The price of gold has see-sawed since the Federal Reserve raised interest rates on Dec. 16, and market experts debate if the action is good or bad for gold. Rob Chang of Cantor Fitzgerald Canada believes that after the small rate hike doomsayers are overstating their case and that gold should sell in 2016 for about $100/oz more than today. In this interview with The Gold Report, he argues that in today’s climate cash costs below $1,000/oz are the bare minimum requirement for survival. Happily, Chang highlights three gold producers and one silver producer that have what it takes.
The Gold Report: Some say the price of gold has for some time been suppressed by fear of a Federal Reserve rate hike. What do you think?
Rob Chang: Now that the Fed has finally raised the rate by a small amount at its December meeting as we expected, we will see a continued sideways trend for gold.
TGR: It has been suggested that the Fed has been exceedingly reluctant to raise rates because of fears that would kill the economic recovery and blow up the deficit.
RC: I agree absolutely. Raising rates is likely a bad idea, especially raising them significantly. The key question is whether the Fed will continue to raise rates, and if so, by how much. Higher rates cause issues across the board, issues that frankly I don’t believe the U.S. economy can handle.
TGR: Given the lack of a robust economic recovery since 2008, and the ever-increasing geopolitical instability throughout the world, the latest being a possible war between Turkey and Russia, are you surprised that gold has continued to fall rather than stabilize or rise?
RC: Yes. Given the geopolitical tensions you mentioned, one would expect the gold price to go up. To be honest, I don’t know why it hasn’t. I can only point to recent good U.S. economic news and the potential interest-rate increases as the reasons.
TGR: Goldman Sachs predicted Nov. 19 that gold will fall to $1,000 per ounce ($1,000/oz) over the next 12 months. What are your predictions for the prices of gold and silver?
RC: For gold: $1,173/oz for 2016, $1,185/oz for 2017, $1,200/oz for 2018 and $1,250/oz by 2020. For silver: $15.69/oz for 2016, $17/oz for 2017, $18/oz for 2018 and then $19/oz long term.
TGR: We’ve seen that producers are already walking a tightrope. To give a recent example, Rubicon Minerals Corp. (USA) (NYSEMKT:RBY) ran into geological problems at its Phoenix Lake project in Ontario, and suddenly the future of the company was in doubt. At $1,050/oz gold, would you expect a perhaps final wave of consolidations?
RC: I certainly think that we’re due, and I’m a little surprised we haven’t seen more mergers and acquisitions already. Producers that do have cash would be well served to cherry pick among the many companies trading at extremely low valuations.
TGR: What are the attributes of the producers that will survive at $1,050/oz gold?
RC: First, all-in sustaining costs (AISC) such that they can at least tread water for the time being. Second, management teams that will resist the temptation to buy cheap companies simply because they can. Third, projects in safe jurisdictions. At Cantor, we look for companies in world-class areas such as the Carlin and Battle Mountain trends or Red Lake: places where you don’t worry that you’ll wake up one morning to find your asset nationalized.
TGR: A bunch of juniors with late-stage development projects have been treading water for years in the hope the gold price will rise. If it doesn’t, will these companies drown?
RC: Some will; others will be acquired by midtier producers. There are some companies that have good access to capital and have been very opportunistic in picking off companies or their assets at good prices.
TGR: Gold producers outside the United States, such as Canada, Australia, Brazil, Russia, are currently enjoying a tremendous dollar premium. How much of a leg up does this give them over U.S. gold producers?
RC: It’s pretty significant, and the premium has increased by over 20% over the past year. With the direction the U.S. Fed is going, and the associated strength in the U.S. dollar because of it, this premium has a good chance of getting even better.
TGR: Will we see mining capital flow out of the U.S. and into those four gold-producing countries?
RC: That would certainly make sense. All things being equal, of course. But at the end of the day, a fantastic asset will always attract investment dollars no matter the macro environment.
TGR: You make frequent visits to mining sites. What are the qualities you look for on site?
RC: I try to see the things management is trying not to show: the corners, the cracks, how the workers are interacting, the condition of the machines, how clean certain areas should be relative to what they are. I try to discover the actual conditions on site, and you can get that only from good conversations with the employees.
I look also for good infrastructure and for a sense of how projects are perceived by area residents. If community relations are poor, that could really sidetrack a mine no matter how good the other metrics are.
TGR: What have you learned from your recent visits to Mexico?
RC: Every company operating there says that its locations are safe, that the problems with the drug cartels are not there but in other locations in other states. That can’t always be true. That typical response has become something of a challenge, and we are working out the best way of getting a better handle on it.
TGR: What is it about Nevada you like so much?