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Why I'm backing gold mining shares through the global turmoil

Experienced investor David Kempton tips junior gold miners to profit through the continuing uncertainty in markets.

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by David Kempton on Jul 22, 2010 at 00:01

Why I'm backing gold mining shares through the global turmoil

Last April whilst walking in the Luberon, Provence, I was telephoned by Citywire for a comment on where to invest whilst all markets were in steep decline, and all news seemed bleak.

Sad as it may be, I walk la belle France with a blackberry to hand, constantly watching events, and so was able to respond immediately with the view to buy junior gold miners as a safe haven.

Global turmoil

Rational arguments are made for holding gold in both inflationary and deflationary periods, but to me it is clear that the overriding case for gold is at times of real global insecurity. Like now...

China is cooling and cutting back, threats of a double dip still hang over us, the Clubmed countries of Europe are effectively bust leading to riots in the streets, even in Germany, since its tax payers resist bailing out the transgressors in the South. Governments are moving to steal company profits with unexpected taxes as already witnessed in Australia, Germany and Spain, where they have even been retrospective. Our respected world economists seem to change their forecasts overnight from deflationary to inflationary expectations.

Do you buy bonds, which are dangerous in inflation, or equities, which are dangerous if there is deflation? Do you keep your cash in dollars, euros or pounds?

The case for gold

This really is no time to go out on a limb on anything, which seems to me to make a case for gold, and the junior gold miners are an interesting way to play it. Gold has stood the test of time and I am told that the cost of a loaf at the time of Christ in gold terms is the same as the cost of an equivalent loaf today.

Gold production peaked 10 years ago, whilst demand grows fast from the burgeoning middle classes in China and India and governments increase their reserves.

Junior gold shares could prosper

I hold the gold shares I have listed below, which in all cases meet my criteria. They are cheap producers in stable (a relative term perhaps) regimes and tax environment. They have significant proven reserves and a trusted management, who, in most cases, I have met and maintained a regular contact.

Many resource stocks are quoted on the Alternative Investment Market (AIM) and Australia , where bizarrely they can be bought in an ISA. They will not be subject to the new Australian resource tax, unless they specifically mine in Australia.

Investors are advised that junior gold stocks are more risky than many shares.

The shares I’m backing

Medusa Mining, quoted on AIM and in Australia

Medusa is a real success story and I have taken the top off it three times. It is still a major holding and now a mature company of almost half a billion pounds market cap. A low cost producer in the Philippines currently producing at an annualised rate of 100,000oz, with a step up expected, it looks cheap with a Price to Earnings ratio of 8 projected for next year and a Price/Earnings to Growth ratio (PEG) of 0.1-0.2. Ongoing exploration drilling creates a flow of announcements increasing the gold resource. Medusa also has exploration drilling on major prospective copper deposits, with seven potential targets. Further announcements are expected in late July. The price is down 25% this year, which is inexplicable, and looks oversold, creating a good buying opportunity.

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15 comments so far. Why not have your say?

Is there a case to consider CEY - Centamin Egypt? Just moved up FTSE250?

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I agree with anonymous 1 Centamin Egypt seems to have a strong investment case and i believe Jim Slater is also a fan

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Should AVOCA RESOURCES LIMITED (AVO) (Australian 250 stock)

be included in your list. Great reserves and low production costs?

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I took the top off my Centamin holding a while ago, a big mistake and find this comment timely as we seem to be in a curious environment in that inflation remains persistently high although recovery looks weak.

Petropavlovsk is another interesting gold play.

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I bought Medusa at 59p & sold recently for a nice profit. Have bought again to hold in my ISA portfolio, I agree with the author that it looks oversold. I also hold Petropavlovsk for the long term. By the way, I am a widow who has learnt to enjoy managing my own investments & am also learning to trade currencies. I hope this might inspire a few women to have a go but be prepared for a steep learning curve.

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I have criticised Mr Kempton on this board in the past on the grounds that his recommendations are far too risky for the average investor. Maybe I should have reserved judgement as who am I to know what anyone elses risk profile is.

However, my recent experiences and his rationale have converged recently and I now accept his basic arguments.

Like him, I think gold miners are a special situation, in an otherwise precarious stock market. Last year I bought European Goldfields which quickly appreciated in value, however when they published a trading update I formed the opinion that the majority of their income had come from reworking spoil heaps adjacent to the abandoned mine they had bought the rights to. I was content to take a profit.

I have since bought Petropavlovsk. (formerly Hambro Mining) Last year (2009) they produced stonking results which almost wiped out there bank borrowings. First half of 2010 as not been anywhere near as good, but they have bought new machinery, been granted new licenced areas, and they have received a visit from the Russian President, who has given his seal of approval. Like other market watchers, I am waiting to see the gold price spike upwards.

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what about Vatukoula Gold Mines plc, currently going through price falls?

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nyo look to me to be the next cey

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nyo look to me to be the next cey

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Red Back Mining in Canada. Look at the chart. Plus the exchange rate will

go in it's favor.

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small gold mining to consider for multi bagger; charat gold (CGH), stratex (STI), goldstone resources (Grl). I also hold vatouka gold, CEY and POG as strong players.

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Avocet Mining has a solid gold record so far, and is now fully quoted on the Oslo Market. Its reserves and prospecting are mor than promising with production rising constantly along with the gold price,

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Another AIM company close to producing, and currently stockpiling ore is Trans Siberian Gold (TSG). Two majors own the majority of the stock....... but the share price is a bargain at the moment because there are not enough shares on the market to interest the big investment funds.

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My individual stocks (UK listed) : Petropavlovsk, Centamin, Medusa Mining - all low cost producers.

Then for a selection of overseas listings I rely on New City's Investment Trust ''Golden Prospect Precious Metals'' fund - up 84% over last 12 months.

http://www.ncim.co.uk/fact/gppm.pdf

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Stella

Jul 28, 2010 at 09:36

I agree with the sentiments expressed re Trans Siberian Gold. the shares are a steal and should reap rewards for the small investor.

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