-- Published: Wednesday, 18 February 2015 | Print | Disqus
Source: Kevin Michael Grace of The Gold Report
The bottom is in, says Gwen Preston, founder of the Resource Maven, but the next bull market in gold hasn't yet arrived. In this interview with the The Gold Report, she argues that investors should concentrate on finding likely takeover targets and explains that these companies are often distinguished by strong investor and institutional backing.
The Gold Report: You have doubled down on your declaration that "Nov. 5 was the bottom for gold and gold equities." What makes you so certain?
Gwen Preston: The primary reason is fundamental: supply and demand. Demand for gold remains strong despite headlines about exchange-traded funds liquidating their holdings. Physical buyers are buying a lot of gold. These include the central banks of China and Russia, countries pushing for an alternative to the U.S. dollar for international trade, and individual buyers in India and China, people who have long believed in gold as a store of value. The latter buy when it's cheap, which has resulted in $1,200 per ounce ($1,200/oz) becoming a real bottom for gold. Every time the price falls toward $1,200/oz, the Shanghai premium—the extra amount that buyers in China are willing to pay at that moment to get their hands on an ounce of gold—spikes.
Meanwhile, gold supply is starting to shrink. Producers let costs climb out of control during gold's bull market. When the bear market came, they then had to cut costs. New mines and mine expansions were deferred or canceled and output from higher-cost operations was cut back. We have reached peak gold—we will never again produce as much gold as we're producing now.
TGR: What are the other reasons in support of your argument?
GP: The second reason is that, even after expenditures were reined in, the all-in sustaining cost to produce an ounce of gold sits at a global average of about $1,200/oz. So the market must be willing to pay at least that much.
The third reason is gold's intangibles: currency concerns, global debt worries and geopolitical risk. Gold is the only currency that exists outside the world of government manipulation.
TGR: With regard to the increasing importance of gold bullion to Asia, is it possible that the Chinese could tell the world that the gold price will now be determined in Shanghai rather than in London?
GP: That shift is already underway. I don't believe China will come out and say it because China is more calculating than that. For example, China hasn't said it is promoting the renminbi as a real alternative to the U.S. dollar, but it has inked 25 different currency-swap agreements with countries all over the world, including some in the Middle East in the heart of petrodollar land.
Having said that, there are rumors circulating about China establishing its own gold fix. The London gold has been abandoned and there is active talk of an alternate being set up in China.
TGR: Where do you see the price of gold going this year?
GP: I see a slow steady climb: $1,400–1,500/oz by the end of the year. We won't have a proper bull market in 2015, but we are past the worst of the bear market.
TGR: How will the mining juniors as a class do in 2015?
GP: It's difficult to talk about the mining juniors as a class because in periods like this the market is going sideways, and a sideways market is made up of companies going up and companies going down. Gold companies are more likely going to be on the rising side. And within that group there are certain companies with projects very appealing to the majors. Those takeout candidates will be some of the best-performing stocks this year.
TGR: How close to production must projects be in order for their owners to be likely takeout candidates?
GP: Projects across the entire spectrum have potential, but my favorites for the best leverage are what I call the predevelopment projects with good economic metrics. By this I mean proof that the metallurgy works, the infrastructure is there, the engineering is straightforward and the resource makes sense, whether for open-pit or underground mining. In other words, all the boxes have been ticked and these projects demonstrate very good potential to be high margin. Projects with high-margin opportunities will be taken out first.
TGR: What's your opinion of the gold majors?
GP: I'm impressed by how cheap they are. They were even cheaper two months ago, but they're still trading at historic lows. This has resulted in incredible opportunities for investors willing to be patient while gold rises. The question is, of course, which companies. You want a company with an entry point that's still low relative to its one to three year chart. You want a company with a good handle on costs. You want a company that has a manageable balance of debt and cash—and certainly enough cash to be able to act on acquisitions now while projects are cheap.
TGR: Is it more important for juniors to get significant support from new investors?
GP: Very important, especially as generalist investors have largely abandoned mining because the sector did not give their shareholders enough return when gold prices went from $800/oz to $1,900/oz. So miners now fight for support from a smaller group of investors. Within that smaller group, there are some serious contrarian investors looking to get in now while stocks are dirt cheap. Any companies that can attract interest from those people really distinguish themselves from the pack.
TGR: What's your opinion of the gold explorers?
GP: Explorers are a harder bet right now. They are always the last to respond to a rising gold price and the last to respond to the turnaround from a bear market. But there are definitely some really good ones out there.
TGR: Final question. If there were a Junior Gold Investors Happiness Index and at the end of 2014 it stood at 2 on a scale of 1 to 10, where it will stand at the end of 2015?
GP: I would say something in the range of 3 or 3.5. Investors starting in the market now will be quite happy because they are starting at a bottom. However, those who have been invested in the market for many years have a lot of lost ground to recover. It's going to take a while. It's going to take a big rebound before that lost ground is recovered, and portfolios are back in the black again. I think that the Happiness Index will start to rise, but it will take a year or two or three before the big run up.
TGR: Gwen, thank you for your time and your insights.
Gwen Preston is the founder and editor of Resource Maven. Preston watches the wires, talks to her network and analyzes economics to identify those companies from which investors can profit. She has been interviewed by the CBC and Financial Post. A former senior writer at The Northern Miner, she holds a Bachelor of Science from McGill University and a Master of Journalism from the University of British Columbia.
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-- Published: Wednesday, 18 February 2015 | E-Mail | Print | Source: GoldSeek.com