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The Gold Stock Strategist analyzes leading junior gold producers and major gold mining companies.

Comments are welcomed!

Sunday, August 10, 2008

It's Been a Tough Six Weeks

Yes, I have been AWOL from this site for the past six weeks. My day job and personal projects have been taking up all my time and I haven’t been able to spend any time on the Gold Stock Strategist.

In a nutshell, here is what is happening IMHO.

The housing/credit crisis has created a flight to cash by investors— not to gold or jr. gold stocks. The housing/credit crisis is expanding globally. Australia, the U.K, and parts of Europe are seeing drops in their residential real estate values.

Remember, credit is the driver of monetary expansion and contraction. Monetary contraction creates generalized contraction in aggregate demand. Credit is contracting. This is reducing liquidity for all equity investments.

Access to capital for all junior resource stocks is limited due to the credit crunch. this puts downward price pressure on even good miners as investors are compelled to sell first and ask questions later..

The good news for emerging junior gold producers is that lack of access to capital may slow in some cases—but not kill—growth in intrinsic value. Emerging producers can finance their growth with earnings from the sale of gold.

Nevertheless, the cost of production is rising for all energy-intensive miners due to rising energy and labor costs. Investors are concerned about production costs as well for junior miners. These rising cost pressures should be easing somewhat as the price of oil declines. But, production costs have already risen significantly for many juniors.

The price of gold has met significant resistance at $950 per ounce because of the reduced monetary expansion and related global economic slowdown.

Moreover, the outlook for rate cuts in Europe increases as their economies slump. This is bullish for the US$ and bearish for gold.

How far the price of gold can fall as global economies slump is unknown. But many observers suggest the floor is somewhere between $750 and $850 an ounce. It is currently hovering a little above $850 an ounce.

In short, the macro environment remains mildly negative and very uncertain as far as the future of junior gold miners are concerned.

The risks of investing in emerging junior gold producers are many and varied. Rhw macroeconomic environment is exerting great downward pressure on the share prices of these companies. The economic prospects for these companies are still much greater than the prospects for pure junior exploration plays.

Despite a 40 percent plus contraction in share price, I am still holding my positions in Metanor and Gold-Ore. As producers, they are in a much stronger position than non-producing juniors and are priced for gold at $350 an ounce. I don’t see the price of gold at that level in the foreseeable future.

That said, it may take a year or even longer for these companies to begin to reflect their real worth given the current liquidity crisis.

There are three key activities that junior gold producers (like Metanor, Gold-Ore, San Gold, Gold Resource, ATW Venture, Jaguar, Capital Gold, and Minefinders)can do to boost share prices going forward.

First, ramp up to production capacity quickly.

Second, prove up resources as quickly as possible.

Third, expand the investor base—including institutions

Other ideas like buying back shares may help a bit, but using revenue from the sales of gold to prove up resources is a better use of capital IMHO.

The emerging junior gold producers remain deep value plays that will take time for the market to recognize.

It’s been a tough six weeks, but the intrinsic value of emerging junior gold producers remains intact.

I will be visiting the Metanor mines and mill this coming week and will report what I see.

Good luck to us all through this downdraft!

Best,
Gold Stock Strategist

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