Dave Gonigam

Gold is ending the week doing a little more backing and filling. After yesterday’s run-up, the spot price has pulled back to $1,665.

$2,000 looks far off in the distance. To say nothing of last September’s $1,900 high.

Then again, it could happen with the snap of a finger.

“A push on toward $2,000 is definitely on the cards before the year is out,” says Philip Klapwijk, “although a clear breach of that mark is arguably a more likely event for the first half of next year.”

Mr. Klapwijk is global head of metals analytics at the consultancy Thomson Reuters GFMS. The catalyst for $2,000 might well be, in his estimation, Spain. A meltdown there — coupled with continuing strong demand from China — could give gold a whole new “safe haven” glow.

That said, he also sees a short-term dip to the year-end 2011 level of $1,550 within a couple of months. You’ve been warned.

“U.S. investors might sleep better at night with an allocation to gold in the face of continued negative real interest rates,” says U.S. Global Investors chief and Vancouver stalwart Frank Holmes.

“The chart below shows how gold has historically climbed when interest rates fell below 0%, with a ‘strong correlation from 1977-84, and again recently when rates turned negative in early 2008,’ according to Desjardins Capital Markets.”

Negative Rates, Positive Gold

The blue line on the chart is the very definition of “financial repression” — interest rates held below the rate of inflation. And the red line is how you combat it.

Keeping the faith with bullion is one thing. Keeping the faith with stocks has been, well, more of a challenge.

The HUI index of major gold stocks has bounced off lows hit earlier this week. Cold comfort in light of the fact the index sits where it did in August 2010. Or for that matter, November 2009.

“‘Cheap gold stock’ is a redundancy these days,” says Chris Mayer, “as nearly all gold stocks look cheap. While the gold price has held steady, gold stocks have lagged it. In March, that gap was the widest it’s been in the last 12 months.”

A Future of Frustration

“Gold stocks trade at only half of their historical multiples of the last dozen years,” Chris goes on. “Yet gold miners enjoy the highest profit margins and cash flows they’ve had in decades.”

What gives? “Gold management teams are usually lame. All they want to do is take what they earn and put it back into the ground to find more gold. It doesn’t matter if it makes sense to do that or not. Or maybe they blow the money on an expensive acquisition. Shareholders are often an afterthought. One way you can see this is to look at dividends paid. Only technology stocks pay out less of their earnings to shareholders.”

“Many analysts,” adds another Vancouver favorite, Rick Rule, “myself prominently among them, were dismayed at the gold mining industries’ abysmal corporate performance during the last decade.”

But this is starting to change. “Even as the [gold] equities prices continue to decline,” says Rick, “corporate performance is increasing, and increasing dramatically.

“A cursory look at producers’ income statements tells a dramatic story: Earnings and cash generation, on a per share basis, are increasing in dramatic fashion. Capital expenditures are increasingly funded with internally generated cash, rather than equity issuances or debt.”

Some producers are even — gasp — paying a dividend. Newmont is raising its dividend as the price of gold rises.

So keep the faith, Mr. Rule advises: “Recognize that markets work, but only in the longer term. If you can’t handle that, find another avocation. The cure for low prices are low prices; the cure for high prices are high prices. In order to sell high, you must buy low.”

Dave Gonigam
for The Daily Reckoning

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

  • Rusty Brown

    “The cure for low prices are low prices”

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