PETALUMA, CA –
The Gold Report: What was your prediction for gold prices in 2011 and how did last year’s investment ideas work out?
Mike Niehuser: Depending on how you want to spin it, we were a little conservative in some respects, but for year-end 2011, we nearly hit it right on the nose. Our forecast for 2011 included the price of gold ranging from $1,300/ounce (oz) to $1,500/oz with the potential with some catalyst to go over $1,600/oz by year-end. In reality, gold traded up to $1,500/oz for the first half of the year making us look smart, then exploded to $1,900/oz and retreated back to where we thought we would end up at year-end at $1,600/oz.
So very close on price, but, more important, we missed the mark on the catalyst, which is the story of the year. We thought the catalyst would be the accelerating deterioration of the U.S. dollar in combination with typical seasonal demand late in the year, but this was blown out by the debt crisis in both the U.S. and Europe, with a wildly different impact on metal and stock prices. Understanding the difference could be very important to making it through 2012.
TGR: What difference are you referring to?
MN: As the U.S. dominates the world’s media, those in the U.S. see the world from a closed system. We know closed systems become more unstable over time. The result is that news media can move into hyper drive, which is what happened with the debt ceiling fiasco last summer. This is especially the case where politics are concerned. In reality with the U.S. dollar’s role as the world reserve currency, the debt is not an issue so long as foreigners are willing to accept dollars or treasuries on the cheap, and we can continue to kick the can down the road almost indefinitely.
The timing of our new-found austerity came at the wrong time with Europeans dealing with their own austerity issues. It would appear that the combination sparked fears of global currency devaluation sending gold and silver to record levels. As the U.S. economy improved, debt as an issue moved off the front page. The issue did not subside in Europe and the U.S. dollar remained strong relative to the euro, leading to a relative decline in interest rates, gold and, consequently, mining equities. I really thought 2011 had the potential to look like 2010 for mining stocks, but it really started to look like 2008, which led to the best buying opportunity of a lifetime in the first quarter of 2009.
TGR: So what are you seeing for metal prices and mining stocks in the coming year?
MN: The old adage that the only constant was volatility is no longer a cliché. While the U.S. economy is showing strength and the U.S. dollar is strong, there has never been more uncertainty in my lifetime; 2012 could be a very volatile year to the extremes. I was born just prior to the Cuban Missile Crisis, but holding catalysts for volatility constant, which is a bit absurd to even suggest, we would expect gold to trade over a wider range and higher than the prior year, say between $1,400-1,700/oz with the potential for some catalyst for the upside to $1,800/oz or $1,900/oz. Demand destruction by higher gold prices may have upset seasonal factors for good and there may be any number of catalysts that may impact prices almost at any time.
TGR: So what kind of catalyst are you looking for?
MN: Well, it’s not any one catalyst, but it is the unperceived impact of any particular catalyst on a potentially unrelated event. Not only the type and relationship of the catalyst but also the timing is important. Working backwards from Dec. 21, 2012, the end of the world by the Mayan calendar, we have a national election in the U.S.; certainly by some timetables Iran is predicted to have a nuclear weapon at some advanced stage of development; and I believe Greece has some event in the month of March. On top of this we are likely to see more political grandstanding early in 2012 on any number of issues including extension of the payroll tax cuts, unemployment benefits and, of course, the federal debt ceiling. Not to be facetious but we will also have the Federal Reserve Chairman Ben Bernanke committing to more frequent press conferences in the name of transparency. Among the international or political challenges of 2012, the Federal Reserve may touch on more of these than you might imagine.
TGR: Are you not giving the Federal Reserve too much credit in world affairs?
MN: Certainly not if the U.S. dollar is the world’s reserve currency. Originally the Fed was charged with the mission as an economic stabilizer to provide an elastic currency in times of financial panic and a lender of last resort for failing banks. The Fed has since suffered mission creep and is now charged with maintaining full employment and, most recently, reduction of systematic risk. One can argue that with banks getting bigger since 2008, the potential for moral hazard has, in fact, increased with larger banks still too big to fail. This may be chump change. Bernanke has said he has no exposure to Europe, but it is apparent that through “temporary U.S. dollar liquidity swaps,” the Fed now may, in effect, have become a global lender of last resort. Systematic risk domestically and globally may be assured. Once again, put it on the credit card.
TGR: Do you think there is a chance that the Fed may accommodate another stimulus program since this is an election year?
MN: This is rather doubtful considering the need has gone away with the stabilization in the U.S. economy. But given the mission of the Fed to pursue full employment, forgetting a moderating unemployment rate, there are still over 10 million unemployed, and millions more under-employed, and they vote. It is interesting that with changes in the voting members at the Fed that there will be fewer stimulus hawks. Sort of like a football team losing their defensive line. Another stimulus program, even talk of one, would be a huge catalyst. Even without a stimulus, the Fed holding short-rate interest rates near zero for the foreseeable future is damaging to a functioning economy in allocating investments. With zero interest rates, basically price controls, funds flow to non-productive assets like gold and other tangibles or consumables rather than fixed assets and equipment for some future return. This also encourages our consumer-driven economy, which is spend now, save later, or better yet pass the buck and kick the can. In any event, we know how well this worked in the last decade.
TGR: It would appear that all that uncertainty should be pretty good for gold?
MN: In the long run, it is without doubt bullish for gold. It is unavoidable but it may take a very long time. Remember that the late Roman Empire was financed through the gradual salting of freshly minted coins with base metals. This is not much different than deficit spending and transfer payments from taxpayers to the entitled or government salaries and pensions. Saving and investment is punished while spending and consuming is encouraged. In the short term, should interest rates increase either by the Fed in the short end or the market requiring higher yields on longer maturities, positive real interest rates could erase gains in metal prices. This seems to be impossible. More likely, as the president has now used a recess appointment for the new head of the Consumer Financial Protection Bureau, the financial markets now have an unvetted regulator in a new bureau accountable only to an independent Federal Reserve. Bankers are risk averse and primarily wish to protect their jobs. I have heard it from bankers’ mouths, you won’t see lending until they know they have a job. So even with near zero interest rates-negative real rates-a sluggish economy will hold down inflation and with a strong U.S. dollar, gold could have a tough time in the new year.
TGR: So with gold trading over such a wide range are you bullish on mining stocks?
MN: I think it is important to remember that only a few short years ago you would have traded your first born for prices at these levels. Even with higher costs of exploration and production, the cream still rises to the top. We should embrace the idea of higher costs as it rewards the productive who are willing to educate themselves and take risks to meet a need. This is so basic and so important. The most important disclosure I can make is that I am an optimist. Also, I believe that sooner or later the market rewards investors seeking companies with low relative valuations that are building shareholder value.
As I said, this feels a lot like the beginning of 2009, which was a short period of time that produced some very high returns. I can’t claim we are at the bottom but getting past seasonal tax loss selling, this is a good time to look for companies with good stories. If companies are better known, I look for production or catalysts for increasing or extending production, important for increasing fundamental value or new discoveries. In this environment, you have a lot to pick from.
TGR: Thank you for your insights.
Mike Niehuser is the founder of Beacon Rock Research LLC, which produces research for an institutional audience and focuses in part on precious, base and industrial metals, oil and gas and alternative energy. Previously a vice president and senior equity analyst with the Robins Group, he also worked as an equity analyst with The RedChip Review. He holds a bachelor’s degree in finance from the University of Oregon.
Article published courtesy of The Gold Report – www.theaureport.com