Will the U.S. Federal Reserve Send the Gold Price to $5000?

Precious metal was a hot topic at Mines and Money Americas

SmallCapPower | October 27, 2016: At the recent Mines and Money Americas 16conference, SmallCapPower had the opportunity to sit in on one of the panel discussions taking place that talked about a favourite commodity of many mining investors… gold. It was a panel with experts Robert Cohen (Dynamic Funds), Ani Markova (AGF Investments), Trevor Turnbull (Scotia Capital) and legendary investor Frank Holmes (U.S. Global Investors), and each member was quite bullish on the precious metal.

Related: Mickey Fulp – “I Think Gold is the Next Big Thing”

The first question that was discussed was about the expectations for 2017 and how gold will perform. The consensus was that if interest rates continue to be negative it will be a good thing for gold. With negative interest rates you’ll have more uncertainty so the price of gold will likely go up. Even if the U.S. Federal Reserve hikes interest rates, it will only affect gold momentarily Mr. Cohen stated, because inflation is going up faster than the rate hikes so inflation will shine through and you’ll see gold’s value increase again. The biggest risk for gold, however, is if the Fed hikes rates and investors don’t see the inflationary background.

 

picture1Macro-economic factors: why are people buying gold? The answer to this question and not supply and demand factors are going to be the drivers for gold moving forward. It’s the fear and love trade, volatility in the market with real negative interest rates, and cultural affinities to gold according to the panel. With rising GDP per capita in China and India you can expect gold to increase as these countries have a huge cultural affinity to the yellow metal.

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There was another consensus for the panel and it was surrounding where the price of gold is heading. All of the panelists were predicting US$1400-$1500 per ounce in the next 12 to 18 months, with Ms. Markova even saying she thinks gold will go up to $2000 per ounce very soon. Mr. Holmes brought to our attention that back in 2011 when gold was up at $1900 per ounce, we had interest rates of -300 basis points, but he believes that if rates drop to -700 basis points then we could see gold prices top out around US$5000 per ounce, a future which he believes is not that unlikely.

The final part of the discussion was what we always like to hear; which companies they would pick for their portfolios. Mr. Cohen liked Northern Star Resources, saying that it has an amazing 96% return on invested capital (ROIC) versus the average of only 11% ROIC, amongst 88 companies that he looked into. Ms. Markova likes junior explorers but didn’t specify which ones, and Mr. Holmes liked Jaguar Mining (TSE:JAG) because the CEO has “really turned the company around.” Jaguar has the same production numbers as Richmont Mines Inc. (TSE:RIC) but is only trading at two times its cash flow and has a market value of $126 million versus Richmont’s $788 million, so he believes there is some value to be unlocked in that stock.

It seems that these experts still feel bullish about gold. Ms. Markova pointed out that this year most companies will have a 30-40% reduction in net debt by year end, which would provide shareholders with increased returns, so if you like gold and thought you missed out, there still may be time to reap some large rewards.