-- Posted Friday, 5 August 2011 | | Disqus

It seems to defy logic: even though gold prices are at historic highs, the stock in many junior gold companies has been languishing. In this exclusive interview with The Gold Report, Vishy Karamadam, managing director of Ubika Research in Toronto, which runs the Ubika Gold 50 Index, says now is the time to give those shares a second look.

The Gold Report: The United States narrowly averted defaulting on its debt obligations at the beginning of this week. What do you make of this high-stakes game of chicken that was played out on the global stage by American politicians?

Vishy Karamadam: It shows the difficult situation in the U.S., and to a similar extent, in Europe. Too many promises have been made to citizens without the resources to deliver on those promises. The debt ceiling is a symptom of the larger problem in all these countries as they deal with, "How do I cut down and where do I cut down?"

For the U.S., it is also indicative of a more fractured political system, which is preventing the debt ceiling from being raised, a fairly routine exercise under Ronald Reagan, George H.W. Bush and George W. Bush.

TGR: Basically, the GOP doesn't want President Obama to have two terms. Politicians put people's livelihoods at risk in order to achieve political goals. Even if this legislation gets the country past this hurdle, doesn't it seem like this system is permanently flawed?

VK: The American system of divided government has served the country well for more than 200 years. The process of raising the debt ceiling, while it looks messy, is the case with pretty much all democratic processes. While there may be political agendas behind it, the U.S. is at a turning point.

TGR: Do you believe a deal will return the gold price to below $1,500/oz. (ounce) as it was before this crisis started to escalate?

VK: If the debt deal is to the liking of the market, there may be a short-term correction. However, larger themes are driving gold prices. One is the inability for many developed nations to manage their government debt. The other is the inflation scenario in emerging economies. Both of these have to play out over many years to come. While the debt ceiling may have an immediate impact, I don't think it will change gold's strong, long-term trajectory.

TGR: In late July, managed money funds increased their net long position in gold to 238,319 contracts, which is approaching the all-time high set in October 2009. Do you put much faith in those numbers when you make projections for gold?

VK: When we make projections, we tend to look at emerging markets. Overall demand for gold is roughly around 1,000 tons per quarter. Most of it is coming from the emerging markets. Gold had traditionally served to fight against inflation. That is a better indicator for gold prices.

We also watch the central banks because they tend to have a long-term view about macro-factors. In the first quarter, Mexico added around 100 tons of gold into its reserves. Emerging market central banks are trying to add more weightage to gold. In the previous cycles, central banks were net sellers of gold. Emerging market central banks have around 2% of their assets in gold. That shows that while the price of gold seems to suggest there is a bubble, the portfolios of central banks don't hold a lot of gold yet.

TGR: Since your index, the Ubika Top 50 Gold Index, was launched on Feb. 1, 2010, the cumulative market cap of the 50 junior gold companies in the index has increased to $14.6 billion, or about 80%. That compares to a 36% increase during the same time for its benchmark, the TSX Venture Index. The gains are impressive, but the index is actually down so far this year due to share price declines for some notable juniors and mid-tier explorers.

VK: The index had a better run last year than so far this year. That is partly based on sectoral rotation away from junior gold stocks as some risk aversion has come into the marketplace. While the underlying commodity has been strong, the junior market's drivers are not always correlated with the commodity. I would note that the TSX Venture Index is also down year-to-date. It's not that there is not potential in these companies. It is a general market capital rotation away from junior companies.

TGR: Excellent. Do you have some parting thoughts for us?

VK: Junior gold companies haven't been so good for investors this year, but investors should focus on finding high-quality junior companies developing projects with good management. Those types of companies are not a bad place to park some investment dollars because they will be rewarded eventually.

TGR: Thanks.

Vishy Karamadam, co-founder and director of Ubika Research, has over 15 years of management experience in corporate finance, management consulting, customer knowledge management and retail banking strategy. He has worked for blue chip organizations in Toronto, Canada and India. He is focused on investment research, content management and advanced analytics for Ubika Research. He holds a Bachelor in Technology degree in electronics and communication engineering, Masters in finance from University of Mumbai, India, and an MBA from McGill University, Montreal, Canada. Vishy was a recipient of McGill International Student Scholarship.

Ubika Research specializes in small-cap companies where market capitalization amounts to less than $500 million and offers fresh and timely market insights to end investors and market participants. Ubika Research provides access to all research reports and investment ideas through the exclusive online destination SmallCapPower. Users can sign up to receive free daily emails on small-cap stock picks, research and investment ideas.

SmallCapPower.com (SCP) is a leading resource for small-cap investing. As an interactive website with rich investment content and dynamic functionality, SCP brings investors and financial industry professionals together to discover and communicate with small-cap companies.

Except for the historical information presented herein, matters discussed in this interview/document contain forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from any future results, performance or achievements expressed or implied by such statements. Nothing in this interview constitutes an offer or invitation to purchase or acquire any shares in any company or any interest therein, nor shall it form the basis of any contract entered into for the purchase or sale of shares in any company mentioned in this interview and report. Ubika Research and SmallCapPower are both divisions of Ubika Corporation and are not registered with any financial or securities regulatory authority and do not provide, nor claim to provide, investment advice or recommendations to readers of this report. For making specific investment decisions, readers should seek their own advice. For full disclosure please visit: SmallCapPower/disclosure.

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-- Posted Friday, 5 August 2011 | Digg This Article | Source: GoldSeek.com

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