Discovery Investing: Gold's Demise

Michael Berry
0 Comments|September 11, 2006

Pullback in metals markets is opportunity for discovery investing.



Pullback in metals markets is opportunity for discovery investing.

Gold broke down significantly Monday morning. Apparently the Russians and Chinese convinced the Iranians to be more compliant about suspending that country's uranium enrichment program. Silver opened Sunday night down $1.13 and traded at $11.73 at its 50-day moving average (M.A.). Gold broke decisively through its 50-day MA, fell $16.90 and traded at $592.90. Support at $590 will be crucial, although I think $575 gold is more likely.

    

The decline in the precious metals is a knee-jerk overreaction: behavioral investing at its best. What chance is there that Iran will comply with the UN and suspend its nuclear programs? Individual investors must decide on this question by asking themselves: How badly does Iran want a nuclear weapon? Even with the recent declines gold has appreciated 144% in the past year, and silver at $11.73, down $0.40 traded for $4.20 per ounce on 9/11/2001. Both metals have shown impressive performances. Ask yourself why.

The world's capital and commodity markets are treating events Monday morning as if all the world's problems are solved. That is clearly not the case. These pullbacks will be buying opportunities. They could also provide you with an opportunity to become a Discovery Investor for your portfolio. Most Discovery shares are cheap, because they have not been "discovered." No matter what happens in the short run, we will need more copper, zinc and nickel, etc. On Monday morning the U.S. dollar came under pressure once again, and Bloomberg suggested that the Europeans are worried about inflation. Stocks such as BHP Billiton (NYSE: BHP, BullBoards), Rio Tinto (NYSE: RTP, BullBoards) and Barrick Gold (NYSE: ABX, BullBoards) / (TSX: T.ABX, BullBoards) will be under pressure. This may provide an opportunity to stock up. Barrick announced Monday that it would sell its 50% interest in South Africa's South Deeps 29 million ounce gold mine for $1.53 billion. Could this be a precursor to a bid for Goldcorp (NYSE: GG, BullBoards) / (TSX: T.G, BullBoards)? Perhaps the Barrick - Nova Gold (AMEX: NG, BullBoards) / (TSX: T.NG, BullBoards) deal will stall. Peñasquito anyone - Peñasquito?

(Editor's note: Peñasquito is one of Glamis Gold's (NYSE: GLG, BullBoards) / (TSX: T.GLG, BullBoards) properties and is located in Zacatecas, Mexico. The company calls it one of the world's largest bulk-mineable gold and silver deposits.)

Michael Berry has been a portfolio manager for both Heartland Advisors and Kemper Scudder, where he successfully managed small and mid-cap value portfolios. He was a professor of investments at the Colgate Darden Graduate School of Business Administration at the University of Virginia and has also held the Wheat First Endowed Chair at James Madison University. Dr. Berry is now a proponent of what he calls "discovery investing."


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