VANCOUVER, Canada – The ‘changing of the guard,’ in commodities investing, is here.
A couple of weeks ago, when we were in West Africa, the gold-Dow ratio was 8.4.
The ratio is one of those simple comparisons that people point to as a possible indicator of relative value. My father-in-law says an ounce of gold always permits one to purchase a worthy men’s suit. Heaven knows what an ounce should allow one in terms of women’s garb, or children’s clothing. Or a Costco splurge.
The gold-DJIA link has been all over the place. In 1999-2000, when I was building CBS MarketWatch, I saw the Internet stock go to $130-something from a $17 IPO price on its first trading day. Gold in contrast was in the pits – so low that when anyone (mostly me) wrote about the bullion market, the coverage guaranteed the fewest page reads on our news service.
Today, two weeks after my latest tour of West Africa gold and diamond companies, about eight ounces of gold are needed to ‘buy’ the nominal value of the Dow Jones Industrial Average. (See historical chart here.) It is falling, or improving, as gold believers see it.
One of the folks with me in West Africa was a geologist, a doctor of geology with a background in economics and mathematics. Quinton Hennigh has had some success creating exploration models for gold prospectors. Witness Gold Canyon Resources (TSX: V.GCU, Stock Forum), for one. Others that might be on the cusp of large discoveries include Evolving Gold (TSX: T.EVG, Stock Forum) and EurOmax Resources (TSX: V.EOX, Stock Forum).
Dr. Hennigh at age 44 is convinced we are experiencing a ‘changing of the guard’ in terms of rock vs. paper. He is so convinced, he is searching for gold properties and situations that appear poised for extra-leaps in quantifiable resource. His preferred continents right now are North America, Australia and Africa. The Balkans are in there, too. Maybe even Western Europe. (Stay tuned.)
Trained at Colorado School of Mines in geology and geochemistry, Dr. Hennigh models drill targets for his client companies. He is a self-professed step-out maven who believes there are a dozen or more Carlin-style and Wits Basin-style mother lodes of gold on the planet. (We discussed some of them in this article.)
“In many cases, you have to just go for it if you believe in a concession; start with the big picture, not the in-filling and connecting dots,” he says. “If the gold is there, enough of it, it will be mined.”
When we were in Ghana, I think it was at a crowded market in Accra, he started getting into the gold-Dow ratio. That surprised me: a geologist with a landscape view of the gold price. I have never been a believer in these kinds of gauges. But Dr. Hennigh was convinced gold will continue to make up ground on the Dow. (Photo above: Quinton Hennigh, at left, examining Midlands Minerals maps with VP of Exploration Tom Neelands in Ghana – Thom Calandra photo)
“It has many years of history, going back well before 1929,” he said about the ratio, which today is approximately 12,100 Dow vs. $1540 gold. That’s 7.85 or so.
“Right now, some investors are scared to death of another meltdown, even in the gold sector, which should be flying with the high price of gold,” Dr. Hennigh says. He is based in Colorado.
“I think short-term frustration will weed out the weak hands in the gold sector (in equities), and for those who stay put, they will enjoy the benefits of the divergence gold is now making with the rest of the market. As we head toward a bottom in the Dow/gold ratio over the next two-to-five years, those who have intestinal fortitude will be rewarded. It's the chance of a lifetime ... a chance to pick up the pieces when everyone else thinks all is lost. It's a changing of the guard.”
While we were in Ghana, the Dow/gold ratio was 8.4. It now is below 8. “I believe that over the next two-to-five years, we will see it fall toward 1-to-1,” he said. The geologist’s view of the gold rally’s length is more or less in line with market historians, who see the ratio favoring gold for approximately 15-year spans over the course of a decade and a half of data.
If Dr. Q, as I call him, is correct, and I am of course in his camp, investors might be looking for corroborating evidence among metals equities. One sign is when companies increase their non-brokered private placements of stock to investors. There have been quite a few this week, among them Edgewater Exploration (TSX: V.EDW, Stock Forum), which is active in Spain and in Ghana. Edgewater just increased its “raise” to $7.5 million Canadian from $3 million “due to investor interest.”
ACTIONABLE NOTES: I got the nickel story this week from Robert Kim Tyler, a Sudbury, Ontario-based geologist and president of tiny Canadian Arrow Mines (TSX: V.CRO, Stock Forum). The company controls several projects in northwest Ontario. One of them, Kenbridge, saw Falconbridge (now Xstrata PLC Ticker: XSRAF) in the 1950s spend the equivalent of $100 million-plus (at today’s dollar purchasing power) on a shaft, diamond drilling, crosscuts and so on. “I’ve been a gold guy for years, so going into nickel was a calculated choice,” he said. “At least 70 nickel producers have shut down since 2008.” (Photo: Kim Tyler – Thom Calandra photo)
Mr. Tyler grew up in the mini-nickel nation of Sudbury and worked with Vale Inco Ltd. (NYSE: VALE, Stock Forum) and Rio Tinto (RIO), among others. His elevator pitch to me (over breakfast) on nine-cent CRO stock: “In 2007, nickel went for the equivalent of $3k gold at $24 a pound. It crashed the next year to $4.80 a pound and is now at $10 to $12. And it is climbing steadily. It is essential for all stainless steel products. Meanwhile, the average worldwide cost for producing nickel is $8 a pound. At Kenbridge ours will be $3 a pound and that is three years away. North America nickel operators really do not exist anymore.”
There are challenges for CRO: raising a lot of cash, as much as $120 million over several years; competing with gold, silver and other specialty metals in the reach for investor cash; executing appropriate scoping studies and additional economic feasibility assessments. And contending with nickel monopolies, among them Norilsk in Russia. Still, if Mr. Tyler proves correct along with his partner, CEO Dean MacEachern, another geologist and former regional manager for Falconbridge Ventures of Africa, he will have achieved what one author described as “The Big Score” – a book that described Robert M. Friedland’s diamond-to-nickel transformation of Voisey’s Bay in Newfoundland in 1993. Inco bought it for $4.3 billion.
I own none of the companies in this article. The firm I work with (see below) represents EurOmax Resources for investor outreach services. My current sked includes a possible trip to see Canaco’s holdings in Ethiopia and Tanzania. CanacoResources (TSX: V.CAN,Stock Forum) will spin out 100 percent its Ethiopia gold and copper holdings to existing shareholders as of a record date of June 28.
Thom Steps Out: I am adding professional outreach for natural resources companies to my log. I will continue to write free articles like this one for Stockhouseand its nearly one million users. Here is the press release about my new gambit: Thom & Torrey Hills Capital.
VANCOUVER: On Monday I will be speaking at Joe Martin’s Cambridge House show. Lucky for me it’s not during The Hockey-ness. My 25-minutes are on Monday June 6 at 8:30 a.m. I’ll be looking at West Africa ideas and images. Stockhouse also has a booth at the show: Booth 305. Come by for some fresh investment ideas. Oh, and view this video overview of the gold equities market from Stockhouse’s Marcus New: Click here.
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