Gold entered 2002 on a substantial rally, rising almost four percent in
the first two weeks of the year. Changes in gold fundamentals and
proposed reductions in producer hedging in the upcoming year have
helped push gold higher.
Historically, gold has been a safe haven in unsettled times and, given
the uncertain condition of the world economy now, this year is unlikely
to be different. As a result, expect a bull market for gold for the
upcoming year and a target price of $300 US per ounce.
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Bullion’s strength in 2002 will likely stem from its fundamentals,
which have turned in its favour.
One of the most important features of gold’s recent rally is that it is
being supported by volume, which compares to gold price movements in
December, which were based on low volumes.
It is also interesting and different that gold is rallying without the
aid of the European currency the euro. The correlation between bullion
and the euro has been more than 85 percent for the past two years.
We have also been hearing of large speculators in the market loading up
on bullion. Although they are equally capable of unloading it into the
market, the belief is that the long-term hedgers are reluctant to add
to their positions given the strong spot price. More buyers coming on
the market will likely support bullion prices in the near-term.
Our top picks for 2002 are gold companies that have shown considerable
growth in 2001 and have the potential to achieve positive results in
the upcoming year.
Two of our top choices are Barrick Gold Corp. and Goldcorp Inc.
Barrick Gold is a leading international gold company operating mines
and development projects in the United States, Peru, Tanzania, Chile,
Argentina and Canada.
In late December, the $2.3 billion US acquisition of Homestake Mining
was completed, creating one of the world’s largest gold producers, with
an immense reserve base of 84.3 million ounces. The Homestake
acquisition adds to Barrick’s operating strength and furthers its goal
of becoming the industry’s “most profitable, lowest-cost producer.” We
forecast the merged entity will have production of 5.88 million ounces
in 2002, at an average cash cost of $172 per oz US, falling to $165 in
2003. Barrick is the industry leader.
Goldcorp is mining one of the highest-grade gold deposits in the world
with production of the Red Lake, Ont., mine expected to reach 500,000
oz of gold this year.
Red Lake has estimated reserves in excess of three million oz and
recent drill results from the high-grade zones may indicate additional
reserves. Grades as high as 13.8 oz per ton have been encountered. The
Red Lake mine has improved the company’s forecast production and cash
cost per oz profile. Goldcorp is virtually debt free and poised for
exceptional growth and profitability.
Ian Morrison is a financial consultant with Wood Gundy Private Client
Investments in Calgary and is licensed to sell insurance products. His
views do not necessarily reflect those of CIBC World Markets Inc. or
The Western Producer. Morrison can be reached at 800-332-1407 or by
e-mail at ian.morrison@cibc.ca.
