Once Again, the Spotlight is on Gold

This is a guest post from a Canadian Investment Team (Andrew Johns) at Raymond James Financial.

     In our September 1st Market Update, we discussed the seasonal trade (that gold tends to rally at this time of the year), and this year has proven to be no different.  The TSX Gold Index rallied by 8% that day to close at $20.79, and since then it has continued its ascent (closed at $22.45 today).

     Last time we wrote about how China had secretly increased its gold reserves by three-quarters since 2003 (bringing its holdings to over 1,000 tons, doubling its reserves over the past six years).  Recently, India stepped into the fray and bought 220 tons of gold from the IMF for $6.7 billion.  In nominal terms, gold is at an all-time high of over US$1,100 per ounce at the moment.

     In the second quarter of 2009, jewelry demand dropped by 20%, but investor demand increased by 51%, according to the World Gold Council.

     Harrod’s of London has recently gotten into the market, providing retail purchasers with gold coins and gold bullion ranging from 1-gram ingots to 12.5 kilogram gold bricks, all for sale on its ground floor.  The store has been packed with shoppers accumulating gold.

     For investors still looking to gain gold exposure, we have two ideas that we believe are still reasonably priced.  One is Agnico-Eagle Mines (TSE:AEM), the other is the convertible debenture of Great Basin Gold (TSE:GBG).

     Agnico’s stock recently pulled back from a high of over $75 to just over $60, due to some start-up problems at its mines.  However, the company is a low-cost producer (with costs below US$400 per ounce) and some speed bumps were to be expected as it brings five mines online.  All of its assets are in politically stable jurisdictions (Canada, Mexico and Finland) and we expect Agnico to double its production to over 1 million ounces next year.  We believe the stock has been unjustifiably sold off at this point.

     Another interesting way to gain gold production and exploration upside while getting paid to wait is through Great Basin Gold’s new issue of a convertible debenture paying 8% annually.  Great Basin is a gold producer and developer with revenue and two producing mines in the mining-friendly jurisdictions of Nevada and South Africa.  It produced 80,000 ounces of gold last year and we expect production of over 110,000 ounces next year.  This debenture is convertible into the stock of Great Basin at $2.15, and the stock recently traded at $1.70.  This means that if the stock price continues to rise, the debenture could rise as well, providing investment upside while paying investors an attractive coupon while they wait.