Investing in Gold Mining Companies - Hispaniola
Companies / Metals & Mining Mar 21, 2007 - 11:44 AM GMT
Sean Brodrick : On my way to check out a mine in Hispaniola! - By the time you read this, I'll be flying to the Dominican Republic on the island of Hispaniola. I'm not going there for rest and relaxation. Instead, I'll be investigating a small mining company. It's exploring a rare spot where gold is literally laying on the ground just waiting to be scooped up!
I'm in a hurry to see this place in person. Especially since gold looks ready to move past $800 an ounce. More on why in a moment.
First, let me tell you about my golden ticket to the Dominican Republic. Let's start with a little background …
Columbus Leaves a Legacy Of Gold Mining in Hispaniola
In “ Grabbing Mexican Gold and Silver ,” I told you how the Spanish conquistadors came to the New World looking for precious metals. Well, that gold rush started with Christopher Columbus, who led his crew west. The second place he landed was the island of Hispaniola – his flagship, the Santa Maria, wrecked there on Christmas Eve in 1492.
He instructed the ship's crew to form a colony and hurried back to Spain onboard the Nina with good news: The native Taínos made gold ornaments and jewelry from the deposits of gold found in Hispaniola's rivers! Even better, the natives were easy to conquer! Columbus was made “admiral of the ocean sea” and governor-general of all the lands he discovered.
By the next year, the colony was a mess. The colonists were only interested in finding gold, and gave up farming and fishing to seek the yellow metal in the Cibao Valley. Those Taínos who didn't die of European diseases were forced to pan for gold under horrific conditions.
If it makes you feel any better, Columbus was an incompetent governor as well as a total creep, and he ended up being sent back to Spain in chains.
Around 1515, the gold of Hispaniola was officially “exhausted.” Shortly after, Cortez and his murderous band of conquistadores found the Aztecs and their motherlode of precious metals. So colonists from Hispaniola packed up and moved to Mexico. In fact, the lure of gold was so strong that the entire western side of the island was depopulated.
But the Spanish gave up too easily …
There's Still Plenty of Gold Hidden In Hispaniola … and Some Undiscovered Companies, Too!
The island still has plenty of mineral wealth, most of which is hidden away in the interior of the country. For example, the Pueblo Viejo mine, owned by Barrick and Goldcorp, is formerly one of the world's richest producing mines. And it's still sitting on at least 7.3 million ounces of gold and 38 million ounces of silver.
The Pueblo Viejo mine is located on a Cretaceous-age volcanic belt with epithermal mineralization. Simple translation – there are rich deposits of gold, silver and other metals.
This belt extends through the mountains of the Dominican Republic and into Haiti. However, I'd rather stick to the Dominican Republic because it has a stable government, is friendly to miners, and has excellent infrastructure.
Here's the really interesting part: A slew of junior explorers have staked claims up and down that belt, and they're drilling like crazy to find out if they're the next Pueblo Viejo!
I'm going to the Dominican Republic to visit one of these explorers. The company has already found gold – in fact, the mine is going into production soon . I've been told that the gold is scattered about in the topsoil. All they have to do is scoop up the topsoil with bucket loaders, pile it up, then dump chemicals on it to leach out the gold.
What's more, it seems as though they've only scratched the surface. Like many good gold mines, there is a lot more to this than meets the eye.
I'm going to check it out in person … that's the only way to make an accurate assessment. If everything looks good, I'll be including the company in my next report, which will be all about junior miners. These are just the kind of companies that should catapult higher when gold takes off again …
Seven Reasons That Gold Will Surge Past $800 an Ounce
China can't get enough gold. According to the China Gold Association, China's gold production hit 19.9 metric tonnes in January, up 25.7% from a year earlier. At this rate, the country should produce 260 tonnes this year. But that's still 100 tonnes short of demand.
China's 2006 gold consumption grew by an amazing 17%, and the Shanghai Gold Exchange reported that gold trading volume rose 72.83% in January. Plus, this is the year of the golden pig in the Asian calendar, considered a “lucky year” for investments like gold. Many Chinese buy golden pig statues to celebrate.
There are now two gold ETFs in India. The first Indian gold exchange-traded fund is Benchmark Mutual Fund's Gold BeES, which launched on February 15.
The second one is rolling out now. It's run by UTI Mutual Fund, and is called, naturally enough, UTI Gold Exchange Traded Fund. According to Rajesh Bhojani, President of Marketing for UTI Mutual Fund, investors account for about 30% of the gold market in India. I figure these new ETFs will only boost investor interest in gold.
Existing gold ETFs are pumping up demand. When the streetTRACKS Gold Shares ETF (GLD) started in November 2004, it held about 100 tonnes of gold and gold was trading around $450 per ounce. Now, it holds 476 tonnes and gold is trading around $650 per ounce. That's not a coincidence!
Despite the recent sell-off in markets of all types, the amount of gold held by the GLD barely budged (down 2.2% from its peak). I expect U.S. investors to start adding again, and that will drive prices even higher.
Investment demand is booming. Reuters reports that worldwide investment demand for gold should remain at historically high levels this year, with investors continuing to buy large volumes of gold in bullion, coins, and jewelry.
That's confirmed by commodities consultant CPM's 2007 Gold Yearbook report, which predicted investors would likely add another 39.7 million ounces to their gold holdings in 2007, after investing 43.5 million ounces in 2006.
Central Bank gold stockpiles swoon to a 60-year low. The International Monetary Fund (IMF) reports that the amount of gold held by central banks and other government organizations declined for the eighth straight year in 2006. Bullion holdings were 867.6 million ounces last year, the lowest since 1948, according to the World Gold Council.
Only Russia's central bank made purchases last year, according to the IMF. At the same time, central bank gold sales fell to 11.4 million ounces in 2006, down from 20.6 million ounces in 2005. If this trend continues, prices should rise.
China's holdings have remained unchanged since 2001. But the country is setting up a managed fund to handle its $1.1 trillion in currency reserves. Some of this money might go into gold, and even a small move in this direction would send prices soaring.
Miners can't find new deposits fast enough. Analysis by Metals Economics Group (MEG) shows exploration budgets increased to $7.1 billion in 2006, the fourth consecutive annual increase since the bottom of the exploration cycle in 2002 and the highest total since MEG began these reports in 1989.
So where is all the gold? Well, it takes time to bring new gold mines online … and the easy deposits have already been found.
Meanwhile, production at existing mines is grinding down. A quick scan of last year's individual country production numbers shows declines in the U.S., Australia, Canada, Peru, and Russia. Even South Africa's gold output fell nearly 8% to its lowest level since 1922!
Big gold producers are finding it tough to replace their reserves. And despite the price of gold rising for years, supply from mines is actually going down . That is a recipe for much higher prices.
One last thing … gold's technical picture looks great right now. Based on a weekly chart, gold is channeling higher … the rate of ascent is increasing … and it's at the bottom of the channel now.
Bottom line: This looks like the best buying opportunity in gold since January.
My confidence in these fundamental forces is why I'm out and about looking for great, undervalued junior miners to recommend in my “Gold and Silver Super Juniors” report.
Here's Why I Like Junior Miners Over Their Larger Counterparts
First, I like miners and explorers that have great leverage. In other words, they can pull gold out of the ground on the cheap. This means as the price of gold goes higher, these miners see the value of their assets go higher and they make more money on every ounce of gold they sell.
Second, unlike the big boys, there are great juniors that are expanding their own gold reserves without having to buy up other companies. This is possible because they're sitting on top of largely unknown resources.
Third, everybody knows the big miners like Barrick. What they don't know – for now – is that there are great little miners toiling away in obscurity. I think Wall Street will recognize their names a year or two down the road, but the stock prices will probably double by then!
Don't get me wrong – there are gold juniors I wouldn't touch with someone else's ten-foot-pole. I'm not eager to throw money at a mine in a country with political troubles … a company that management is using as a piggy bank … or a firm that's underfinanced.
These are not investments for the faint of heart – the junior gold sector can be speculative. But that's why I get on planes to check things out in person. Next stop, the Dominican Republic! Stay tuned …
Yours for trading profits,
by Sean Brodrick
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