|According to the Wall Street Journal, Meridian Gold (MDG - NYSE and MNG.TO - TSX) has total proven and probable gold reserves of approximately 4.3 million ounces. In 2002, it produced 436,000 ounces of gold and 5.1 million ounces of silver from three mines. An increase in both gold and silver prices will have a positive effect on the bottom line. |
Fundamentally, the company is showing some positive trends. Its five-year profit margin average was 3.47% but this figure is 26.5% in its most recent quarterly statement (Sept 30-02), showing the impact of recent gold price increases. Its price/earnings ratio at 38 stands at 89% of the industry average and its price/book ratio of 2.68 is 75% of the industry average. Its current ratio (current assets divided by current liabilities) sits at a healthy 8.79.
|Figure 1 – Daily chart of Meridian Gold (MNG.TO) showing a bullish cup and handle pattern forming. Note the weekly stochastic RSI (dark red line) in the upper window showing a medium-term buy signal in late October.|
|Graphic provided by: MetaStock.|
|A check yesterday of Recognia.com, an automated chart pattern recognition program, showed that MDG had recently given a bullish continuation triangle pattern. In the chart of Meridian Gold on the Toronto Stock Exchange (TSX), a longer-term cup with handle was also observed to be in the process of forming (Figure 1).|
|The profitability of a long position is strongly dependent on the price of gold moving above $400 and continuing higher. Assuming this occurs, Meridian Gold looks to be in an excellent position to profit from the trend. |
The Gold Derivative Debate
Meanwhile, a huge debate rages among gold bugs regarding the large gold short derivative positions and the fact that the shorts are highly motivated to keep the price of gold below $400 to contain losses.
1. In June 2002, the total derivative gold short positions totalled $279 billion according to the Bank of International Settlements (BIS).
2. This figure had climbed to $315 billion by December of that year when gold was selling at $320/oz.
3. By June 2003, the figure had dropped slightly to $304 billion, suggesting that shorts were beginning to cover.
Suffice it to say, there is strong incentive on the part of the shorts to keep the price of gold from skyrocketing. But if economic forces continue to drive the price higher, pressure will mount on the shorts to cover, potentially creating a short-squeeze and propelling the price of the yellow metal into the stratosphere.
Whether you are a bull or a bear, it is not a game for the faint of heart or pocketbook. Based on the last year, however, the odds appear to be firmly stacked in favor of the bulls.
* In a November BIS statement, the total over-the-counter (OTC) global derivatives market as of June 2003 was reported to be $169.7 trillion, up 20% from June 2002.
Blackman, Matt , "Playing the Gold Game," Working Money, March 11.
Introduction to Chart Pattern Recognition
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