Dec '09/Jan '10

A sharp eye trained on the future

Market strategist Don Coxe offers his views on the year ahead

By P. Diekmeyer

Don Coxe has tracked the mining industry for most of his 35-year career in investing and money management. As global portfolio strategist for BMO Capital Markets, he was a staple of investment information with his regular conference calls and portfolio strategy journal. In 2008, Coxe launched the Toronto Stock Exchange-listed Coxe Commodity Strategy Fund, and more recently established the investment advisory firm, Coxe Advisors LLC, in Chicago. In a pair of conversations, Coxe gave CIM Magazine his take on trends to look out for during the coming year and beyond.

CIM: You say that your investment approach is based more on “page 16” stories as opposed to those on page one. What do you mean by that?

Coxe: Investors need to pay more attention to long-term fundamentals rather than to topics of the day. Any investment that will not be written about by historians two centuries from now, is probably not worth following up on. A company’s latest earnings announcement is a page one story, but news of an emerging technology that could make that company’s products obsolete is often buried on page 16, or it only appears in some obscure scientific journal.

CIM: What “page 16” stories are you following that could have an impact next year?

Coxe: Rising gold prices have made a lot of headlines. But the bigger move has been the changing attitude of the world’s central banks towards the ore. Many have reversed their policies of selling “excess” reserves and have started to rebuild holdings. The Chinese central bank has been buying up a lot of that country’s local production. India’s central bank also recently announced a major reserve purchase.

The other big story is that China, India and many sovereign wealth funds have been increasingly looking at global resource assets. Historian Niall Ferguson recently predicted that next year China will stop its massive U.S. dollar purchases and move to hard assets instead. True, China has failed at several attempts to buy controlling stakes in major resource companies, including Unocal and Rio Tinto, but the country learns fast, and it will be back.

CIM: What does that all mean for gold prices?

Coxe: These actions have significantly helped to ramp up gold demand, a trend that will likely continue next year. Despite the reports of people selling off all their old gold jewelry, prices continue to rise. Much of this is due to the fact that gold production has not kept pace with demand. Global output has been slowing for almost a decade now. Although exploration budgets have shot up, new bodies are not coming onstream at the pace they once did. New mines that come into production are simply not of the same quality that they once were. Ore grades have fallen from about 12 grams per tonne several decades ago to closer to three grams per tonne.

CIM: What about other precious metals?

Coxe: Interest has been rising in the category. About two-thirds of all drilling in the world is for precious metals. However, gold remains the big story. The only problem is that many of the most promising deposits are in high-risk areas such as Russia and the Congo. Silver, which is often found in many of the same areas as gold, and whose price tends to move in tandem with it, will also continue to do well. Platinum demand will also remain strong. Its main drawback is that many of the key platinum reserves are located in South Africa, which is showing signs of increased instability. We look for companies that have un-hedged reserves in the ground in politically secure areas.

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