Gold bugs have longed to see a U.S. financial meltdown, but the big payoff for investors in the sector is still down the road, said John Ing, the president of Maison Placements Canada Inc.
"It has been a joyless bull market," Mr. Ing said. The gold mining companies have been caught up in the plunge in the resource sector as hedge funds sell shares to raise cash for redemptions.
"Junior mining companies in particular have been [down] hard as some resource funds have been dumping and hitting every bid in sight," Mr. Ing said. "Ironically gold bullion has done the reverse since Sept. 7."
The dramatic selloff of commodities and resource stocks by hedge, pension and commodity funds has made the group a major casualty of the financial turmoil. However, investors should take advantage of the meltdown in "hard assets" by buying oil, natural gas, base metals, potash, coal and gold companies, Mr. Ing said.
And he looks for continued turmoil in the financials as a result of their continued shortage of capital even with the U.S. bailout.
"I fully expect days where we will have $200 (U.S.) moves in the price of gold," Mr. Ing said. "We are seeing an unwinding of a decade of leverage or debt."
He also expects China and India will continue to grow. "This is not the end of the bull market in commodities," Mr. Ing said. The massive injections of liquidity into the economy are increasing the risks of inflation and a decline in the U.S. dollar, he said.
Among the senior producers, Maison Placements recommends Barrick Gold Corp., Agnico-Eagle Mines Ltd., Kinross Gold Corp. and Eldorado Gold Corp. Among the juniors it likes Aurizon Mines Ltd., High River Gold Mines Ltd., MAG Silver Corp. and US Gold Corp.
There are signs that the "real asset" play could have legs.
"Name me one commodity among meats, grains and metals we follow that is higher now than it was in March?" asked Robert Tebbutt, vice-president of corporate risk management with Peregrine Financial Group Canada Inc. The answer, he says, is lumber. "It's telling you lumber mills have been closed down, but supply is being bought, although not in large quantities. To me it says we are in for a potentially better building industry."
Likewise, base metal prices also look poised for a necessary recovery, Mr. Tebbutt said. Copper is at a 20-month low, although it remains highly profitable to produce. Aluminum prices are just 15 per cent above their costs of production, while costs of producing zinc and nickel are above their current prices.
"Only lead and zinc are showing signs that the downtrends are over, but lead will be the stronger because of needs for battery replacement, which is the strongest sector of the battery market," Mr. Tebbutt said.
BMO Nesbitt Burns Inc. has "outperform" ratings on base metal stocks including BHP Billiton Ltd., Companhia Vale do Rio Doce and European Goldfields Ltd.