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| Adrian Mastracci, president of
KCM Wealth Management, says "You need to be
prepared for volatility. For most, if gold makes
more than three to five per cent of their portfolio,
you ask why." |
By: Gary Lamphier
The Vancouver Sun
RRSP Extra
Wednesday, February 5, 2003
More than war rumblings are sparking renewed interest,
higher prices for metal
Edmonton – Gold bugs love bad news.
After suffering through years of depression for much
of the buoyant 1990s, they’ve had plenty to cheer
about lately: the tech wreck, plunging stock markets,
swooning U.S. dollar, global economic downturn, corporate
scandals galore, and now a possible war in Iraq.
For devotees of the yellow metal, this is party time.
It’s little wonder bullion prices have been on
a roll, hitting a six-year high of about $370 US an
ounce in the spot market. That’s up about 46 per
cent since February in 2001, when gold began its big
run.
Prices for most gold stocks, which typically move higher
and faster than the underlying price of bullion, have
soared higher.
The S&P/TSX Canadian god sub-index has doubled
since early 2001, and share prices of small to mid-tier
producers such as Eldorado, Bema and TVX have tripled
or more.
As a result, brokers who once courted tech companies
are now promoting gold stocks. A recent gold show in
Vancouver attracted 3,000 investors, the biggest turnout
in 11 years.
With RRSP season in full swing, many investors are
now asking themselves whether it’s too late to
joint the party, and whether they should consider adding
some bullion or gold stocks to their portfolios.
As always, the answer depends on whom you ask, and
on the individual investor’s goals risk tolerance
and asset diversification strategy.
“I have some clients who have some gold in their
portfolio and others who don’t want it at all,”
says Adrian Mastracci, president
of KCM Wealth Management in
Vancouver.
“You need to be prepared for volatility. For
most, if gold makes more than three to five per cent
of their portfolio, you ask why. I’m a firm believer
in holding a basket [of securities], and part of the
basket could be gold.”
Still, most pros say gold stocks are a riskier bet
than they were two or three years ago, and the market
may be reflecting that. While bullion prices remain
in an uptrend, many gold stocks have gone sideways in
recent weeks.
Key producers such as Placer Dome, Barrick Gold, Meridian
Gold and Agnico-Eagle are trading well below 52-week
highs, and even highly regarded stocks such as Goldcorp
are struggling to maintain their momentum.
In part, that reflects worries that speculators have
already driven the price of gold too high and too fast,
and that bullion prices already have a built-in “war
premium” that could evaporate if there is a quick
resolution in Iraq.
Barry Allan, a gold analyst at Research Capital in
Toronto, agrees there is some short-term “fluff”
in the gold price but he says recent talk about a “war
premium” is overblown.
“I’ve seen commentators suggest there is
a $50 war premium in gold. I don’t believe that.
I take a look at other factors [that drive gold prices]
such as U.S. interest rates, the U.S. dollar, and what
the hedgers are doing. There is a war premium, but it’s
not of that magnitude,” he says.
Allan says it’s closer to $15 or $20 an ounce.
On a longer-term basis, he insists gold is in a major
rise that isn’t about to reverse course soon.
A variety of factors have created what’s shaping
to be a golden era for bullion, Allan says.
Among them: a weak U.S. dollar, rock-bottom interest
rates, steady declines in global gold reserves, a big
drop in bullion sales by central banks, and a halt in
forward-selling by most producers. All of these factors
will continue to push gold prices higher in the long
term, he says.
For conservative investors, he recommends the shares
of Barrick Gold, a big-cap producer that hasn’t
participated in the recent rally. For more aggressive
investors, he prefers growth-oriented junior and mid-tier
producers such as Kinross, Miramar, Eldorado, Iamgold
and Meridian.
Plenty of market pros remain skeptical about gold stocks,
however.
“Most gold stocks trade well above what they’re
worth, on a discounted cash-flow basis,” says
Martin Ferguson, an equity fund manager with Mawer Investment
Management in Calgary.
“Many people can make money in the market by
simply playing the trend but I choose not to, because
the underlying asset is just too expensive.”
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