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David Urban
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A true investing contrarian with more than a decade's experience in the financial markets. I review a variety of sectors with both long and short ideas. @dcurban1 Blog address: http://www.atruecontrarian.com/ The top gold and silver analyst on Seeking Alpha. One of the few that does the hard... More
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A contrarian investor with a global macro view.
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The 2012 Investment Forecast
  • Gold Stocks – Where is the Bull Market? 0 comments
    Sep 16, 2010 7:28 PM | about stocks: GG, NEM, ABX, KGC, AEM, GLD, DGP

     

     

    Gold bullion has been on a strong and steady march since its bottom in late 2008 but Gold stocks have remained mired in a sideways movement as investors become impatient waiting for the sun to shine upon them. But to understand why Gold stocks are moving sideways investors first need to have a brief history lesson about the industry.

    For the 80′s and 90′s Gold was looked at with disdain after Paul Volcker broke the back of inflation and equities started their great bull market. With the Gold price trading in a tight range close to the production price Gold producers were forced to hedge against price declines. With profit margins tight, hedging was the smart strategy as it gave downside protection to the mining companies. Exploration projects were difficult to fund and companies instead focused on increasing production and efficiency at current mines.

    When the Gold bull market started gold producers continued to be wary of the runup in price after spending almost 2 decades in a zero profit margin environment.

    In the early part of the 2000 decade new investors looked to mothballed projects drilled out in the 70′s and 80′s which were shelved because they were uneconomic at the current prices. Savvy investors purchased many of these projects and looked over the drill results with new technology, often leading to major new discoveries.

    Technological advancements also led to new discoveries at existing mines and greenfield areas. Exploration companies popped up overnight and a global Gold rush began as investors scoured the globe looking for major projects in South America, Canada, the Caribbean, and Africa.

    New producers realized that having only one mine with a 10 to 20 year lifespan puts an end date on the company if additional projects are not discovered/purchased. This pushed the new producers to use the rising Gold price as an opportunity to acquire assets and build up the inventory to increase the life span of the company.

    More importantly, it allowed the new producers to continue to move up the curve from being an exploration company to a development company then to a small and mid-tier producer and finally a major producer.

    This in turn led to companies like Goldcorp growing into major Gold producers since before companies like Barrick Gold and Newmont Mining dominated the landscape.

    The new producers have become even more aggressive than their old guard counterparts acquiring bolt on projects similar to Goldcorp’s activities at Red Lake to increase the assets and existing life of a project.

    In most cases stock is used as currency to acquire the new projects diluting current shareholders but offering long-term value as a more ounces in the ground extends the life of the company.

    This has caused stock prices of most companies to trade sideways while the price of Gold bullion rises disappointing investors. But hope is on the way, as the remaining major exploration and development projects are acquired Gold producers, new and old, will have to turn inward for growth. This means corporate efficiency and a decrease in development expenses which will translate into a jump in profits and stock prices.

     

     

     

     

    Disclaimer
    Communications are intended solely for informational purposes. Statements made should not be construed as an endorsement, either expressed or implied. This article and the author is not responsible for typographic errors or other inaccuracies in the content. This article may not be reproduced without credit or permission from the author. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided “AS IS” without any warranty of any kind. Past results are not indicative of future results.
    PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.

    Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile. This is not intended to be investment advice or a solicitation to purchase any of the securities listed here. I will not be held liable or responsible for any losses or damages, monetary or otherwise that result from the content of this article.

     

     



    Disclosure: Long Gold exploration stocks
    Themes: GOLD, Precious Metals Stocks: GG, NEM, ABX, KGC, AEM, GLD, DGP
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