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-- Posted Wednesday, 27 October 2010 | | Source: GoldSeek.com
Managing Director Tan Khandaker, of New York-based Khandaker Morgan, thinks gold hedging strategies by large funds will underpin a rising gold price at least for the next few years and perhaps beyond. Tan also sees junior gold companies as the best way to leverage rising gold prices. Khandaker Morgan has built an index of junior miners with near-term catalysts for growth, and it's up about 15% since March. In this exclusive interview with The Gold Report, Tan presents some of his strategies for identifying small companies with big prospects.
The Gold Report: Tan, please give our readers a brief overview of your company.
Tan Khandaker: Khandaker Morgan basically specializes in small-cap global equities. Within the small-cap sector, we focus on metals and mining, oil and gas (O&G) and healthcare; but we also have some interest in the cleantech sector.
Over the last eight years, we have focused on companies whose market capitalization is as small as $50 million and as high as $500 million. We look for equities with catalysts that are going to be near-term drivers for significant upside.
TGR: On the Khandaker Morgan website, it says you specialize in "equities, alternatives (hedge funds/private equity funds) and commodities strategy." What sort of gold strategy or strategies are you recommending to your clients right now?
TK: We are a fundamentals-driven company and we are very much focused on macro drivers and global trends. When it comes to specific commodity strategies, it's designed around the overall paradigm shift in the global market over the long term. When I say 'long term,' we're not looking at 12-month shifts—we're looking at 24-, 48-month shifts toward specific commodities either on the supply/demand side or on the overall hedging side.
Based on that particular outlook, we are bullish on gold because we believe that global economic turbulence is still not under wraps. We believe it's going to take at least 24 to 48 months, if not longer, to stabilize economic volatility around the world and, principally, in Europe and North America. While that's going on, we believe issues with currencies and inflation will be key catalysts for the gold price. Inflationary pressure on low interest rates is basically going to drive the gold price in a positive direction as a standard hedging strategy, if not a safe haven for investors.
TGR: Do you see a steady rise in the gold price? We've seen a couple of jumps over the last month. What sort of highs could we see and what's the path to get there?
TK: I see a very nice, almost inverse relationship between gold prices and equities markets. Because the equities markets are volatile, we are looking at gold as a nice hedging strategy. There's been some fluctuation in the pricing of gold but we believe that, from a macro standpoint, there will be a steady rise in the gold price because of the overall shift of money toward a more stable, safe place.
TGR: I would be remiss if I didn't ask you how high you see gold going in that first 24-month period, and then in the 48-month period to which you referred.
TK: In that first 24 months, I'm looking at gold easily crossing over $1,500/oz. After that, it could even go higher.
An important driver is the overall performance of the Asian markets. China has been performing pretty well. India is coming across well. Some countries like Brazil and other parts of South America are also clocking some good numbers. Based on Latin markets and the performance of Asian markets after those first 24 months, we could see even more of an upward shift or stabilization around the $1,500–$1,700 price range.
Then, once North America and the rest of the world establish economic stability, the gold price will stabilize around that number. But whichever way you look, I don't see gold prices falling sharply or anything like that. Gold will be used as a hedging mechanism against volatility. We are already seeing that with major fund managers across the world using gold as a good hedging tool.
TGR: In terms of gold-price catalysts, what sort of balance do you have between supply and demand fundamentals and, basically, fear?
TK: That's a great question. From the $250–$950 rise in the gold price, I would say it was mostly due to fear. Beyond $950, and what we're looking at now, is actually more about the stability of gold and using it as a hedging tool. I think the fear factor has come down quite significantly. If you break it down into percentages, I would say the drivers are between 30%–40% on the fear side and about 60% on the hedging side. On a long-term basis, about 80%–90% of the drivers will come from gold being used as a hedging tool.
TGR: How are you recommending clients gain exposure to gold?
TK: We don't deal with retail clients; we work with institutions or high net-worth individuals. Our overall outlook to institutions has been pretty consistent with the macro drivers and the macroeconomic slowdown.
For clients that want to invest in gold to preserve capital and see modest growth, we look at major gold producers and some mid-tier producers. For clients looking for more growth and more opportunity who have a high risk tolerance, juniors are the way to go. Some of the juniors will be taken out at a premium due to this overall paradigm shift. There are some great juniors that have near-term upside potential and are trading at a significant discount to their net asset value. These would be excellent targets for acquisition.
TGR: Khandaker Morgan builds indexes, one of which is the Khandaker Mining World Index. How many juniors are in that index?
TK: It's a combination of 100 juniors. Juniors being companies below a $500 million market cap.
TGR: How do you select the companies that make up that index?
TK: That's a great question. If you compare our index versus Russell, companies in the Russell Index are picked based on market cap mostly. Obviously, market cap is one of the factors in our index; but, far more importantly, we look at growth characteristics of companies within that market-cap range. We look for near-term catalysts that would qualify those companies to be in our index. A company may have the market cap but not the growth characteristics to fit in our index. So, in some ways, our index projects the overall growth perspective of the worldwide metals and mining sector.
TGR: And these aren't just gold companies; you also include base metal companies, uranium juniors and others, right.
TK: It's a metals and mining index. So we look at gold, precious metals and base metals. We also look at rare earth elements (REEs). I would say it predominantly focuses on precious metals, base metals and some of the long-term potential is in rare earths.
TGR: You launched this particular index in March 2010. How much has it gone up since then?
TK: It's picked up a lot, well into the double digits.
TGR: Has gold's run caused you to add more gold companies to the index?
TK: We don't necessarily use gold's performance as a guide when adding gold stocks. We look at overall sectors. If you look at exit and entry, you're looking at two criteria—market cap and growth characteristics.
Now, in terms of the composition and weighting, there are more precious metals juniors than anything else. There are also base metals juniors and miscellaneous commodities like coal and rare earths juniors.
TGR: How do you go about investing in this index? Is there an ETN?
TK: That's a great question. This will be an actively managed index as opposed to a passive fund. With an ETF, you lay out a basket of stock and just invest in it as it appreciates passively. We want to create an actively managed index with quarterly updates on companies getting in and out based on growth and market cap. We plan to have a hedge fund around it that would present the investment vehicle for the index and are now in the final stages of putting the legal framework together. It should be in existence in the next couple of months.
TGR: Will it be available only to institutions?
TK: It will be available to institutions and high net-worth individuals.
TGR: Any final thoughts on the precious metals sector that you'd like to share with our readers?
TK: It's very important to continue following the evolution of gold pricing, performance of equities markets and performance of the overall global economy. There is a clear relationship between equity markets performance and the gold price, as well as the overall economic performance of particular countries, specifically those in North America. We are quite bullish on gold; and, given what's going on, we believe it will continue to be a safe place for investment.
Mr. Tan Khandaker is principal and executive managing director of Khandaker Morgan Group, Inc. and also serves as a head of Global Portfolio Strategies and Risk Management. He has more than 10 years experience as an independent advisor to various funds, PE and investment banks. Prior to founding Khandaker Morgan Group, Inc., he founded and managed Roushan Khandaker Group—a boutique small-cap equities research firm for more than eight years—focusing on the metals and mining, healthcare, oil & gas and cleantech sectors. Mr. Khandaker has interviewed more than 5,000 CEOs of global small-cap companies in Khandaker Specialty Sectors and has overseen an India-based, 20-person analyst team conducting independent valuation research on global small- and micro-cap companies; many of his picks where acquired at a very high premium. Mr. Khandaker developed particular expertise in mining, healthcare and mergers and acquisitions (M&A) and consulted for various investment banks and financial magazines shortly after leaving academic research at Harvard Medical School and affiliated Brigham & Women's and Massachusetts General Hospitals in 2001. From 1999–2000, he was an adjunct faculty at Fisher College, Boston; and from 1997–1998, he had firsthand exposure to clinical trials at Mount Sinai Hospital, New York. An entrepreneur at heart, Mr. Khandaker received his MD, (diploma in medicine) from the distinguished Mitford Medical College, Dhaka, affiliated with Royal College of London. A national board scholar, he graduated with distinction in 1995 and was a practicing physician in internal medicine before he joined academia. As captain of the medical school soccer team, he led his team to victory on numerous occasions. Streetwise - The Gold Report is Copyright © 2010 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part. The GOLD Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report. From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise. Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported. Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734. Participating companies provide the logos used in The Gold Report. These logos are trademarks and are the property of the individual companies.
-- Posted Wednesday, 27 October 2010 | Digg This Article | Source: GoldSeek.com
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