Junior gold explorers from British Columbia to Colombia are poised to pounce. In this exclusive interview with The Gold Report, Vikas Ranjan, managing director and principal, Ubika Research, reveals why some companies make a compelling case for success.
The Gold Report: Vikas, given the recent agreement to shore up banks in the Eurozone with a $1 trillion eurofund, do you still believe the world is on a path to a soft recession?
Vikas Ranjan: I think recent developments tell us that the risks are lower than a couple of weeks ago. The current economic problems, particularly in the Western countries, are more about policy than economics. The Greece debt bailout announcement could mitigate the potential of a hard run on other European countries, and it will have an impact on banks and the financial system in general.
TGR: Gold went up on the news. How do you explain that?
VR: That is a bit of a conundrum. Historically, gold goes up on uncertainty and other things go down. Over the last three to five months, we have seen more harmony; every asset class going up or going down together. The exception is U.S. Treasuries, which seems to be the only asset class people swarm to when things really are murky.
To some extent, gold has become a levered play. There are a lot of derivatives, a lot of exchange-traded fund-based trading in gold. Gold prices are decoupling from the fundamentals of demand and supply, purely from a physical gold perspective. That could explain, from a trading perspective, why things are looking good for asset classes in general; gold is simply one of those asset classes.
TGR: People seem to be exiting bonds for equities. Do you see that trend continuing?
VR: I would say so. There was a lot more pessimism than was warranted in the market in the summer and early fall. People had a panicky reaction. They flocked into U.S. Treasuries. We feel there will be a shift away from bonds and into equities and other riskier assets, such as copper bonds. That will be good for the global economy.
TGR: Will European banks have to liquidate some of their gold assets to cover write-downs on their Greek debt holdings?
VR: That is certainly a possibility. At the same time, gold as an asset class retains a lot of fundamental attraction. Any potential for liquidation by some European funds or banks will be counterbalanced by demand and buying from other sources.
Confidence in paper currency continues to erode, so gold is a store of value. We see gold remaining attractive as an asset class in the portfolios of major fund managers and institutions for at least the next couple of years. As an asset, gold is still less than 2% of the portfolio of all invested funds globally, I believe. Historic averages have been as high as 5% or more when some currencies were on the gold standard.
TGR: Can you be a bit more specific in terms of Ubika's gold forecast?
VR: We have probably seen the highs for this year. I wouldn't be surprised if it settles in the range of $1,600–1,700/ounce (oz). From there on, we see the next stop being $2,000+/oz levels, most likely in the first half of 2012.
TGR: You continue to call junior gold exploration companies the "most compelling case" for success. As of Dec. 31, 2010, the companies on the Ubika 50 Index were worth a combined $15.3 billion (B). By Oct. 14, 2011, their combined value was down to about $14.07B. Why do you still believe in these companies?
VR: The basic principles have not changed. In terms of risk and reward, the junior gold space presents the highest reward potential, along with high risk.
What has happened in the junior gold space is that investors' appetite for risk has gone down. The junior gold companies did very well after the 2008 meltdown; they had phenomenal returns in 2009 and part of 2010. In 2010, our index was up 99%.
This year, realization is setting in that the economy isn't going so well, which creates aversion to riskier assets. Junior companies and small-cap companies get hit first. Gold was singled out because fund managers who made money in junior gold companies and are losing money in other things liquidate junior gold stocks first where they may still have profits. It is ironic that most investors, including the so-called sophisticated ones, would not stick to their winners. Rather, they sell their winners and take out money wherever they can. That had an impact.
Longer term, if gold prices stay higher—I mean $1,200/oz or over for the foreseeable future—interest in companies with good assets and the potential to advance toward feasibility and production will come back.
TGR: In closing, what advice would you offer investors in this low-priced equities environment?
VR: It is important to remember that economic growth is linked to demographics. If you look at global demographics, growth will come from emerging markets: 2.5 billion people live in India and China. They need things that we take for granted. The world economy, in general, is on a growth path and will be there for years to come.
There will be big falls and stumbles, but if I have to bet on the long term, I would bet on equities. Equities have provided the best returns over 100 years in real terms and will continue to do so in the foreseeable future. Don't get panicky or too skittish about not being in the market. Take your time, understand your companies, understand the risks, but invest wisely and maintain a good exposure to equities if you have the time horizon on your side.
TGR: That's good advice. Thank you, Vikas.
Vikas Ranjan is a management and investment professional with over 15 years experience in diverse areas of investment management, finance, customer analytics and investment research. Ranjan is a principal of Ubika Research, a specialized research and analytics company with a wide range of small-cap clients and operations in Toronto and Vancouver. Ranjan's previous experience includes various management positions in companies such as TAL Global Asset Management and Bank of Montréal. Ranjan has a strong knowledge of financial markets and has researched and analyzed companies in diverse industry sectors and markets. He holds a Bachelor of Arts in economics (Hons.), a Master in Management Studies from the University of Mumbai, India, and a Master of Business Administration in finance from McGill University. Prior to cofounding Ubika, Ranjan cofounded P2P Systems Inc., a company acquired by Toronto-based technology company Microforum In.
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-- Posted Sunday, 6 November 2011 | Digg This Article | Source: GoldSeek.com
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