of this
year, with current rates resting at around 553.80 an ounce.
Silver is not too far behind this hurdle, reaching a 22 year
high at the end of this month, now up to $9.44 an ounce, with
talk of it reaching the $10.00 mark in the none too distant
future.
2005 was a momentous year for the metals, as currencies
fluctuated and gold once again proved itself to be the renowned
safe haven that it is, when investors are looking for a stable
place to park their money.
In a recent interview with Business Week, James Turk, co-author
of the book, "The Coming Collapse of the Dollar and How to
Profit From It: Make a Fortune by Investing in Gold and Other
Hard Assets," offered some insight to readers, when asked the
question of who is interested in buying gold these days. He
reported that, "the most significant buyers over the past few
years have been individuals. Gold goes to where the wealth is
being created. So for example, the European central banks have
been disgorging gold from their vaults, and that gold is going
to China and India because that's where new wealth is being
created. Gold is also going to the Middle East with the rise in
energy prices."
The global repositioning of wealth is an important feature when
analyzing just why gold is moving in the direction that it is,
especially when we are talking about responding to threats of
terrorism and international security. Kazuhike Saito, a
commodity analyst with Interest Capital Management based in
Tokyo recently told Bloomberg reporters that the impending
threat of further terrorist attacks "are definitely supporting
prices." This is an undeniable aspect of a market response to
global political uncertainty. Taking a look at how companies are
repositioning themselves to meet the demand, Tracey Thom,
Director of Investor Relations and Corporate Communications at
Kinross Gold Corp. (NYSE:KGC;TSX:K) commented that, "with the
weakening US dollar, it seems like gold prices are further
strengthened and maintained at this level." When asked what her
predictions were for 2006, Ms. Thom stated, "with the continued
weakness in the US dollar, we could see gold continue to rise
through the year." In terms of why we saw gold rise to such
great heights, she told InvestorIdeas that, "a lot of what
happened in 2005 was influenced by the demand increasing by
about 5%, where supply was decreasing on a global basis. Demand
is out-tracking supply at this point." Thom furthered, "people
tend to go back to gold vs. currencies when currencies start to
fluctuate the way they have."
Brenda Radies, Vice President of Corporate Relations for Pan
American Silver Corp. (TSX:PAA; NASDAQ:PAAS) stated that,
"silver and gold tend to trade in tandem, but not always.
Because 40% of silver is based on industrial fabrication, silver
sometimes follows the base metals. Having said that, both silver
and gold are likely to be affected by the US dollar over the
next year. We think silver has more price growth potential than
gold at this point because the supply and demand fundamentals
are better for silver than for gold. In 2005 silver rose 30%
while gold rose 18% and we expect to see this outperformance
continue."
However, a shift in focus towards junior mining companies could
be what we are looking at next and as Brad Cooke, Chairman and
Chief Executive Officer of Canarc Resource Corp.
(TSX:CCM;OTCBB:CRCUF) states, "when the metals move,
institutional investors invest first in the major producers but
once that market becomes saturated, then they look to junior
exploration companies." Canarc, whose major shareholders include
Barrick Gold Corp. (NYSE:ABX, TSX), has seen its share price
start to rise in recent months as a result of such investor
interest.
As of January 1st, 2006 Jack McClintock, former global
Exploration Manager of BHP Billiton became President and Chief
Operating Officer of Canarc. Mr. Cooke furthered that the
development of Canarc's principal gold project "gives us a
platform upon which to build a mid-tier gold producer over the
next three years."
With final regulatory approval of the merger between Barrick
Gold Corp. (NYSE:ABX, TSX) and Placer Dome (NYSE:PDG, TSX)
coming through on January 12th, 2006, Canada is now home to the
world's largest gold mining company. The impact of this
agreement on the Canadian gold mining market in general is
greatly tied to this deal and as Tracey Thom tells Investor
Ideas, with three joint ventures in place with Placer Dome,
"Gold Corp will soon take (these) on, when Barrick takes
complete control of Placer Dome. Gold Corp will offer
approximately $1.4 billion for those assets."
On the side of silver, when asked the all encompassing question
of whether he saw silver moving this year, Hugh Clarke of
Endeavour Silver Corp. (TSX:EDR; TSX:EDR; FSE:EJD; EDRGF:PNK)
stated that, "Firstly, silver is a small, illiquid volatile
market and historically has been a follower, not a leader. It
follows gold but will, from time to time, move on its own. At
this moment, we may be in the early stages of this kind of
independent price movement."
Clarke furthered, "I do believe the US dollar will resume its
long term devaluation which will probably only add fuel to the
appreciating prices of both gold and silver." When asked for his
view on whether he thought silver will become an Exchange Traded
Fund, Clarke responded, "I think its going ahead. It would
appear that in the next few months this may become a reality."
In terms of concluding whether or not the global supply of
silver could ever meet global demand, Clarke furthered, "The
short answer is no. For decades, silver demand has outstripped
silver supply in the order of 100-200 million oz. per year. The
main source to cover this deficit has come from government
inventories. The primary source of silver (72%) comes from mines
while the balance (28%) comes from scrap/re-cycling and
government supplies. It should be noted that unlike
gold/platinum/palladium, the vast majority of silver used in
industry is consumed, not re-cycled...never to be seen again. As
recently as 1990, visible government supplies were in excess of
2 billion oz. while current estimates put this number at only
200 million oz. The cupboard is bare."
If this is the case, the focus should be shifting back towards
junior mining and exploration firms, if Barclays Bank is to
stockpile the proposed 130 million ounces of silver, required if
silver is to become an ETF.
Jon Nadler, Investment Products Analyst with Kitco Bullion
Dealers and regular contributor to MarketWatch, recently gave an
interview with Investor Ideas, offering his insight on gold and
silver, as they presently stand. When asked where he currently
sees silver in relation to gold at present, Jon replied that,
"during bull market periods in precious metals, it usually takes
fewer and fewer ounces of silver to purchase an ounce of gold.
Generally, in such periods, the price performance of silver
outshines that of gold (in the 1980 bull market silver's
performance was three times better than that of gold). We expect
great feats from silver in coming months and years." However he
did offer as a reminder that in addition to this, silver's "fate
is inexorably tied to copper production, as well as a continuing
strong demand from Asian countries."
Offering some comment on what is helping to contribute towards
gold's current demand, Mr. Nadler explained, "Underlying these
basic market-shaping numbers is a rise in global political
tensions (Iran comes to mind), a developing 'house-of-cards'
scenario in US real-estate prices, and the growing triple threat
created by the government, trade, and consumer deficits in the
USA." All of this in addition to a basic supply and demand
imbalance, have many experts agreeing that the increase in the
demand for gold, comes from a series of commonly agreed upon
causes.
Mr. Nadler offered the final comment that, "as the quest for
preserving capital takes precedence over the evermore elusive
quest for "sure-fire" double-digit gains in the 'conventional'
investment asset classes - gold appears to be the vehicle of
preference for this journey."
But with increasing speculation over whether silver will become
an Exchange Traded Fund (ETF), everyone is waiting to see what
the outcome will be once the Securities Exchange Commission has
finished reviewing the matter. If silver were to begin trading
as an Exchange Traded Fund (ETF), this movement could trigger an
increase in the price, if it is approved.
However, if this were to occur, some analysts are saying that
during the anticipatory period the price is expected to build
but once the ETF hits the markets, the price could begin to show
signs of a retreat after achieving gains.
Jennifer Lee Jennifer Lee has a degree in English Literature
from the University of British Columbia. She holds a publishing
certificate from Simon Fraser University and has worked at both
Vancouver and Western Living magazines, where she began her
career as an editorial intern. She has worked as an editor in
countries such as Zimbabwe and South Africa, producing books,
newsletters and editing various quarterly magazines on a variety
of international development related topics. In South Africa,
she worked to help produce a bi-weekly newsletter for the
Institute for Security Studies on crime and corruption headlines
which appeared in all national and provincial papers. Prior to
working in southern Africa, she wrote articles for DMR
Consulting Group, on mergers and acquisitions taking place in
the market during 2001. She now produces a quarterly publication
at the University of British Columbia.
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