Since gold bullion plummeted this past summer to US$550 an ounce from US$720, it has inched its way back. Driven by an expectation that interest rates in the U.S. will soon fall and geopolitical worries about the Middle East will soon abate, the metal recently reached US$590.

Indeed, managers of precious metals funds are decidedly upbeat. They consider now a good buying opportunity as the fundamentals behind another escalation in the gold price reassert themselves.

“Over the past couple of years, the U.S. dollar has enjoyed the support of rising interest rates,” says Charles Oliver, lead manager of AGF Precious Metals Fund and senior vice president of Toronto-based AGF Funds Inc. “When the Federal Reserve Board starts to lower rates, that support will be taken away. As in similar cycles over the past 30 to 40 years, gold should be positively influenced by that.

“The fundamentals have improved, from the interest rate perspective. It may be a while, but the Fed will lower rates,” he adds.

The deterioration of the US$ underpins Oliver’s belief that bullion will hit US$1,000 an ounce in the next few years. He points to the country’s US$800-billion trade deficit and US$300-billion budgetary deficit. “You can’t keep on spending. You have to live within your means,” he says.

The U.S. could raise taxes to reduce these twin burdens, he adds, but that is not a popular move. Nor do Americans appear ready to cut their spending. He suggests that the U.S. has resorted to a third alternative — printing money: “This has an inflationary effect. I do believe inflation is increasing. Gold does well in that kind of environment.”

Taking a diversified approach, Oliver owns more than 100 stocks, split among senior producers, mid-sized companies and junior players that are primarily in exploration and development. “We try to go across the spectrum,” says Oliver, a value-oriented investor who periodically rebalances the portfolio in favour of cheaper stocks.

Noting there has been a spate of mergers in the gold sector, he says: “There’s a finite pool of companies out there. We’re trying to find the more attractive ones, which can either keep running their operations or fall prey to larger players.”

One long-time favourite is Cambior Inc., which is active in Guyana and Quebec. The company received a friendly takeover offer in September from Iamgold Corp., which will make the combined company the world’s tenth-largest producer at one million ounces a year. Even though Cambior’s shares have moved up, it was recently trading at a 20% discount to its peers, says Oliver, tracing the discount back to the company’s hedge book several years ago.

Iamgold, which is also in the AGF portfolio, has been trading at a discount because it is primarily a royalty firm. But it has begun to develop mines, including the Quimsacocha project in Ecuador.

“By getting Cambior, Iamgold is acquiring a team of very good operators who have experience in South America. It’s an optimal situation,” says Oliver, adding that the merger will attract interest from institutional investors. “It has done it at a very good price because Cam-bior trades at a discount.” Cambior recently traded at $3.85 a share; Iamgold at $9.35. Oliver has no stated share price targets.

Another favourite is Randgold Resources Ltd., which produces about 500,000 ounces a year at mines in Mali, Ghana and Tanzania. “Mark Bristow, the CEO, is a very good operator and has been active in West Africa for 15 years,” says Oliver. “The company developed mines in some of the worst environments in the 1990s, when it was very hard to finance new projects.” Bought two years ago at about US$10 a share, the Nasdaq-listed stock recently traded at US$19.50 a share.



Gold and gold stocks may be down, but that’s only temporary, says John Embry, a member of the team that manages Sprott Gold and Precious Minerals Fund and chief investment strategist at Toronto-based Sprott Asset Management Inc. He attributes the recent decline to the attempt by the Bush administration to make itself look better for the upcoming U.S. mid-term elections. “These elections are very important to the Republicans,” Embry says. “There could be a lot of investigations after, and they won’t stand up to scrutiny.”

As well, the Republicans are anxious to show that the economy is moderating and that inflation is under control.

@page_break@Gold is no mere commodity and is, in fact, “a barometer of inflation and faith in money,” argues Embry. “It’s a barometer of economic well-being. When gold prices rise, it sends the wrong message. And the Republicans don’t want that to happen. In reality, things are a mess. They don’t want it on the front burner, so gold has to be dealt with in the short run.

“Does it bother me? Yes. Does it detract from the eventual upside? No. It will add to the upside,” he adds.

Not surprising, he feels this recent downturn is nothing new. “You get these occasional periods, which cleanse the sector. People who own stocks know why they own them. That’s setting us up for another upside,” says Embry, who believes gold will hit US$1,000 an ounce by 2008, driven by the weakness of the US$ and the parlous state of the U.S. fiscal and trade deficits.

He is running a 65-name fund, although the top 20 names account for 60% of the portfolio, including a number of mid-sized players such as Meridian Gold Inc. and Agnico-Eagle Mines Ltd. And he has a preference for undiscovered junior firms, which account for almost 40% of the fund. There is no exposure to heavyweights such Barrick Gold Corp.

“I’m looking for companies that are unrecognized and have the best leverage to a much higher gold price. I like a lot of companies that have large ore bodies that are being developed, but that’s not fully reflected in the value of their shares,” he says, arguing that the recent slump has produced a lot of cheap stocks.

One favourite small-cap holding is Guyana Goldfields Inc. The firm is active in the so-called Guiana Shield that spans the northeastern portion of South America. Its best-known exploration project, Rory’s Knoll, has the potential to produce up to 10 million ounces of gold, says Embry. Bought two years ago at $2 a share, it recently traded at $8 a share.

Another favourite is Aurelian Resources Inc., which is exploring in Ecuador; its project has the potential for eight million to 10 million ounces. Bought three years ago, it hovered between 50¢ and $2 a share, then took off this past spring on news of the extent of the Ecuadorian mine. It was recently trading around $30 a share.

Embry is even more bullish on silver and has invested about 25% of the portfolio in silver producers and 6% in bullion. “The supply/demand equation is better for silver [than for gold],” he says. Once-huge inventories have been eaten up. “There’s only one thing that can govern the supply/demand imbalance: a higher price. I’m extremely excited about silver.”

Silver is US$10.80 an ounce, but Embry believes it can double in the next 12 months, driven partly by investment demand. Top names that have been added in the past six months include Silver Standard Resources Inc. and Bear Creek Mining Corp.



Robert Cohen also argues that gold’s decline is a temporary development. “It’s basically tracking the decline in crude oil, which peaked at US$77 a barrel last summer,” says the portfolio manager at Goodman & Co Investment Counsel who oversees Dynamic Precious Metals Fund. “The percentage decline in both is pretty much equal. But we are starting to see gold rebound.”

Cohen points to recent positive developments, such as the Russian central bank’s decision to increase its gold holdings. As well, central banks in Europe may have sold only about 380 tons out of the 500 tons allocated for sale this year, putting less downward pressure on bullion.

And the so-called “Indian wedding season” is approaching. “There is good retail demand outside of jewellery manufacturers,” says Cohen. “And when there is a pullback, you get more jewellers stepping in to take advantage of a lower gold price.”

Meanwhile, the Fed is likely to lower interest rates, which should be supportive. “The U.S. is at risk of stalling its economy unless it can persuade nations such as China that are artificially keeping their currencies up to let their currencies fall relative to the US$,” says Cohen. He says gold could hit US$650-US$700 an ounce within 12 months: “We also have tight gold supplies and robust physical demand — all good factors.”

Running a fund of about 30 names, Cohen favours smaller and mid-sized players, with one exception — Barrick Gold Corp. “Barrick is the best-managed senior gold company in the world,” he says. “Management has executed well on their development projects and has an excellent pipeline of development projects compared to its peers. They have also managed to keep the cost structure down.”

Barrick, which is active mostly in the U.S., South America and Australia, produces 8.7 million ounces a year and expects to boost that to almost 10 million ounces in 2009. The stock recently traded at $32.50 a share; Cohen has a $40-a-share target within 12 to 18 months.

Another favourite is Alamos Gold Inc. Primarily active in Mexico, it operates the Mulatos mine and has about 3.5 million ounces in reserves. Production should almost double to 200,000 in 2007 from 110,000 ounces this year. Bought about two years ago at an average cost of $2.50 a share, it recently traded around $8.50. Cohen has a target of $11 a share within 12 to 18 months, assuming gold hits US$650 an ounce.

Cohen also likes Palmarejo Silver and Gold Corp., which operates a project in the Mexican state of Chihuahua that could have 200 million ounces of silver and 3.1 million ounces of gold. Bought in early 2005 at about $2.50 a share, Palmarejo is now $8. “It is still undervalued for what it is,” he says. It has very low production costs. His target is $12 a share within 12 to 18 months. IE