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Eric Coffin: Is Market Sentiment Shifting to Gold?


 -- Published: Monday, 19 January 2015 | Print  | Disqus 

Source: Kevin Michael Grace of The Gold Report 

 

Equities past their peak? Bond market dead? So where do investors go looking for returns? Eric Coffin suggests gold, both bullion and stocks. In this interview with The Gold Report, the publisher of Hard Rock Analyst explains how changes in the currency and energy markets have reignited interest in the sector and suggests why investors can profit from this new economic reality.

 

 

The Gold Report: Quite a few analysts believe 2015 will be a year of great economic volatility, as foreshadowed by what happened with oil in 2014. Do you agree?

 

Eric Coffin: I do think 2015 will be pretty volatile, with the potential for nasty financial surprises. We've already seen bond yields go negative in Germany, France and elsewhere, and we could see big moves in and out of different asset classes.

 

TGR: Could the oil price collapse be a leading indicator of a global economic slowdown?

 

EC: That's an oversimplification. Economic growth in China has slowed and will probably slow some more. And China is the 800-pound gorilla of commodity consumption. Estimates for worldwide growth in 2015 have recently come down but not enough to justify the drop in the oil price.

 

The main reason for the oil price crash is oversupply. U.S. supply has grown massively due to fracking and horizontal drilling, while Libya and Iran have both added a million barrels a day. These events have disrupted the equilibrium.

 

TGR: Mario Draghi, president of the European Central Bank (ECB), has famously boasted he will do "whatever it takes" to save the euro. Greece will hold an election Jan. 25, and the polls tell there is a good chance the new government will reject its current arrangement with the ECB. If this occurs, can the euro be saved?

 

EC: The euro could survive a "grexit." The rescue package for Greece put together in 2012 essentially shifted all government debt from public and private banks to the International Monetary Fund, the European Rescue Fund and other transnational institutions. Together, they could handle a $300 billion ($300B) write-down. Not easily, but they could manage it.

 

The real danger for the euro would occur should Greece prosper following a massive devaluation of its currency. Then countries like Italy, with much bigger debt loads, would want out as well, and the euro might be finished.

 

TGR: The next ECB monetary policy meeting is in Frankfurt on Jan. 22. Will the Germans go along with the launch of the quantitative easing (QE) program Draghi is rumored to unveil there?

 

EC: Draghi can't just jawbone any longer. He's got to do something, or the market will stop taking him seriously. But I'm not sold on the idea that the Germans will agree to any QE program big enough to impress the market. I think it would take a trillion-euro-sized program to impress the market. Hard to believe the Germans will go along with that.

 

TGR: You wrote recently that "gold is the world's second strongest major currency." Are you surprised that it has recently outperformed the U.S. dollar?

 

EC: Not really. I've been waiting quite a while for this to happen. Most market strategists do not view gold as a currency but only as a commodity. And their rule is: dollar up, gold down. But when you do view gold as a currency, you see that compared to many other currencies, including the euro, ruble, yen and rupee, it has been a good place to be in over the last year.

 

We may be moving to a new model, whereby gold has a weak correlation to the U.S. dollar, or perhaps no correlation at all.

 

TGR: Is there anything to the recent stories that Vladimir Putin might deal with the oil-induced threat to the ruble with the creation of a new ruble, one backed partially by gold?

 

EC: Putin clearly likes bullion. The Russian central bank has bought a lot of it in the last two to three years. There's a certain logic to a gold-backed ruble because the ruble is now effectively a petrodollar, and the oil price collapse has been disastrous for Russia. It's far more likely that Putin would sell U.S. dollars rather than gold.

 

 

TGR: What are your 2015 forecasts for the prices of gold and silver?

 

EC: I'm still deciding, but if this reversal in the gold-dollar correlation can be maintained, $1,300 to $1,350 per ounce ($1,300–1,350/oz) is a fairly reasonable minimum target. If things blow up in Greece, it's tougher to call because that would be tough on the euro and good for the U.S. dollar, but it would also drive more people into other asset classes, such as gold. If gold can get to and through $1,350/oz, silver should be able to get to $22–24/oz at least.

 

A zero-yield bond world would be good for gold because the traditional argument against gold—it doesn't pay interest—would no longer have any force.

 

TGR: For several years, the gold-silver price ratio has been at a traditionally high 65. Recently, this has risen to 75. Will this trend reverse?

 

EC: You can probably count on the fingers of one hand all the silver miners making money today. There are few silver projects being financed to production, and the potential for a fall in silver production is greater than that for gold. It won't take many investors to be long on silver to drive the price up $5–10/oz.

 

TGR: You told The Gold Report in September, "If gold stays at the $1,200–1,250/oz area for an extended period, there will be mine closures." Since then, the price of oil has fallen 50%. How does that affect your calculation?

 

EC: Oil at $50 per barrel will have a big, positive effect on bulk-tonnage operations, especially ones that run off generators. I've talked to a couple of producers recently about this, and the consensus is that it reduces their cash costs by about $50 to $75/oz. These savings will allow some of these operations to hang on a little bit longer. The strong U.S. dollar helps miners outside the U.S. as well, because so many of their costs are in local currencies.

 

TGR: You have a particular interest in Yukon gold projects. Doug Loud and Jeff Mosseri told The Gold Report last month that the new Yukon environmental bill has created a regulatory nightmare, with potentially grave consequences for the future of mining there. What's your view?

 

EC: If you're in a part of Yukon with settled native land claims, and if you can get the local bands onside, that clears a lot of the hurdles at the federal level. If you're not, you've got a big problem. The western half of the Yukon has settled claims.

 

TGR: Let's talk about uranium. Late last year, people in the industry were excited because the spot price of U308 went from $30/lb to $42/lb. Since then, the price has fallen to $35.50/lb. How does that affect the prospects for explorers?

 

EC: It doesn't help. It was easier to raise money in the fall than today. The uranium price has fallen in part because it is traded as an energy commodity, and oil and natural gas have fallen as well. It doesn't make a lot of sense for uranium to trade with oil, but there you are.

 

I'm still bullish on the sector. The Germans have said they want all their nuclear reactors off line, but Japan intends to get as much of its reactor fleet back on line as possible. I think approvals for restarts will accelerate in Japan. Most important, China is going to build a great number of reactors over the next 20 years. I got interested in uranium again last summer when the spot price fell to $28/lb. At that price, producers were going to lose money; there would be mine closures, and there was no way we would see new production. It had nowhere to go but up. But a fully bullish scenario will take some time to unfold.

 

TGR: The first big mining conference of the year, the Vancouver Resource Investment Conference, began Jan. 18 in Vancouver. What's the mood of investors going to be, and what should it be?

 

EC: I'm told that registrations are about the same as 2014, which was not great but not horrible. The last good year for the mining industry was 2011, and investors are pretty tired of being smacked upside the head.

 

When you look at the world economy, there's no shortage of worries. Anyone expecting 2014-style returns in New York in 2015 will be sorely disappointed. There's nothing to be had in the bond market. So where can investors get returns? There are a lot of very inexpensive mining companies out there. Even small increases in the gold price, coupled with falling energy and currency costs, mean they could put up pretty good numbers in 2015. In the last month, gold was up $40/oz, but most of those companies were up 50%. The mining sector has the best leverage because it's the sector that's been slapped down the most.

 

On the subject of conferences, HRA is once again cohosting the Toronto Subscriber Investment Summit along with Resource Opportunities (Tommy Humphreys) and the Oil and Gas Investments Bulletin (Keith Schaefer). It's happening the day before the Prospectors and Developers Association of Canada (PDAC) conference, on Saturday, Feb. 28, at the Hilton Hotel. Some of the companies that I mentioned in this interview are presenting at our event—Continental Gold, Precipitate Gold and Excelsior Mining. For more info or to register to attend, go to www.subscribersummit.com. Seating is limited and we usually sell out pretty quickly.

 

TGR: Eric, thank you for your time and your insights.

 

Eric Coffin is the editor of the HRA (Hard Rock Analyst) family of publications. Coffin has a degree in corporate and investment finance and has extensive experience in merger and acquisitions and small-company financing and promotion. For many years, he tracked the financial performance and funding of all exchange-listed Canadian mining companies and has helped with the formation of several successful exploration ventures. Coffin was one of the first analysts to point out the disastrous effects of gold hedging and gold loan-capital financing in 1997. He also predicted the start of the current secular bull market in commodities based on the movement of the U.S. dollar in 2001 and the acceleration of growth in Asia and India. Coffin can be reached at ecoffincustomerservice@hraadvisory.com or the website www.hraadvisory.com.

 

DISCLOSURE:
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.
2) Streetwise Reports does not accept stock in exchange for its services.
3) Eric Coffin: I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. 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) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal
disclaimer.
6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

 

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.

 

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