The four-year-long bear market in metals stocks has resulted in an historic opportunity for investors, says Rick Mills, the owner and host of Ahead of the Herd.com. In this interview with The Gold Report, he explains that gold and other metals must rise as supply falls, so that when the market finally turns, those companies that have continued to increase shareholder value will reward shareholders many-fold.
The Gold Report: Last month, the price of gold reached a five-year low near $1,140/ounce ($1,140/oz). Then it rose quickly to over $1,200/oz. Does this tell you the bottom is finally in?
Rick Mills: Gold will probably remain, in the short term, somewhere between $1,000/oz and $1,200/oz. Medium term, when people realize the Federal Reserve cannot raise interest rates and the global economy has serious problems, gold will rise.
TGR: The last time we spoke, you said, "Federal Reserve Chair Janet Yellen has more to do with the price of gold than anything else going on in the world today." That being the case, what do you make of her recent remarks about losing "patience" and raising interest rates?
RM: Yellen's impatience reflects a concern regarding low to zero inflation. If rising interest rates are needed to curb inflation, yet there is no inflation, why would Yellen raise rates?
If Yellen does raise rates, that will mean a continuing strong U.S. dollar, and that's not something I suspect the U.S. really wants to see considering the recent poor earnings statements from the S&P 500. They have been a disaster, and they're going to get worse as long as the dollar stays strong or gets stronger.
TGR: Over the past four years, metals stocks have performed poorly, even as we have seen enormous growth in the S&P 500 and the broader equity markets in general. Now we are seeing tremendous volatility in the equity markets, which has led some observers to suggest we have a bubble about to burst. What do you think?
RM: The multinationals listed on the S&P 500 have a lot of overseas earnings, which now come in the form of much weaker currencies because of currency wars. When these earnings are brought home to the U.S., they are converted into U.S. dollars, resulting in the earnings rout I just mentioned. This will not stop as long as the U.S. dollar stays so strong, so I do see the S&P going south.
TGR: In January, you quoted Mark Bristow, "The gold mining industry [is] fundamentally broke at a gold price of $1,300/oz." If true, doesn't this mean that either the price rises above $1,300/oz, or most gold companies close shop?
RM: Absolutely. I have previously written regarding all-in sustaining costs [AISC], which is the new reporting metric for gold miners. AISC does not include costs such as project capital, dividends, working capital, taxes, financing and interest charges on debt, costs related to business combinations, asset acquisitions and asset disposals, and items needed to normalize earnings (i.e., stock options, charges for discontinued operations). With gold currently selling for US$1,200/oz, gold miners with AISCs as low as $1,000/oz are not making money, and this is not sustainable.
The producers have reacted to the collapse of the gold price by high-grading deposits, and the explorers have slashed their exploration budgets by 60%. High grading and cost-cutting will result in falling production and reserves.
TGR: Meanwhile, we have tremendous physical gold demand from Asia, and the central banks are buying and not selling gold. Doesn't the law of supply and demand tell us to expect a substantial increase in the price of bullion within the next two or three years?
RM: Demand for gold exceeds mined supply; this situation is going to get worse so I would suggest that you're right.
TGR: Where do you see the prices of silver, nickel and copper going in 2015?
RM: I wish I had a crystal ball; I don't, so I quit predicting prices some time ago. All I'll say now is that given the global economic fundamentals, and my expected lower U.S. dollar, I don't expect any of these metals prices to go lower than the low they just reached and came back up off of.
TGR: You are fond of pointing out that investors realize the greatest leverage from a rising bullion price from owning gold equities rather than owning bullion. Today, even after the four-year bear market, there are still hundreds of zombie companies on the TSX Venture Exchange. With so many juniors now trading under $0.20/share, how can investors seeking leverage distinguish between the moribund companies and those that will flourish?
RM: Investors need to spend the time doing due diligence. They must constantly educate themselves about the market and companies individually.
Investors should find those companies that, even over these last four difficult years, are still raising capital, keeping a strong balance sheet, advancing their projects and building shareholder value. The share prices of such companies are like a spring, and the tension grows ever stronger as their share prices remain at today's low valuations. When the market finally turns, this spring will move with tremendous force, and investors in those companies will reap great rewards.
TGR: Rick, thank you for your time and your insights.
This interview was conducted by Kevin Michael Grace of The Gold Report.
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.
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3) Rick Mills: I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. 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.
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Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.