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DOING SOME DIGGING – What glitters is gold

Gold continues to be our favourite newsmaker this week. Setting a 25-year record on Dec. 12, the price topped US$54...


Gold continues to be our favourite newsmaker this week. Setting a 25-year record on Dec. 12, the price topped US$540. Today (Wednesday) at noon it was down slightly, trading at about US$512/oz in New York.

And in the holiday spirit, BARRICK and PLACER DOME have reached a partial truce in Barrick’s takeover fight for Placer. Barrick has withdrawn the application it previously filed with the British Columbia Securities Commission seeking a cease-trade order in respect of Placer’s shareholder rights plan. Placer Dome has agreed it will waive the application of the shareholder rights plan to either the current Barrick offer or any increased Barrick offer provided that the offer expires no earlier than 8 p.m. EST on Jan. 16, 2006.

Some analysts say Barrick’s efforts are doomed as Placer Dome’s share price is rising. That makes the premium offered by Barrick not a premium at all. The rule of thumb is that any offer with a premium less than 3% over the target’s share value is doomed to fail. By the end of November the Barrick offer was 8.2% below Placer Dome’s share trading price. If Barrick is serious about getting its hands on Placer Dome, it will have to up its US$9.2-billion offer, perhaps by as much as US$800 million.

For those of the ‘Bah-Humbug’ persuasion, a few gold analysts are saying the price is due for a downward correction. They warn that recent price gains are driven by speculation rather than real demand. The direst warnings involve a price drop greater than gains over the last year. But the nay-sayers are few and far between.

Most prognosticators are wearing their rose-coloured glasses to view the gold price. They see good times ahead with gold trading at US$500 to US$600 during 2006. Some predict at least US$900/oz, beating the all-time high of US$873 reached in January 1980. Others look toward US$1,000 in the next five to seven years, and that is considered a conservative estimate by some.

The industry is happy, if cautious when looking at the gold price. PRICEWATERHOUSECOOPERS recently released its annual survey of 42 leading gold miners headquartered in Canada, the United States and Britain. The survey revealed that the average gold price used by respondents is US$399 for reserves, a 9% increase from US$366 in 2004, and US$415 for carrying values, also up 9%, from US$379 over the same period. The most often reported figure for both reserves and carrying values was US$400.

Gold miners are probably wise to assume a lower price because they are also dealing with currency fluctuations. The figure that rose 19% in U.S. dollar terms over 2004, rose only 13% in Canadian dollars as our currency strengthened against the greenback. In Australian dollars the gold price rose 19%, and in South African rands the price rose 30%. Changes in the money markets can work both ways.

PricewaterhouseCoopers’ entire survey may be downloaded in .pdf format at www.pwc.com/goldsurvey05.

We at CMJ are cautiously optimistic about the continued strength of the gold price. Like the miners, we believe there are even higher peaks for the price, but how high we do not know. In the meantime we applaud the industry’s use of conservative price numbers in their estimates. They are using a price safety margin that will avoid abandoning projects when the gold price takes its inevitable eventual dreaded downward correction.


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