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Summary

  • Real interest rates are going to remain low for a while yet; that news caused gold's price to increase.
  • Learning about sector rotation and macro events will make you a much better investor than clinging to conspiracy theories.
  • Metals are going to get much scarcer, and prices are going to get very dear.

Juniors can't fund their projects, which means that the majors' reserves will continue to shrink. Rick Mills argues that this process can have but one result: higher metals prices across the board. In this interview with The Mining Report, the owner and host of Ahead of the Herd.com shares his outlook on precious metals.

The Mining Report: Last month, the price of gold rose over 3% in one day. Can we ascribe this to the conflicts in Ukraine and Iraq or the unraveling of Chinese commodity financing deals?

Rick Mills: I don't think those things had anything to do with it. The unraveling of Chinese commodity financing deals was mostly about copper. While the situation in the Middle East is certainly affecting the price of oil, I believe that Federal Reserve Chair Janet Yellen has more to do with the price of gold than anything else going on in the world today.

TMR: You're referring to her press conference of June 18?

RM: Yes. She confirmed that the tapering of bond buying will continue, but more important was her announcement that the Fed's zero interest rate policy will continue. Real interest rates are going to remain low for a while yet; that news caused gold's price to increase. Below is a chart created by U.S. Investors. It shows in stark clarity the relationship between real interest rates and gold's price.

TMR: Many goldbugs believe gold and silver prices are manipulated downward by central banks. Do you agree?

RM: No, I don't. I almost wish it were true. If it were, I could sit back and play the markets knowing exactly what was going to happen next. This claim of manipulation is just an excuse for being constantly wrong. It's a business model to sell gold off your website and expensive newsletter subscriptions. Learning about sector rotation and macro events will make you a much better investor than clinging to conspiracy theories.

TMR: Do you have any thoughts on where the prices of gold and silver will go in the second half of 2014?

RM: Higher sooner rather than later. That goes for copper, nickel, tin, zinc and pretty much any mineral. It's a question of supply and demand. Junior resource companies own the world's future deposits. They buy claims from prospectors, work the projects and advance them to where they are bought by larger companies. And these mining juniors cannot get funding. So how will the majors replace their reserves? The answer is that they can't. It's just a matter of time before metals prices react to physical shortages. Think about it, when was the last time you heard of a major mining company making a discovery?

TMR: You've written at length about rising global scarcity of resources. What effects will this have on metals prices?

RM: We live on a planet with a finite resource base with a growing population. We reached 7 billion people in October 2011. The United Nations says we can probably expect upward of 10 billion people by 2050. Other reports claim that world population will reach 11.4 billion by the 2060s. Norman Borlaug, the father of the green revolution, said if we do everything that he has shown us, and there are no black swans, the earth could support 10 billion people at most.

Ecological overshoot is coming. Our freshwater aquifers, probably our most important treasure, are being sucked dry by industry and unsustainable drybelt agriculture, and poisoned at the same time through fracking. We're rushing headlong into shortages of resources and the resulting conflicts over them. The low-hanging mineral fruit has been picked. Metallurgy is becoming more complicated, energy is becoming more expensive, and labor shortages loom. The baby boomers are starting to retire en masse, and the resource-orientated talent pool is thinning out.

At the same time, massive urbanization is ongoing in Asia and Africa. As people there move into the cities, they climb the protein ladder and eat more dairy products and chicken and beef. They get cell phones and maybe a washer and dryer, air conditioning and a motorcycle. All this puts an enormous strain on supply. Metals are going to get much scarcer, and prices are going to get very dear.

TMR: You've also written about the return of economic imperialism. Do you foresee superpowers invading countries to secure resources, or will they apply pressure indirectly?

RM: I like Lenin's take on the morphing of early 19th-century imperialism that he called monopoly capitalism-an alliance between big business and banking capital that dominates the state to gain exclusive control of raw materials and control of foreign markets. And both direct and indirect pressure are being applied. Russia has applied force directly in the Crimea and is applying it directly and indirectly in Ukraine. Look at what China is doing to the other stakeholders in the China Seas and what the U.S. did in Libya for control of both water and oil. Countries need to access secure sources of minerals, energy and just basic materials. If they don't, we can expect more Arab Springs, even in developed countries.

TMR: When we last spoke, you noted the significantly higher cost of new nickel and copper projects. Where do we stand a year later?

RM: Things have gotten worse. We have not seen the demand destruction that would facilitate a drop in prices, and we're not going to.

Even after the unraveling of Chinese commodity financing deals, copper is still over $3 a pound. If you're searching for new copper deposits, you must go farther and farther afield into dangerous country.

Nickel is the same. Indonesia, one of the biggest suppliers, has decided to stop exporting raw ore. Nickel comes increasingly from laterites, and the metallurgy just doesn't seem to work on them. As a result, cost overruns are ballooning out of control.

TMR: Do you worry that environmentalists could attempt to fence off Greenland as "the world's last great unspoiled wilderness?"

RM: You should talk to the people of Greenland and ask them what they want. That sort of talk more amuses me than anything else. It's easy to preach about freezing somebody else's economic development when you already enjoy a high standard of living. I think most Greenlanders understand that when you have natural resources, you need to exploit them responsibly for the betterment of all.

Greenland has one of the world's best reporting and permitting systems. Work is going ahead.

TMR: What effect has the new royalty/tax regime had on miners in Mexico?

RM: The cost of doing business, mining, in Mexico has risen; there's no doubt about that. So much will depend on what happens to the price of silver.

TMR: Which so-called critical or strategic metal is most interesting to you?

RM: Right now, cobalt. I think a lot of attention is being focused on this metal, and rightly so, with Tesla's "Gigafactory" talk. There's no cobalt production in the U.S., and I personally don't believe there will be any. Investors will have to start looking farther afield. In Russia, for instance.

TMR: Junior miners saw a big surge in share prices last winter. Then there was a big fall off. Might we see another surge this year?

RM: We're not going to stop using metal; we're not going to suddenly stop valuing gold and silver as precious. Majors do not find the worlds mines, juniors do. Juniors' share prices have to go up; the sector has to revive for majors to replace mined reserves.

TMR: Rick, thank you for your time and your insights.

This interview was conducted by Kevin Michael Grace of The Mining Report and can be read in its entirety here.

Rick Mills is the owner and host of www.Aheadoftheherd.com and invests in the junior resource sector. His articles have been published on over 400 websites.

Disclosure:
1) Kevin Michael Grace conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor.
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: None. Streetwise Reports does not accept stock in exchange for its services.
3) Rick Mills: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.
6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

Source: Rick Mills' Econ 101 - Rising Demand And Falling Supply Equals Higher Metals Prices