-- Published: Wednesday, 3 December 2014 | Print | Disqus
Source: Kevin Michael Grace of The Gold Report
For all the talk of gold sinking remorselessly to $1,000 an ounce, the metal has risen to $1,200 per ounce and has held its ground. Have we seen the bottom? Money managers Doug Loud and Jeff Mosseri of Greystone Asset Management say that if we haven't seen the bottom, we will soon. In this interview with The Gold Report, they predict that the next bull market will result in patient investors realizing gains in the multiples.
The Gold Report: David Stockman noted Nov. 13 that after an 8% correction in October, equities came roaring back, gaining 12% in less than a month. How long can this last?
Jeffrey Mosseri: It's really a question of interest rates. As long as they remain close to zero, equities can continue to run with periodic 5–10% corrections.
Douglass Loud: And I don't think the Federal Reserve wants to raise interest rates. If it does, the U.S. government will have to pay more interest on its debt, and that would be difficult, given all the money it's been printing.
TGR: Sure, but stocks can't have an infinite value. There must be some correlation between actual worth and share prices.
DL: That's the theory. Look at 1929!
JM: What we don't know is what happens in a period of extended zero-interest rates. In the 1980s and 1990s, we had low interest rates for a short period of time, and the price-to-earnings (P/E) ratios reacted accordingly. Those P/E levels we have today do not seem as out of whack as what we had then.
DL: And these high P/E ratios are not yet manifested in a lot of stocks. A few hot stocks with large P/E ratios greatly influence the entire S&P 500.
TGR: Tech stocks in particular are characterized by high P/E ratios. Are they vulnerable?
JM: They're always vulnerable. But the hedge funds are piling on so as to have better results by the end of the year.
TGR: Why aren't gold stocks benefiting from this equities blowout?
JM: They should. I use the metaphor of the U.S. dollar being the cleanest dirty shirt in the laundry basket. Most people have forgotten, however, that there is a clean shirt in the laundry basket, and that's gold.
DL: Gold is denominated in U.S. dollars, so when the dollar goes up, gold goes down.
TGR: Doug, when we last spoke in July, when gold was around $1,300 per ounce ($1,300/oz), you said, "There are games going on. Institutions can profit by shorting gold and then buying it back before it rises in price or so the conspiracy theorist in me thinks." Some conspiracy theorists are now saying that these institutions are determined to bust gold down to $1,000/oz. What do you think?
DL: These institutions short gold and write reports saying that gold is terrible and investors better get out. Then, after the price falls they can buy and cover their shorts. The price turns around, and the institutions can say it's time to for the investors to get back in. I'm not sure that the trader knocking the price down ever talks to the institutional adviser. He's not supposed to, but you never know.
JM: I'm not sure that the shorts can get gold down to $1,000/oz. There is tremendous physical buying, particularly in Asia, and central banks are buying as well. The U.S. and Canadian Mints have stopped making silver coins because they've run out of silver. Demand for gold and silver bullion is quite high, but the paper market is about 50 times the size of the physical market. So games can be played in the paper market.
TGR: Something interesting happened Nov. 7 and 14. On Nov. 7, gold went up 3.15%, and on Nov. 14, it went up 2.3%. And these gains have not been reversed. Have we reached a bottom?
JM: It's difficult to pinpoint. One positive factor is that gold has broken through an important technical number at $1,170/oz. Both gold and gold stocks have been beaten down to such a degree that value hunters have come in.
DL: Geopolitics is also involved as well. On one of those Fridays, it was discovered that Russia had sent 32 tanks, trucks and supplies into Ukraine. Vladimir Putin hasn't gone away, and neither has Ebola.
JM: Or ISIS.
TGR: The bear market in gold equities is now in its fourth year. If ordinary investors come to the conclusion that gold is a rigged game they can't win, won't the gold space become a ghost town?
JM: If you go to some of these gold conferences, it seems like it.
Many marginal explorers have gone bankrupt or have been taken out, but there is still some cleansing that needs to be done. What's interesting about this bear market is that the classic relationship between gold and gold stocks has been reversed. Gold has led the stocks down and not vice versa. We are seeing signs in the last month that the classic relationship is being re-established, with gold stocks leading the metal up. This gives cause for optimism.
DL: Another thing to remember is that efficient, producing gold miners are always finding more gold. If you own the miner instead of the metal, there's always going to be more gold under the stock, and you're going to be more liquid. One of these days all this will pay off. There are funds being set up to buy cash-poor companies with good projects. They'll eventually make a lot of money, if they'll just be patient. And when the gold and markets pay off, they pay off in tens of multiples.
JM: The trillions of dollars created by central banks are chickens that will one day come home to roost. Eventually, people will flee from paper currency to gold.
TGR: Silver, unlike gold, is primarily an industrial metal. Yet it has fallen in lockstep with gold. Why?
JM: Silver is an industrial metal, no question, but it is also a precious metal and regarded as such. For instance, India has now forbidden the ownership of gold, and the Indians are buying silver instead.
DL: The silver to gold ratio, which was previously at 50 or 60:1, is now 70:1. I think this ratio must come down. But does gold fall, or does silver rise? I don't know.
TGR: Are we going to see a flurry of takeovers of well-managed companies with products but low share prices?
DL: Definitely. The situation for so many miners today is similar to that of the beautiful but poor maiden of Victorian times. Sometimes her only salvation was to marry the mean old miser because he was the only person who could save her family's house and farm.
Not so long ago, miners got money every three months. Need another million? Sure. This can't happen today because the money's no longer there. After the financial crisis, the mining stocks got dumped, and many of the funds that bought these stocks disappeared. Now, if we get a couple of high-priced acquisitions, this will bring attention back to the gold space.
TGR: How will the market for gold and gold stocks change in 2015?
JM: If we haven't bottomed, we're pretty close. Investors will come to realize that gold is the only clean shirt in the basket. Gold stocks will move first, and bullion will follow. There's a lot of upside.
TGR: Doug and Jeff, thank you for your time and your insights.
Douglass N. Loud joined Greystone Asset Management at its founding in 2005 and has been senior managing director of Axiom Capital Management Inc. since 2009. Prior to that, he was with Murphy & Durieu, where he served as executive director of the Private Clients Group. Loud has over 35 years of investment management and securities industry experience. He holds a degree from Yale University and a law degree from the University of California, Berkeley.
Jeffrey N. Mosseri established Greystone Asset Management in 2005 and became a director of Axiom Capital Management Inc. in 2009. He was a stockbroker and investment manager at Goldsmith & Harris for 20 years. Mosseri also worked as a stockbroker and investment manager for Carnegie Capital, the investment advisory division of Prescott Ball & Turben, where he ran the international arbitrage division and developed the gold mining research and investment department.
1) Kevin Michael Grace conducted this interview for Streetwise Reports LLC, publisher ofThe 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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3) Doug Loud: I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
4) Jeff Mosseri: I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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-- Published: Wednesday, 3 December 2014 | E-Mail | Print | Source: GoldSeek.com