Global gold demand continues to climb

For many undercapitalized junior mining companies, the past 12 months have been a sort of annus horribilis. As capital remains tight in the current economic climate, financing for speculative exploration projects continues to be hard to come by. While the mining industry overall is coping with the global shortage of capital, recent surges in gold prices are causing renewed activity (including mergers and acquisitions), helping that sector to buck the trend.

Many mining companies were caught off guard by the economic events of 2008 and the speed with which the commodity price bust and liquidity crisis took effect. Underfinanced juniors found themselves in a precarious situation. In many cases, field work was halted and investment decisions deferred.

But while mineral exploration and development slowed, demand for gold keeps rising - driven by the weakening U.S. dollar, continued political and economic tensions in many parts of the world, and as a hedge against inflation. This ongoing trend of reduced exploration could affect inventory outlook, causing demand to outstrip supply and push commodity prices higher.

However, many market and industry watchers expect to see an upswing in merger and acquisition activity in gold as organizations with strong balance sheets look to procure desirable development projects owned by cash-strapped juniors in safer, more accessible areas.

At September's Denver Gold Show, junior companies delivered optimistic messages highlighting acquisitions and joint venture partnerships. Small and intermediate producers interested in lowering production costs, mitigating risks, and picking up quality assets at lower valuations are expected to drive an increase in M&A in the sector, by acquiring emerging or development-stage projects that are not receiving full value in the market.

Besides surging prices, new discoveries are also re-invigorating the sector and financial markets have warmed to gold investment. In particular, Canadian companies are approaching brokerages, seeking capital to fund new gold exploration and development projects. However, it is worth noting, often these new deposits are located in notoriously risky areas. To woo investors, companies must demonstrate that their development projects are well-sized, well-priced and have an acceptable risk level.

While Northern Dynasty Minerals Ltd.'s Alaska-based Pebble Project is principally a copper deposit, it is also the world's largest gold resource.

Unlike many other promising gold prospects, however, it is located in a politically and economically stable part of the world.

The International Finance Corp. has actively invested in mineral development in the developing world over the course of the financial crisis, and is said to be considering financing as many as 15 new mineral projects in the coming year. Australia's export credit agency is also expanding financial support for mine projects in Africa. Canada's Endeavor Financial Corp. recently announced new gold project financings. And Kinross Gold Corp., a Canadian gold producer, said in June that it's considering as many as 50 new investments in all countries where it has operations, as it looks to acquire both development-stage projects and operating mines.

Even before the 2008 crisis hit, global investors were in the midst of a remarkable gold-buying spree, purchasing nearly 280 million ounces of bullion and coins between 2001 and 2007. This is an unprecedented demand. So too have the shares of major gold producers seen significant buying pressure, as such equities are often used as a form of gold investment, with shares tending to outperform other stocks during protracted periods of weakness.

The weakening U.S. dollar also has increased gold's luster as an alternative investment. China, India, Russia and other national governments have been actively buying gold.

So while industrial and jewelry demand for gold is soft, investment demand is expected to hold as the overall mood toward gold and gold equities remains bullish.

As has so often been the case throughout history, gold continues to be the hedge of choice against volatile markets, preserving investor wealth against bouts of inflation and other economic problems. Gold has shown its resilience during the economic troubles of the past year, becoming a refuge for a financial community that has been constricted in virtually every other sector.