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precious metals

Gold granules at a gold and silver separating plant. A big problem for many analysts is the difficulty in determining whether gold is actually cheap.HEINZ-PETER BADER/Reuters

If gold were a supermarket item, it would be in the marked-down aisle. The price has plunged by $500 (U.S.) an ounce, or more than 25 per cent, from the record high near $1,900 set two years ago.

Gold miners have fallen even more precipitously, many trading at a fraction of last year's levels. Some of the bigger companies have fallen so much that they actually sport dividends that might tempt the yield-hungry investor. Consider that Barrick Gold Corp. shares yield 4.1 per cent and fellow giant Newmont Mining Corp. sports a 5-per-cent payout.

It's clear gold investments are deeply discounted, but should shoppers pounce and load up the cart?

Many money managers remain skeptical, even at these seemingly cheap prices.

"I am not tempted to buy bullion at these levels," comments Martin Braun, senior strategist at J.C. Clark Ltd., a Toronto investment firm.

He says he'd be more interested if prices reached his estimate of the level where miners as a group couldn't make money hauling ore out of the ground. "Until I saw something around the $1,100 to $1,200 mark, no I'm not tempted," he says.

Gerald Connor, chief executive officer of Cumberland Private Wealth Management Inc. in Toronto, is also giving gold a wide berth, despite its recent plunge. The firm cut its gold-related holdings a few years ago, and hasn't got much of a position currently.

"Are we tempted to buy here? There is probably some temptation but we just can't quantify where this metal might go and I think there are other more attractive areas of the market," he said.

Cumberland is looking to increase its holding of U.S. stocks, viewing asset classes such as gold and bonds "very expensive relative to equities," he says.

A big problem for many analysts is the difficulty in determining whether gold is actually cheap. Gold sometimes reacts to geopolitical events, inflation, deflation, money printing and financial instability. Then again, sometimes the metal confounds analysts by not moving as expected to these factors, as recently happened when Cyprus launched a partial confiscation of high-value bank accounts. Normally that would make gold – a supposed hedge against financial calamity – soar, but it didn't rally, suggesting that even though the price is down, it may be no bargain.

Unlike other commodities, most gold is hoarded as money and not consumed, adding to the difficulty in analyzing it using conventional market factors.

"Most resources, like copper and oil, have supply and demand characteristics and you can make an educated guess as to what the commodity will do based on that," Mr. Braun says. "Nobody can actually sit down and do the same fundamental analysis on gold."

Gold mining company stocks are another way to play the metal, but they have their problems too. They've been serial disappointers, given their poor record of bringing mines on stream and making acquisitions. "It's just almost inevitable that whatever can go wrong will go wrong with these guys," Mr. Braun says of mining companies.

To be sure, not everyone is down on the metal. Over at Sprott Asset Management, one of Toronto's best-known advocates for gold, analyst David Franklin says now is the time to pick up the metal. "The time to buy insurance is when it's cheapest," he says, contending that gold remains a hedge against a financial system beset by money printing among major central banks.

Although gold hasn't reacted to recent financial instability, Mr. Franklin says that during the 2008 financial panic, bullion also fell for a short while and didn't initially act like a typical haven.

Mr. Franklin said that incongruous move for gold in 2008 was due to levered speculators being squeezed out of their positions, something that has been under way currently. Bullion quickly resumed its advance once these holders' positions had been liquidated.

As for gold mining stocks, Mr. Franklin is cautious, preferring to play the sector mostly through ETFs that hold the metal itself. He estimates that, at current prices, about 15 per cent of gold production isn't cash flow positive. Under $1,300 an ounce, the proportion of money-losing mines swells to about 30 to 40 per cent of the total, he says.

The situation for junior exploration companies is more dire. Sprott did a review of stocks on the junior-laden TSX Venture Exchange and found that out of the approximately 2,400 listed companies, only 900 had more than $500,000 in cash. Small companies need about $500,000 a year just for salaries, audit fees and other routine expenses, according to Mr. Franklin. He suggests many juniors will disappear through mergers or bankruptcies if they can't soon raise additional funds.

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