The glittering stuff is on the way back

THAT resilient natural resource that Western Australia parochially considers its own is finally back in the headlines – gold bullion.

The precious of metals is back in town, with a significant consolidation in the price per ounce above $US300. This is significant, as many previous attempts to move through this psychologically threatening value have failed.

This time, however, a combination of an expected reduction in producer selling and Enron-inspired financial concerns has underpinned the gains.

The World Gold Council, the global industry’s peak promotional body, has said that gold has taken on a “dual role” as a reserve currency and as a reserve asset. This assertion was made in response to certain questions regarding major currencies, and the stress in equity markets caused by continued doubt on earnings and accounting quality.

All this uncertainty is helping the bullion price rise, and helping Australian gold producers. In Australian dollar terms, the gold price is a whisker away from its highest level in 14 years. In addition to this, the low rates have reduced the forward premium in the gold market, which makes it less attractive to sort sell or forward sell gold.

Gold producers have been promoting a view that forward selling will be unlikely in future. This is in part because of industry rationalisation, whereby larger international players can control supply.

Newmont Mining, AngloGold and others will be the dominant players, with more rationalisation expected.

This is helping the share process of smaller Australian players, with all mid-cap producers gaining market capitalisation recently in sympathy with the bullion price rise. The timing is exceptional for a number of junior resources companies seeking attention from the investment community.

Recent capital raisings in the resources sector have attracted something missing in the smaller end of the market particularly – institutional interest. Thirty new resources floats have either just listed or will hit the market in the coming months, raising more than $150 million, with major domestic and foreign investment funds included.

AMP is one large fund that has placed its money where its mouth is, providing capital for the newly listed Independence Gold, as well as contributing to capital raisings for Sipa Resources, Perserverance Gold and Sedimentary Holdings.

AMP has said that the resurgence in the resources sector was being driven by lack of opportunity post consolidation in the sector, a change in the economic cycle, improving world growth expectations and exploration success.

Recognising that profits can be found in the resources sector following recent petroleum and mineral discoveries, local institutions are being joined by European and UK fund managers. Recently, gold and copper junior Oxiana Resources raised $12.5 million from a share issue aimed squarely at London and Scottish-based funds and investors.

The worm is turning, with serious consideration being given to small exploration companies from the “big end” of town. Major exploration success in 2001 by juniors, an improved minerals outlook and the reduction of exploration budgets by BHP-Billiton and Rio Tinto have combined to push the junior sector to its most buoyant period in years.

The big trap for punters, however, will be to sort the seed from the chaff.

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