The outlook for junior Gold Mining stocks...
RICHARD GRAY of Blackmont Metals & Mining became a CFA in 2005 and earned his Bachelor of Applied Science (Geological and Mineral Engineering, 1997) from the University of Toronto, says the Gold Report.
He says it's been a Dollar vs. gold story ever since the economy ran into trouble last fall. Here he reveals the attributes of successful junior Gold Mining stocks, and why he thinks gold's upside scenario is "maybe $1,100 or $1,200 an ounce..."
The Gold Report: Gold's on a roll. What's your take on what's driving the gold and precious metals sector right now?
Richard Gray: I believe there are two real drivers behind the Gold Price: the fear trade vs. the U.S. Dollar, and the potential for inflation. I tend to minimize the overall impact of supply and demand. Given what we've seen over the course of 2009, investors are looking for an alternative investment to the Dollar. If you go back to when the overall economy ran into trouble last fall, ever since then it's been more of a Dollar vs. gold story and that's still true today.
As the economy recovers and there's a scenario where inflation is an issue, then there's a case to be made that gold will do well then, as well. But for the time being, it's just people worried about where their money is today and using gold as a safe haven vs. where it could go with their other investments. What we've seen in the last six weeks is that gold has broken through some historic levels because there's increased worry that maybe the U.S. Dollar isn't the world currency anymore and the U.S. economy is really not as stable as we've been led to believe.
Investment demand, whether from funds or individuals, has been a major, major driver, taking gold from $700/oz through to where we are today. And this investment demand is simply investors just looking for a safe place to put their money.
TGR: Do you think there's a high probability that once we start to recover we will hit inflation?
RG: The trouble is there are no real applicable precedents we can use. With all the stimulus money that's been injected into the system, it would seem inevitable that inflation will be an issue down the road.
On the other hand, you could also argue that all the value that was destroyed (particularly in the last 12 months), won't be regained by all the stimulus money in the world. That's the argument for people who say inflation's never going to be an issue because the stimulus money isn't anywhere near what was lost in the last 12 months.
Personally, what I've been telling clients is that gold around $1,000 is probably a reasonable place to be looking long term. I don't think gold's going to take off and go to $1,500 or $2,000. I think the upside scenario is maybe $1,100 or $1,200 and then somewhere in a range between $900 and $1,100 is probably where the gold market is healthy and where the economy, as it compares to the gold market, is also reasonably stable. The fear trade is going to be here for a while and inflation might have an impact later on. But in the meantime we are not calling for a dramatic move up or down.
TGR: Gold has gone up about 21% this year. Silver has gone up 61%. Is silver being driven by other elements?
RG: Yes. Silver is somewhat of a unique metal. The simplest way to put it is when the economy is good, it trades closely with the Gold Price—usually on a 50:1 ratio. During these times it is treated more like a precious metal, a metal you invest in to protect your money. When the economy is weak, like the second half of 2008, it trades more like a base metal, where supply and demand has more of an impact. We saw the ratio rocket up to 80:1 last fall. Right now we're at 65:1, which is right in the middle of the bull market and bear market scenario here and that probably fits as well.
On the supply-demand aspect of silver; it is consumed (whereas gold is typically not) and it is usually mined in deposits that are primarily lead, zinc and copper. So it's got a bit of a two-headed look to it.
