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Gold Market Remains Strong
by Lawrence Roulston

Resource companies have seen some gains over the past quarter, but results have been uneven, to say the least. Emerging gold producers and companies with advanced stage gold deposits have generally turned in favourable performances. Some of the silver companies also did well. Gold exploration success is being recognized while base metal and uranium companies and early stage explorers are still shunned by most investors.

The gold market remains strong, albeit somewhat volatile. Many investors bought gold as a safe haven at the height of the financial crisis. With “green shoots” pointing to the beginning of economic recovery, some of those gold ounces are being sold back as at least a few investors are getting back into equities.

The safe-haven gold that is being offered back to the market is finding ready buyers in investors who look beyond the early stages of recovery. People now recognize inflation as the inevitable consequence of trillions of dollars of stimulus spending. Gold is gaining recognition as a hedge against the declining value of currencies, which is the flip side of inflation. Silver is following gold higher, with the big silver companies rising in value. However, the smaller silver companies have not benefited from the metals price gain.

Some commentators feel that the gains in the broad markets and in resources have gotten too far ahead of economic fundamentals. Certainly, there are still serious concerns with the U.S. economy. However, in looking at the resource markets, it is important to consider the global picture. China is the third largest economy, still far behind the magnitude of the U.S. Nevertheless, China is by far the biggest consumer of metals. The Chinese economy grew at 6.1 % in the first quarter and is expected to grow at 8% for the year. That is down from the 10%-plus level of earlier years, but a torrid pace for any large economy.

The copper price, now up 66% from the low of earlier this year, reflects the on-going consumption of metals in the global economy. Base metal juniors are being shunned, as if investors believe that the world will no longer use metals.

Over the past ten days, I participated in resource investment conferences in Hong Kong and Vancouver. The contrast in the outlook for resources in North America compared to Asia was remarkable. The next issue will include observations from those two events. For now: Asia is preparing for economic recovery by accumulating resources while they are incredibly cheap.

One of the big concerns at present with regard to the junior resource markets is whether we will experience the dreaded summer doldrums. It appears likely that there will be some softening, even if just from the self-fulfilling nature of the concern. Companies that are fully valued, or which are merely biding time waiting for the markets to lift their share prices, may experience declines.

Companies that are generating shareholder value by advancing their projects will continue to be rewarded. Money is coming back into the resource sector as investors around the world are beginning to recognize the exceptional values in the context of a longer term outlook.

At this moment, the most favoured area for investors remains precious metals, both gold and silver. Specialty metals, especially those used in high-tech applications are also gaining recognition. The uranium price is up 25% from the low of earlier this year, with little or no reaction yet in the juniors. In due course, even the base metal juniors will begin to get some respect.

 



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