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-- Posted Thursday, 10 March 2011 | | Source: GoldSeek.com
Northern Securities Analyst Matthew Zylstra seeks out junior precious metals stocks with value in the ground and growth potential that are not yet obvious to the markets. He also looks for companies that have unrecognized base metal potential that can significantly reduce the cash costs of precious metals production. In this exclusive interview with The Gold Report, Matt shares some strategies that can move portfolio values significantly upward.
The Gold Report: What lies ahead for gold prices?
Matthew Zylstra: We don't officially put out a gold price forecast, but I believe that the bullish environment, basically a perfect environment, will persist because of continued geopolitical friction, inflation and currency debasement concerns. I expect the spring and summer to be relatively choppy, but conservatively I believe the price of gold will rise above $1,500/oz. by the end of 2011.
TGR: Is this fear of catastrophe, fear of inflation, a hedge against a weak U.S. dollar?
MZ: I think it's a number of factors. On the demand side China is emerging as a large producer, but it is also a consumer of gold. It's trailing India, but demand is exploding and China looks poised to become the largest consumer nation. From the demand side, things look very positive.
Driving this demand I believe is a growing mistrust of fiat currencies, which are subject to the whims of politicians, the threat of monetization and the possibility of a sovereign debt crisis. I think it's the worth of a dollar that should be on trial, versus the value of gold. If you cut the value of a currency in half, you know everything gets adjusted in price. Right now in North America, people are generally content in trusting paper money in its various forms, but I think this could change, especially with rapid increases in things like food and energy prices—these are hard to ignore.
TGR: When might that change occur?
MZ: I don't expect it would be something immediate or sudden—but I think it is happening now. As investors become more concerned with monetization and rising inflation, and as yields on debt securities remain at record lows, I simply expect people will become more concerned with the erosion of purchasing power and will move away from paper assets to tangible assets as a store of value.
TGR: We have had a fairly peaceful revolution in Egypt and now one not so peaceful revolution in Libya. There's turmoil in Tunisia, and it looks like a domino effect in northern Africa. Now we're thinking of the Middle East, particularly Saudi Arabia, Kuwait and Jordan. With all that's been going on, we have seen gold move up only about 5% since the beginning of February. That's not a spike. Is that because gold is fully valued at this point, and that might be why it did not react to this unrest?
MZ: Market reaction to political events is not always immediate or what we may expect. There are a number of factors to consider that influence the gold price. People in countries with high political risk may decide to slowly move their investments to gold because it is perceived to be a safe investment, but it takes some time for people to decide what, in fact, a safe asset is. For example, is the U.S. dollar a safe asset? Are bonds a safe asset? I think people perceive fiat money as safe currently, but as they see their purchasing power erode while holding these "safe assets," some will change their view and put it into a tangible asset like gold or silver.
TGR: Could it be a bullish signal that people have not had the knee-jerk reflex to buy gold in reaction to the unrest in the Middle East and northern Africa?
MZ: Yes. If all investors felt that political unrest automatically leads to higher gold values, then gold would likely be much higher already and hence there would be less opportunity for appreciation. I feel there is considerable long-term upside to the gold price, and part of that upside is because of healthy skepticism about gold and silver as safe haven currencies. This skepticism provides opportunity for bullish investors—it's sort of a contrarian idea. What I mean is that if everyone was invested in an asset, there wouldn't be any upside left.
TGR: Do you have a forecast for silver?
MZ: Silver has really surprised me. I don't have a price target, but I think the same factors that are influencing gold are factors for the move in silver. In the silver market there is also a lot of talk of a very large short position on the COMEX, so short covering could be a big factor. I have also read a lot about the difficulties in obtaining physical silver.
TGR: Do silver producers have more upside than gold producers?
MZ: Yes, I believe that silver producers do have more upside. With the current spot price of silver in the $33–$36/oz. range—which we have not seen since the 1980s—and with typical silver cash costs for producers in the range of $5–$10/oz., margins will be significantly higher for silver producers even if silver prices stay where they are, and certainly if they go higher. I also don't think the recent and very significant rise in silver has been factored into silver equities prices. But I don't focus so much on the silver producers. I do look at some of the silver exploration companies, and that's primarily due to valuation.
TGR: What about the valuation of silver exploration companies?
MZ: Silver exploration companies trade at much cheaper valuations based on ounces in the ground, about one-fifth on average. I just think that on an enterprise value to resource in the ground valuation, they are significantly cheaper than the producers, but of course there are number of factors that must be looked at, including management, characteristics of the deposit and infrastructure.
TGR: If commodity prices remain the same, can producers increase margins enough to satisfy investors?
MZ: Certainly. Gold and silver producers could increase margins in two areas. They could reduce cash costs by increasing the number of ounces they produce so that they are able to spread fixed costs over a greater amount of production. They could also improve efficiencies, for example, by increasing recoveries.
TGR: Matt, I have enjoyed talking with you very much.
MZ: Thank you very much, George.
Analyst Matthew Zylstra joined Northern Securities in 2010 after having worked at Sprott Resource Corp. (TSX:SCP) and investment counsel firm Foyston, Gordon and Payne Inc., a unit of Affiliated Managers Group Inc. (NYSE:AMG). He is focused primarily on junior precious metals producers, and he also follows some base metals miners. Matthew has worked in the finance sector since 1999. Streetwise - The Gold Report is Copyright © 2011 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 Thursday, 10 March 2011 | Digg This Article | Source: GoldSeek.com
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