List of Articles

It’s not too late to buy gold and gold shares, says analyst

by Wayne Cheveldayoff, 2005-10-27

If you haven’t put gold or gold shares in your portfolio yet, CIBC World Markets equity analyst Barry Cooper thinks it’s not too late.

Proclaiming “the bull market has just begun,” he presents in a mid-October research report the 10 factors he thinks will cause gold to average $525 U.S. per ounce next year versus a recent price of $460 per ounce.

An important factor giving him confidence in his view is that gold is now rising in most currencies simultaneously, whereas before it had been increasing mainly against the U.S. dollar. For example, gold had been hovering near 350 euros but recently moved up to 400 euros.

Gold prices have always been difficult to predict and that is one reason most investment advisors have steered clear.

The gold price is driven like other commodities by the interaction of production supply and consumer and industrial demand. But demand is sometimes unpredictably bolstered by those seeking to protect wealth from the deteriorating forces of inflation and uncertain times.

A complicating factor has been the selling of gold by some central banks. That helped push gold down to $260 per ounce five years ago but it hasn’t stopped it from rallying 75 per cent since then.

Cooper states that gold’s strength is underpinned by weak supply in the face of continued strong demand with “no ‘quick fix’ coming to the supply shortfall that is building.

“We believe no new discoveries of significance are on the horizon. Those that will be found, take in the order of seven years to go from discovery to production.”

Cooper also cites prevalent inflation fears and the genuine belief that gold prices are rising, calling it a self-fulfilling prophecy.

“Many commodities have broken through all-time historical highs (oil, platinum, copper, coal) suggesting the upward pressure remains in place for hard assets. Gold’s all-time peak was over $800 per ounce (in 1980). In current dollars, that figure is in excess of $1,200 per ounce.

“Chinese demand has yet to have an impact, but is coming. We believe that this pent-up demand will assert itself in the next few years as affluence grows. Taiwan consumes five times the gold per capital that China does, yet carries many of the same cultural aspects, but with greater prosperity.”

Other factors he cites are that terrorism hasn’t disappeared, U.S. deficits and trade imbalances are worsening, the U.S. dollar remains vulnerable at current levels, and general equity markets are fragile with the impact of oil prices remaining undetermined.

Major gold companies, he says, are suffering rising costs and are delaying investment in new mines. They will need higher operating margins from a higher gold price before deposits are converted into mines.

Dennis Gartman, publisher of the Gartman letter, also has bullish views on gold, citing the possibility that some central banks holding large amounts of U.S. dollars may seek some balance by switching some U.S. currency to gold. “It is reasonable to assume that India and China, presently holding one to two per cent of their reserve assets in gold, shall move to raise those positions slightly” and that would require “material long-term buying.”

For those interested in investing in gold shares, Cooper’s top picks among Canadian companies are Barrick, Kinross, Glamis, Centerra, Bema, Desert Sun and High River Gold. He believes they “offer either superior growth prospects or significant leverage to the gold price.”

Investors can also purchase a broader basket of Canadian gold company shares in the form of the I-units S&P/TSX Capped Gold Index Fund, an exchange traded fund (ETF) (management expense ratio (MER) of 0.55 per cent) listed on the TSX under symbol XGD.

If you want to hold gold bullion but at the same time prefer the ease of trading it on an exchange, you can purchase the gold ETF (MER 0.4 per cent) traded on the New York Stock Exchange under symbol GLD, with each share representing one-tenth of an ounce of gold.

Investors wanting to keep up with the bullish talk about gold and other precious metals could sign up for an informative, free weekly newsletter published by the Millennium Bullion Fund (, which invests equally in gold, silver and platinum bullion.

Wayne Cheveldayoff is a former investment advisor and professional financial planner. He is currently specializing in financial communications and investor relations at Wertheim + Co. in Toronto. His columns are archived at and he can be contacted at

The URL for this page is .

©2005 Wayne Cheveldayoff