Global unrest and inflation will play a role in improving fundamentals for gold and silver, Byron King, newsletter editor for Agora Financial, tells The Gold Report. But miners have to control costs and clean up their internal cash flow, too. Meanwhile, investors who have run up gains in traditional investments are looking for new asset classes. King shares the names of a few well-managed companies in the gold, graphite and rare earth space that are husbanding their assets and adding value, sometimes in unexpected ways.
The Gold Report: Byron, gold is above $1,300/ounce ($1,300/oz)—although not by much—and silver topped $20/oz. What was holding their prices down, and what are the fundamentals that will move the prices going forward?
Byron King: The short answer is that, for all its faults, the dollar has strengthened, which holds down gold and silver prices. The longer answer is that gold and silver are manipulated metals. That is, the world’s central banks have an aversion to things they can’t control, and one of the things that they can’t control is elemental metals like gold and silver.
Let’s ask why the dollar has strengthened. The U.S. is probably in its weakest geopolitical situation in decades. The Wall Street Journal on July 17 had a front-page story about the confluence of crises across the world—Ukraine, Middle East, Southeast Asia—all of which are profound challenges to American power militarily, diplomatically and economically. But the dollar is still holding up. Why?
I believe the dramatic recent increase in U.S. energy production is what’s behind the stronger dollar. With more oil and natural gas from fracking, the U.S. is the world’s largest energy producer. In addition, we’re importing far less oil and exporting a lot more refined product. It helps the dollar.
Still, when I look at the big picture for gold, I see a resource whose production is challenged on the best of days. Output is declining in the major traditional sources: South Africa is in decline; Australia is challenged; some of the big plays in Nevada are getting long in the tooth.
The majors have their own challenges. Take for example, the on-again, off-again courtship between Barrick Gold Corp. (ABX:TSX; ABX:NYSE) and Newmont Mining Corp. (NEM:NYSE). It’s not that companies can’t make money mining gold. But the Barrick-Newmont dance indicates how important it is to cut costs in this environment. This potentially massive gold merger is all about cutting costs, and it hasn’t happened because of the corporate politics of whose costs get cut.
TGR: Is there a cycle that builds on itself? As the gold price goes down, companies—especially the majors—spend less on exploration and development, which depletes their reserves, production declines and their costs increase. Are we in that part of the cycle where lower prices are setting the stage for less supply and the need for a higher gold price later?
BK: Yes, exactly. Falling supply and static price makes a classic economic case. We are setting the stage for less supply and higher prices. The market is dancing around the reality, but it’s still the reality. Consider that, in the last year or so, gold has been as cheap as $1,200/oz. In late March or early April, the price almost touched $1,400/oz. That’s a 16–17% price swing in two months. Is this the sign of a well-balanced market?
Now consider how macro-events drive things. In the first half of 2014, geopolitical events—Ukraine, Syria, Iraq—drove the gold price. And to me, these locales bring it back to that dollar-energy relationship.
Iraq produces 2.5 million barrels (2.5 MMbbl)/day of exportable oil. In June, when it looked as if Iraq might not survive, the idea of those 2.5 MMbbl/day being taken out of the market helped drive the price of gold from $1,240/oz to over $1,300/oz.
Or look at Ukraine. It straddles key gas export lines to Europe, and the situation involves Russia, which is one of the world’s largest energy producers. Problems with Russia, let alone sanctions and such, affect perceptions of future energy supply, which tends to benefit the dollar.