Fund Manager Adrian Day has a ready answer for investors wondering why the gold price has been so depressed. It is the strength of the dollar. The Bank of Japan can act like a drunken sailor buying bonds at negative interest rates and the European Central Bank can do all the quantitative easing it wants, but as long as the dollar remains high, the gold price will suffer. That is why, in this interview with The Gold Report, Day focuses on 10 companies that can remain stable at almost any price.
The Gold Report: Gold has been bouncing around $1,200 an ounce ($1,200/oz) for a while. Why?
Adrian Day: Until the dollar shot off like a rocket in July, gold had been up and down, perhaps disappointing some people. It closed the second quarter at significantly over $1,300/oz. Since then, both the euro and the yen have fallen and that has affected the price of gold. The concerns about tightening by the Federal Reserve are grossly overblown, however. The number one effect on the price of gold is the dollar.
TGR: Is there any hope on the horizon for the gold funds?
AD: Hope is not an investment strategy. But, yes, there are quantifiable reasons for hope. Number one, monetary policy around the world remains easy. The European Central Bank (ECB) is talking openly about instituting a quantitative easing (QE) policy. As you know, the ECB is prohibited from directly buying government sovereign bonds, which is the way that most central banks effect easing policies. The Federal Reserve buys treasury notes. The Bank of Japan buys Japanese government bonds and so on. The ECB is prohibited from doing that; it must use other means to pursue easing.
TGR: What did Japan do?
AD: The Bank of Japan is acting like a drunken sailor on a Friday night. It actually bought government bonds at negative interest rates, which is a first!
In the United States, the Fed is going to end its tapering policy by eliminating $85 billion a month of bond buying. Nonetheless, monetary policy in the U.S. remains easy. Short-term real interest rates are negative. Recently, the Fed said that it expects real short-term interest rates to continue to be negative through the end of 2015 at least. That is actually a strong bullish factor for gold. Technically, we came close to the support level around $1,180/oz. We have not yet broken through that support; this is the level from which gold has bounced three times in the last year.
The main determent for the gold price at the moment is the dollar. I am not optimistic on a dollar drop in the near term. The dollar is fundamentally overvalued based on a purchasing power parity basis, which is the way most people value currencies. It is overvalued by as much as 20–30% against most of the Asian currencies. That means that the Asian currencies are undervalued.
Fundamentally the dollar needs to drop.
The irony here is that the geopolitical tensions that one would have expected to help gold have actually helped the dollar and, therefore, hurt gold. Physical demand for gold in China remains strong. Imports from Hong Kong have declined this year. At the same time, an increase in Shanghai Exchange deliveries has partly offset that. This year will be the best year on record for Chinese demand, other than 2013’s extraordinarily strong year. Indian demand has started to pick up again after the elections. Middle East buying has been extremely strong in recent weeks. In the rest of the world, outside of Western Europe and North America, physical demand is strong. Fundamentally, the gold market is quite strong.
The one big negative is the dollar.
TGR: As an investor in gold juniors, do you prefer explorers or producers?
AD: I like a combination. It is ironic that conservative investors go for the bigger, well-known names, but these are not necessarily the best names to buy. Gold mining is an incredibly tough business. It is made worse by the actions of governments, NGOs and environmentalists. But the majors are always in need of more gold.
A large mining company, such as Barrick Gold Corp. (ABX:TSX; ABX:NYSE) or Newmont Mining Corp. (NEM:NYSE), mines 5 million ounces (5 Moz) a year. These companies need to find 5 Moz/year just to keep flat. That is not an easy task. During the last 25 years, there has been a sharp decline in the number of large gold discoveries. The senior companies were forced to acquire existing mines and companies. A couple of years ago, large firms were making really idiotic acquisitions at silly prices.
TGR: Why were they overpaying for non-economic mines?