-- Published: Tuesday, 28 October 2014 | Print | Disqus
Kevin Michael Grace of The Gold Report (10/27/14)
The wave of zero-interest liquidity washing over the financial world could result in a short-term gold bottom of $1,000 per ounce, reports Oliver Gross of Der Rohstoff-Anleger (The Resource Investor). The good news is that Peak Gold is here to stay, which means that midtier producers will soon be desperate to buy low-cost, high-quality deposits. In this interview with The Gold Report, Gross argues that this could be the opportunity of a lifetime for contrarian investors.
The Gold Report: Earlier this month, the broader equities markets suffered huge losses as gold made significant gains. Then, after the broader markets recovered, gold fell. Is there now an inverse relationship between the health of the broader markets and the price of gold?
Oliver Gross: This kind of inverse relationship between gold and the broader equity markets isn't really new. It has been observed since fall 2011, when the price of gold peaked. Since then, gold has fallen more than 35%, while the S&P 500 has risen 70%.
The current situation resembles the early 2000s, when the broader equity markets were in the final phase of the dot-com bubble, while gold traded as low as $340 per ounce ($340/oz). Then, of course, the broader equities markets collapsed, while gold rose above $1,900/oz.
TGR: Some analysts believe that the broader equities market is dangerously overvalued. To give one example, Netflix was recently trading at 144 times earnings. What do you think?
OG: After a 5+-year bull run leading to new all-time highs in the broader equity markets, there are many signs of bubble formations in the Internet, high-tech and biotechnology sectors. Again, this feels like the early 2000s. The extremely high price-to-earnings ratios in stocks such as Netflix indicate investor euphoria and huge amounts of speculative capital provided by the central banks.
It is shocking to compare valuations in the broader sectors of the equity markets to valuations in the precious metals space.
TGR: How should investors react to this bubble?
OG: Speaking for myself, as one who follows an anticyclical strategy, I like to invest when there is blood in the streets, and that is certainly what is happening with precious metal equities. Today, investors can buy gold and silver stocks at decade-low valuations and historically low bullion-to-equity valuations.
Nobody cares about precious metals equities today, but when the bubble in the broader markets bursts, we will see a massive shift in market sentiment and in the behavior of investors. That said, investors must stick to best-in-class stories and must demonstrate constancy and patience.
TGR: Could the collapse of the bubble lead to a crisis similar to that which occurred in 2007–2008?
OG: Yes, the possibility of another Lehman Brothers event is there. When the largest and most influential players in the financial industry want to exit this market, we could see a 2008-like selloff very, very fast. I also think that it is only a matter of time before a further big player in our financial industry will go the same way as Lehman.
TGR: Geopolitical turmoil today is greater now than it has been for quite some time: Gaza, ISIS, Ukraine and now Ebola. Traditionally, this would have resulted in a significantly higher gold price, which has not happened. Is what we have seen this year an anomaly, or is the price of gold no longer affected by external events?
OG: That is a question not easily answered. Traditionally, gold has been regarded as the ultimate crisis protection, so geopolitical turmoil usually resulted in a higher gold price. What has changed is the incredible power of the central banks. They have changed the rules of the game. This is a major financial experiment with no historical precedent. The combination of unlimited liquidity, historically low interest rates and historically high debt levels has, for the moment, mitigated geopolitical risk factors and guaranteed faith in the U.S. dollar as the world's reserve currency.
Gold has fought incredible odds since fall 2011. It is the most hated asset class, the official enemy of the U.S. dollar reserve and our global monetary system. And so the biggest financial institutions have no interest in higher gold prices. They still control the gold futures and the paper-gold market, so it is easy for them to attack the gold price. But this can't continue forever, and it's just a matter of time before all the money created since 2008 will no longer simply inflate asset bubbles. Inflation will return, and gold will again respond positively to external crises.
TGR: Where do you see gold and silver prices going in the short term?
OG: I see a 50% chance of a final panic selloff across the gold and silver space. In this scenario, gold could fall to $1,000/oz, and silver could fall as low as $12/oz.
TGR: Wouldn't such prices lead to widespread curtailment of bullion production?
OG: The current all-in costs of gold producers are now above $1,150/oz, even after massive cost reductions and a focus on higher-grade mining. Such expedients can have only a temporary effect. At a gold price of $1,000/oz, there will be many shutdowns.
We need a gold price of at least $1,400/oz to support sustainable production, and that number will rise, as early as 2015 or 2016. We have reached Peak Gold, and it's here to stay. The highest-grade and most-profitable deposits are gone. The bear market in the gold mining space has been so long and painful that the major producers have their backs to the wall.
Most discoveries of the last five years need a far higher gold price to be mined. In addition, many recent discoveries are located in jurisdictions with high country or environmental risks and lack infrastructure, resulting in multibillion-dollar capital expenditures (capexes).
TGR: As a result of the factors you've mentioned, can we now expect a big increase in mergers and acquisitions (M&As)?
OG: Not so much among the majors. Most of them have weak balance sheets and too many in-house projects to risk expensive and dilutive takeovers.
TGR: What are the attributes possessed by those companies likely to be taken out?
OG: When the influential players in the gold mining space think that the gold price bottom is in, and a new bull market is likely, M&A interest will grow big time. Such a consolidation could create a perfect storm for the strongest junior gold producers and quality gold developers with robust, competitive projects.
Specifically, takeover targets will have financeable mine capexes with a good relation to the discounted net present value (NPV) of their projects. They will be profitable with gold at $1,100/oz, and at least break even at $1,000/oz. Their projects will be in pro-mining jurisdictions with stable laws, the sustainable support of regional and local communities, and solid infrastructure.
TGR: What about management?
OG: Takeover targets must have managements with strong track records, or, failing that, existing investment from the larger precious metals companies or previously successful strategic investors. And, of course, healthy financials. There are many evaluations to be made, and there aren't any "no brainers" here. Due diligence and continuous research are critical. When you think you haven't spotted any weaknesses, you've likely missed something.
TGR: You are now more bullish on uranium companies, correct?
OG: Uranium prices have just enjoyed their first recovery in years. We may have seen the bottom here, so I think investors should put uranium stocks back on their watchlists.
TGR: Finally, given that so many current investors in gold companies want out, does the M&A flurry you've suggested offer a special opportunity for contrarians?
OG: Absolutely. Both specific and general valuations are among the lowest for the last 30 years, so this could be the most attractive environment for contrarian investors in a couple of generations.
TGR: Oliver, thank you for your time and your insights.
Oliver Gross is a passionate resource expert, prudent investor and adviser with more than 10 years of experience in the mining and junior sector. He is the chief editor and analyst of the newsletter Der Rohstoff-Anleger (The Resource Investor), which specializes in the global junior resource sector. It is backed by the GeVestor Financial publishing group, the largest online publishing house in Germany.
1) Kevin Michael Grace conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor.
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-- Published: Tuesday, 28 October 2014 | E-Mail | Print | Source: GoldSeek.com