Newsletter writer John Kaiser, of Kaiserbottomfish.com, describes why he thinks the gold price has been selling off recently and why it could be stuck in a trading range for several years. He also weighs in on the underperformance of small cap stocks and reveals which type of junior miners he likes currently.
John Kaiser: Well, the story in the last five years has all been that the quantitative easing being done by the United States is going to result in inflation, the debasement of the U.S. dollar. None of this has actually happened, and now quantitative easing is being shut down, and signals are being given that interest rates will rise over the next couple of years gradually, all because the American economy is finally getting a real footing and no longer needs this type of extreme monetary stimulus.
If this does indeed happen, well, then the whole rationale for owning gold, according to this story, has disappeared. So there’s a sell-off anticipating that, but it’s a no-winsituation because if the Feds are wrong and withdrawing quantitative easing and raising interest rates spurs a major market sell-off and tips the economy into a serious decline, that’s going to have further deflationary effects and not help the price of gold.
Well, there’s a new conduit by which price discovery can be done and gold can flow into what is really the biggest market. China, right now, is the biggest buyer of gold. They have long-term reasons to accumulate gold at the state level and prepare for a future transition away from the U.S. dollar as the world single reserve currency. I’m not sure it’ll have a short-term impact. The market first has to digest the shift away from the whole gold bug narrative to one that looks as gold that something goes up in real price terms because the global economy is growing, and obviously countries like China are going to grow at a faster rate than the United States and eventually eclipse the United States in terms of size. That’s going to be the real driver for a higher gold price going forward. It’s kind of obvious that the Chinese are the ones already anticipating a future where they see themselves as flourishing as opposed to the American mentality, which is almost of an end-times mentality.
Well, where it’s going to be is largely be a random walk. I think there’s a big push to try and break it below the psychological level of 1180, and, unfortunately, if they achieve that, they can plunge it down to 1050. At that price, though, gold is way below the global all-in cost for the development of new gold mines, and it will just be a trigger for a wash out in the mining industry. It’ll be the buying opportunity for the mining industry, and it won’t go much lower in terms of the gold price itself because too many people see the value of a metal where you can’t really make any more of it without losing money.
Because the bigger companies have the ability to survive and extend a downturn.It may take several years for gold to come out of its $1,000 to $1,400 channel. Smaller companies are more at risk of disruptions, and they’re more related to local situations, and, of course, their ability to fund losses during the interim are considerably lower than the big companies, so it’s natural to go into the bigger companies like Barrick than the more medium-sized producers.
At this point, I think in the junior sector, which is my area of specialization, the advanced companies that are hoping to be bought out are going to have a difficult time because, at the current gold price, most of their projects look lousy in terms of their economic studies. I think we need to shift to exploration for gold. If the junior sector is to get any attention from the market, it needs to explore for gold deposits that have a grade and tonnage that work with the prices that we’re stuck with for the next couple of years, and which would do extremely well if gold does get back into the up-trend and I think it’s almost inevitable three years or later down the line. However, raising capital for exploration juniors is extremely difficult because the risk aversion is worse than it has ever been in the 30 years that I’ve looked at this sector.
Our site, kaiserresearch.com, has information on 1,700 resource sector companies that trade on the Canadian exchanges. It’s got a big search engine. If you have an idea of what you think will do well in the next year or so, you can craft a very complex search, and you can find it in our system. We do commentaries recommendations, but we are also an information system on the resource sector.
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