UPDATE - GSSX Index© Continues to Outperform Other Indices

This is an update of the Gold Stock Strategist Index with a comparison to other gold-related asset classes and the S&P 500 index for 2009. I added the S&P 500 index at the request of my good friend Monty High.

One interpretation of the GSSX Index© performance (+40.6%) compared to the price of gold (+1.8%) is that it is fulfilling the role of a leveraged play on gold. Another interpretation--and one that makes more sense to me--is that the junior gold producers were beaten down way below fair value in 2008 as investors were either forced to liquidate equities to cover other obligations, or were fearful of a total collapse in the equity markets, sold first and asked questions later.

(click for larger chart)

Indexes Used for Comparison

Other indexes used to compare with the GSSX Index© include the XAU index, the HUI, index, the TSX Venture Exchange index, and the price of gold index represented by the ETF symbol GLD.

The XAU is an index comprised of 10 large cap precious metals mining companies traded on the Philadelphia exchange. Companies in the index include: Agnico Eagle Mines (AEM), Anglogold Ashanti (AU), Barrick Gold (ABX), Freeport-McMoran Copper and Gold (FCX), Gold Fields(GF), Goldcorp (GG), Harmony Gold Mining (HMY), Kinross Gold (KGC), Newmont Mining (NEM), and Pan American Silver Corp. (PAAS).

The HUI—AMEX Gold BUGS (Basket of Unhedged Gold Stocks) index is comprised of 13 major gold mining companies including Agnico Eagle Mines (AEM), Coeur D Alene Mines (CDE), Eldorado Gold (EGO), Gold Fields ((GFI), Goldcorp (GG), Golden Star Resources (GSS), Harmony Gold Mining (HMY), Hecla Mining (HL), Iamgold (IAG), Kinross Gold (KGC), Newmont Mining (NEM), and Randgold Resources (GOLD).

The TSX Venture Exchange index represents the 2,300 companies listed on the TSX Venture Exchange. The TSX Venture Exchange is a public venture capital marketplace for emerging companies who have not yet met the requirements for listing on the TSX, which deals mostly with well established companies. The TSX Venture index is a much broader index than the others and includes companies other than gold miners such as junior natural gas explorers and other companies—primarily in the natural resource sector.

The S&P 500 comprises over 70 percent of the total market cap of all stocks traded in the United States and consists of leading companies from a wide variety of different economic sectors. The index includes over 100 unique sectors. Most analysts choose to use the S&P as their preferred benchmark index because of its diversified sector coverage as well as its market value weighting. Because the index is weighted by market cap, the largest firms have the greatest impact on the S&P's value.

Finally, GLD is an ETF that tracks the price of gold.

Composition of the GSSX Index©

As I have indicated in previous reports, the composition of the GSSX is subjective as are all indices. Nevertheless, the GSSX is a fair representation of the universe of emerging junior gold producers. The 20 stocks included in the index represent about 40% of all emerging junior gold producers and about 1.3 million projected ounces of gold produced in 2009. Each company represents 1/20 of the total index. It is not weighted by market capitalization. The top performers so far this year in the GSSX index are Castle Gold, La Mancha, Richmont, Kinbauri, and San Gold.

Here is a list of the companies included in the GSSX Index©, followed by a chart with their relative performance YTD.

Alamos Gold (TSX:AGI; OTC:AGIGF)
Alexis Minerals Corp. (TSX:AMC; OTC:AXSMF)
ATW Ventures (TSX:ATW: OTC:ATWVF)
Aurizon Mines Ltd. (TSX:ARZ; AMEX:AZK)
Castle Gold (TSX:CSG; OTC:CSGLF)
Capital Gold Corp. (TSX:CGC; OTC:CGLD)
Gold Resource Corp. ((OTC: GORO)
Gold-Ore Resources (TSX:GOZ; OTC:GREXF)
Jaguar Mining (TSX:JAG; NYSE:JAG)
Jinshan Gold Mines (TSX:JIN; OTC:JINFF)
Kinbauri Gold (TSX:KNB; OTC:KINBF)

La Mancha Resources (TSX:LMA; OTC:LACHF)
Metanor Resources (TSX:MTO; OTC:MEAOF)
Minefinders (TSX:MFL; AMEX:MFN)
MDN Inc. (TSX:MDN; OTC:MDNNF)
New Gold Inc. (TSX:NGD; AMEX:NGD)
New Guinea Gold (TSX: NGG: OTC:NGUGF)
Richmont Mining (TSX:RIC; AMEX:RIC)
San Gold Corp. (TSX:SGR; OTC:SGRCF)
Timmins Gold (TSX:TMM; OTC:TMGOF)

(click for larger chart)

With this post, I have removed Western Goldfields due to a merger with New Gold and have added Kinbauri Gold as a replacement for Western Goldfields.

I hope this is useful for readers.

Best,

Gold Stock Strategist

Expanding Coverage to the 16 Largest Gold Miners in the World

Given the extraordinary rise in U.S. deficit spending, parabolic expansion of the U.S. money base, and increasing pressure being put on U.S. fiscal and trade policy by China (the U.S. top lender), I have decided to expand my coverage of gold producers to include the 16 largest gold miners in the world.

The rationale for expanding coverage is that the larger producers are more likely to benefit earlier than the junior gold producers in a financial environment characterized by a rising in the price of gold.

China's recent pressure on the U.S. raises the probability of a U.S. currency crisis characterized by a falling U.S. dollar in my opinion. The impending bankruptcy of GM and Chrysler could serve as catalysts for growing U.S. dollar weakness if hundreds of thousands of GM/Chrysler workers and auto supplier workers -- maybe millions -- become unemployed. Fewer workers means fewer taxpayers, higher deficits, reduced capacity to service a parabolic deficit trend, a weaker U.S. economy, etc..

On the other hand (yes, I am a two handed economist, apologies to President Truman), a cascading financial crisis in Europe or rising geopolitical tension in Pakistan or some place else could temporarily drive the value of the dollar higher as a safe haven play.

Of course, we could muddle along over the next few years as U.S. households pay off their $2 trillion+ in excess debt and increase savings by $1 trillion+ and the price of gold could trade range bound between $800 and $1,000 per ounce.

Still, over time the larger gold producers are more likely to benefit earlier from rises in the price of gold than the juniors and that is why I have expanded my coverage. Moreover, the larger producers are generally less speculative and volatile than junior gold producers for investors who might be interested in moving into gold mining stocks, but don't want to invest in the more speculative juniors. This is a place to start your due diligence.

Remember, junior gold producer share rises will likely lag the larger producers and could provide double, triple, or even more of a boost than the larger producers as juniors sharply ramp up production in a rising price of gold environment. Moreover, junior gold producer share prices have lagged the larger producer share prices as gold has climbed over the past few years. A simple regression to the mean model suggests that juniors should outpace the majors over the longer run.

Speculation on junior gold producers aside, below are some basic reserves, production, and financial data for the 16 largest gold mining companies in the world including Barrick Gold (ABX), Goldcorp Inc.(GG), Newmont Mining (NEM), AngloGold Ashanti (AU), Kinross (KGC) Newcrest (NCMGY), Polyus (OPYGY), Agnico-Eagle (AEM), Gold Fields (GFI), Yamana Gold (AUY), Buenaventura (BVN), Lihir Gold (LIHR), Harmony Gold (HMY), Randgold (GOLD), IAMGOLD (IAG), and Eldorado Gold (EGO).

16 Largest Gold Miners in the World by Market Cap

I hope this information is useful.

Best,

The Gold Stock Strategist

Is This A Turning Point for the Price of Gold?

I don't need to tell readers of the Gold Stock Strategist how disappointing the share prices of junior gold producers have been over the past year or so. The global deleveraging hit all equity prices hard.

No one predicted junior gold producers would still be about 50 percent off of their highs despite the price of gold having risen from $835 an ounce in January 2008 to $912 an ounce in the fourth week of April 2009 -- a 9.2 percent gain over 16 months.

Input costs have drifted downward. Energy has dropped from about $70 a barrel to $50 a barrel. Labor supply has increased as the economic recession has taken hold, which means the marginal cost of labor should be down.

Well, based on the fundamentals of international finance, junior gold producers may be in for a lift.

Today, we learned that China has been secretly building up its gold reserves since 2003, making it the world’s fifth largest holder of gold bullion behind the U.S., Germany, France, and Italy. China has boosted gold reserves to 1,054 metric tons of gold in March of 2009, up from 600 metric tons in 2003.

In mid-March 2009, China's Prime Minister Wen Jiabao expressed concern about the potential weakness of the U.S. dollar because China holds about $1 trillion in U.S. denominated debt instruments. If the U.S. dollar falls, the value of China's U.S. foreign reserves declines and they don't want to see that happen.

The Prime Minister stated, "We have lent a huge amount of money to the US. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried." In rare comments on another country's financial health, he added: "I'd like to take this opportunity here to implore the United States ... to honour its words, stay a credible nation and ensure the safety of Chinese assets."

Just three weeks earlier U.S. Secretary of State Hillary Clinton urged Chinese officials to keep buying U.S. debt. "It's a safe investment. The United States has a well-deserved financial reputation," she told Chinese television stations while on a China trip in February 2009.

Moreover, the BBC recently reported that China and Argentina have inked an agreement in March of 2009 to bypass the world's reserve currency--the U.S. dollar--for trade purposes making it easier for Argentina to buy Chinese imports directly in yuan. (Does anyone else see the irony in having the Argentines concerned with the value of the U.S. dollar?)

Some pundits suggest that the Chinese are bluffing about moving away from their U.S. dollar denominated foreign reserve holdings. And of course, there are a lot of undercurrents and nuance to this story that cut in favor of the bluff theory.

But based on today's news about China's secret gold purchases the question must be asked, "Is China slowly moving away from the U.S. dollar?"

The consequences of China moving away from U.S. dollar denominated foreign reserves would benefit the demand for gold and subsequent price. I suspect China's gold buying news is one reason why gold was up 5 percent this week.

If today was a bullish turning point in the price of gold, junior gold producers look even more undervalued today than they did yesterday.

Counterweights to the turning point thesis are the historical "go away in May" seasonal sentiments for the price of gold.

Only time will tell us what is happening.

Best,

The Gold Stock Strategist

Why Are So Many Junior Gold Miners Raising Capital Through Equity?

I've been following emerging junior gold producers for 5 years and cannot remember such a prolific level of secondaries and private placements as we have seen over the past four months.

I did a quick Google search and came up with the following list of gold producers and explorers that have recently raised money through equity rather than debt placements. Several of these companies are followed by the Gold Stock Strategist (in bold).

Acadian Mining
ATW Venture
Alamos Gold
Capella Res
Dorato Resources
Garson Gold
Great Basin Gold
Hawthorne Gold
IAMGOLD
Jaguar Mining
Kinbauri Gold
Kinross
Luna Gold
Metanor Res
Novagold Res
Northern Tiger
Osisko Mining
Queenston Mining
Silvercorp Metals
Sulliden
Timmins Gold

Okay, I know Silvercorp (NYSE: SVM) is a silver producer. But I also own shares in and follow Silvercorp and the point of inclusion on the list is that the rush to equity financing is not limited to gold explorers and producers.

Kinross? IAMGOLD? Why are they raising capital?

In a nutshell, there are three takeaway points from this list.

(1) Bank lending has dried up due to the global financial crisis. Even if you are a top notch risk and banks want to loan you money, it will take months because of the higher due diligence standards and regulatory requirements needed to close the loan deal. Equity financing can be completed more quickly and miners believe time is of the essence.

(2) The gold mining sector believes this is a once in a lifetime opportunity to advance projects forward more quickly than earlier planned and they feel an urgency to maximize production within the next 12-24 months. The extraordinary monetary and fiscal policy measures taken by the largest and most productive industrialized nations in the world point to much higher inflation once the credit markets bottom out. More fiat currency chasing a stable amount of goods is a classic recipe for inflation and the price of gold as a store of value has historically risen in price during times of inflation.

(3) Quality projects are finding equity financing very easily.

I believe all these points, but especially the third point, is bullish in the long-run for companies that have raised capital through secondaries and private placements over the past 4 months.

As a final note, creative equity financing (including mergers like New Gold and Western Goldfields and Vista Gold selling Allied Nevada shares) are other non-debt approaches to finance development and are likely to increase in the emerging junior gold producer sector.

For more on this general topic, I recommend you read the following post.

http://www.moneymorning.com/2009/03/30/mining-sector/

Best,

Gold Stock Strategist

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Full disclosure: I own shares in several of the companies listed above. The information provided in this post is believed to be correct, but not guaranteed. Investing in junior gold miners entails risks. Readers are responsible for their own investment decisions. Do your own due diligence.

Gammon Gold & Capital Gold Merger

The Capital Gold BoD must be reading the Gold Stock Strategist. Ending merger talks makes sense for Capital Gold given the discounted value represented by the Gammon Gold offer.

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Capital Gold Corporation Announces End of Merger Discussions with Gammon Gold

Approximately 15,000 Ounces of Gold Produced for the First Three Months

NEW YORK, March 31 /PRNewswire-FirstCall/ -- Capital Gold Corporation reported today that the Letter of Intent with Gammon Gold, originally announced on March 12, was allowed to expire. The Board of Directors of Capital Gold made the decision not to proceed with the signing of the definitive agreement, and further negotiations will not take place.

El Chanate gold production continues at steady rate and the mine has produced approximately 15,000 ounces of gold for the first three months of 2009. The first major components of the new crushing plant have arrived on site. Once the new crusher is installed and online by late June, production at El Chanate is estimated to achieve a monthly rate of 6,000 ounces.
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Jennings cut Capital Gold's target price to C$1.75, which is about US$1.39. This is closer to my estimate of $1.50 per share based on 2009 cash flow multiple. Given Capital Gold's resource base, any buyout below $2.00 per share would be less than fair value IMHO.

Congratulations to Capital Gold shareholders.

Best,

The Gold Stock Strategist.