GOLD

As analysts’ forecasts for gold stocks rise, prepare for a meaningful short-term correction. For the past five years, I’ve consistently recommended overweight positions in the gold sector, while the analytical community was at best lukewarm. Now I think a temporary setback looms. I’m not worried about gold falling below the $480/500 range and believe the Midas metal is still only in the infant stages of a long-term advance. What concerns me is the impact even a 10% correction in the bullion price could have on gold mining shares. As I said in my early year release, stick to core positions in highest quality, internationally diversified gold miners, but if you haven’t done so yet, part with your trading positions. January 20, 2006

GOLD SHARES

Why am I cautious on gold mining stocks? Because many of them are getting quite expensive. Consider that the 20% increase we’ve just had in the gold price has left earnings of most gold mining companies flat. To blame: sharp increases in production costs, exploration outlays and even general and administrative expenses. At the same time, gold mining firms have also aggressively issued new shares, pushing per share production down. Finally, the senior gold mines currently discount a bullion price $90 above current levels, which is worrisome. Do I think the yellow metal will vault from the current $555 or so to $645 during the next year? I wouldn’t say “no chance”, but it’s a very, very long shot. Once again: I expect a meaningful correction in this sector. January 20, 2006

ENERGY

Energy supplies remain abundant, with both oil and natural gas inventories in the US swelling due to mild winter weather. In Europe and Russia, the situation is not as pretty. Russia’s weather has been so inclement that Moscow finds it hard to keep continental Europe supplied with energy. Also, an explosive geo-political overlay keeps energy prices from falling (see my geo-political comments). Still, some energy shares look toppy, which emphasizes the need to be very selective. My personal preference is for highest quality shares like Suncor, Encana or PetroCanada. January 20, 2006

NIGERIA

Tribal conflicts in oil-rich Nigeria are flaring up again. To the industrialized nations, the energy supply issue is getting increasingly precarious. The Middle East remains mired in turmoil; Iran could use oil supplies as a weapon at any time; Iraq’s production is unreliable; Venezuela is run by a madman who lusts after confrontation and is wrecking his country’s energy infra-structure; and a score of other producers, from Angola to Vietnam, are demanding bigger revenues from oil companies for drilling and development rights. Add to this that Russia has started to use oil as a weapon! For the moment, energy inventories are at sufficient levels to satisfy economic demand, but as China, India and others demand a larger share a substantial squeeze will develop. Among the energy producers, Canada is in the most envious position. January 20, 2006

EUROPE/ENERGY

The European continent is feeling the lack of a comprehensive energy security policy. Just as hurricanes focused Washington’s political establishment on the need for a more enlightened energy strategy, the showdown between Moscow and Kiev has shaken up European leaders. Even the possible fixes are similar. As the US depends on natural gas pipelined from Canada (of which there is not enough), Europe overly depends on Russia. Building more LNG terminals to bring in natural gas in liquefied form is an alternative which environmentalists and those who would host the new facilities oppose. And the nuclear option, in many parts of Europe, is too hot a political potato to be discussed seriously. As in the US, Europe needs to reach a pain threshold where political opinion will swing in favor of the most obvious remedies. Only France’s government, which is relatively immune from foreign energy shocks and has followed a highly pragmatic energy policy, has so far responded with concrete plans. The Chirac solution, articulated two weeks ago, provides for a new generation of nuclear reactors, a revision of building codes designed to reduce energy consumption, increased research for alternatives like bio-diesel and drastic cutbacks in the use of oil-based products everywhere except in the transportation and chemicals sectors. January 20, 2006

URANIUM

Europe’s leaders continue to forecast greater need for nuclear power, especially in the wake of Moscow’s spat with Ukraine and the subsequent threat of serious cutbacks in European natural gas supplies. The latest government to project more uranium emphasis is France, which has arguably Europe’s best energy policy. The purest investment play is the Uranium Participation Company (Toronto, Symbol: U), managed by producer Denison Mines, whose sole mandate is to buy and hold physical uranium oxide in concentrate form. Since I mentioned the idea a month ago, the stock has tacked on some 20%. Given that uranium is likely to continue its ascent for years to come, I believe the inclusion of uranium in a portfolio is still a good long-term proposition. January 20, 2006

US MARKETS

In the near term, the US economy and the dollar may surprise on the upside. But markets are starting to focus on the second half of the year, and so am I. The Fed’s rate tightening cycle is likely to last a few months longer, but if that translates into dollar strength, I’ll use the distortion as a chance to add to my core positions in gold and select foreign currencies. January 20, 2006

CURRENCIES

Consistent with my view that natural resource based stocks will have another decent year, I believe the commodity currencies will again outperform. While the next two or three months may be choppy, I feel the Canadian, Australian and New Zealand dollars should be held and, on significant weakness, added to. January 20, 2006


Peter Cavelti’s background as a financial analyst and author spans 35 years and four continents. His grasp of global issues is extraordinary and his comments and books have been published internationally. He was president of Canada’s Guardian Trust and subsequently owned his own firm, which managed some of the best-performing natural resource mutual funds. Peter firmly believes that only an integrated understanding of geopolitical, demographic and economic events can lead to successful investing, and that is what his web service Perspectives is about. If you feel keeping on top of relevant global events takes too much time, Perspectives is for you. Whether it’s investment advice or political analysis, Peter offers his insights in concise and easy-to-read form. Best of all, Perspectives is free. Visit www.cavelti.com and sign up today!