The US Dollar Index is nearing 100 yet again, but has not broken through. Peter Krauth, publisher of realmoneyreport.com sees more positives than negatives for the precious metals. One bright spot is gold priced in some of the largest currencies worldwide.
Peter Krauth is founder and publisher of Real Money Report (realmoneyreport.com),
focusing on value within precious metals, resources, and other investment sectors.
He's an analyst and author whose work has been featured on numerous investment websites.
Palisade Radio Host, Collin Kettell: Welcome back to another episode of Palisade Radio. This is your host, Collin Kettell. On the line with us today is Peter Krauth. He is a new guest to the program. We are happy to have him on. He is the publisher of Real Money Report. That is www.realmoneyreport.com. Peter, welcome to the program.
Founder and Publisher of Real Money Report, Peter Krauth: Thanks very much, Collin. Glad to be here.
CK: Yeah, we met a couple of weeks ago. You put together a great article on a new mining technology that we will touch on at the end of this interview. We got to talking on the phone and I realized you were a wealth of knowledge. You are very ingrained in the gold and silver sector. Of course, it has been four years of a bear market. You had some positive words to add when I asked you how much longer this can go on. You talked about other currencies actually showing strength for gold, whereas the US dollar, of course, is not. What is going on in the gold and silver sector right now, Peter?
PK: Yeah, well, the first thing, I think, for your listeners to keep in mind, at least my opinion, is that I think we are obviously much closer to a bottom after four years of this kind of a bear market actually than anything else. Since gold and silver are priced in US dollars, obviously, it has some effect on their ultimate prices. I think over the long term, not so much short term, near term, but definitely I think the US dollar and its strength will have some effect.
Right now I am watching very closely the US dollar index. From sort of early to mid-2014, it actually soared from the level of about 80 to 100 where we have touched 100 twice earlier this year. We backed off a little bit. But about a month ago we were back down to 94, and in the last sort of week or so we have been actually and very close to approaching 100 again. That is certainly an important sort of psychological level. If we happen to bounce up at 100 and that acts as resistance and we move back down and start heading down, trending down, I think that actually could be pretty significant as a support for gold and silver prices. If we actually go through 100 and head higher, then I think that will act as a head wind for gold.
I think that is a key level right now to watch. Certainly, I am sure a lot of technical traders and analysts are keeping a close eye on it. I do not follow things exclusively. I am sort on the technological side, but because I know that it is tracked very much, I certainly am keeping a close eye on what that does. I think, too, a lot of people watch the strength of the dollar and it has a sentiment sort of effect on how gold and silver are priced in US dollars.
But I think also what a lot of investors, gold and silver investors, are missing is what has been happening in gold and silver priced in lots of other large and important currencies. For example, if you look at the Canadian dollar - sure gold priced in Canadian dollar is down from its 2011 peak by about 25%, but it is still actually up 5% over the last five years. In the Brazilian Real, it has actually just recently set a record, an all-time record, at 4,500 Reals, which is up 75% in the last five years. In Indian Rupees, it is down 25% from its peak, but it is actually up 17% over the last five years. In the last five years once again, in the Yen, it is up 18%. In South African Rand, it is up 63%, and in the Russian Ruble it is actually up 68%.
It is clear that gold is in a bull market. Perhaps not in the US dollar, but it is in a bull market in several relatively widely use currencies. It is perhaps misleading to just think that gold is down because many of us will look at it in US dollars. I am actually guilty of that quite a bit myself. But when one makes the effort to look at it in lots of other currencies it is actually quite healthy and doing quite well.
CK: Well, the action in the US dollar over the past couple of years has certainly been disheartening for gold investors. Unfortunately, so much is resting on that relationship between the US dollar and gold. Even for companies that are operating in these countries where the currencies are performing poorly against gold, many of those companies are still listed on US dollar indexes. People have still have in mind the US dollar at all times when they are thinking about the price of gold.
I guess my next question is do you think that the US dollar index can crack, and when it cracks do you think it can go quickly? I guess what I am getting at is once this rally gets underway- it has been five years, it has been very bad so far. How long does it take for things to turn good again?
PK: Yeah, I mean I do agree that it can turn very quickly. If I had to sort of put odds on it I do think that we are more likely to see weakness in the US dollar. It is probably more likely to actually peak at 100 or somewhere near 100. I think the market is pricing in a rate hike by the Fed. We just got word recently - actually, less than an hour ago - that that was likely to be the case this December. I think it is a bit of in reverse, buy the rumor sell the news. I think that if this is kind of what the market is waiting for once the rate hike actually takes effect, because that has been priced in already, I think that actually we can see gold and silver take off pretty quickly based on that.
CK: A common theme that we spoke about on the show for the past few weeks is we have looked at the HUI against the price of gold and said, "Wow!" Even though the HUI is higher than it was in 2001 when compared to the price of the underlying metal, it is cheaper by almost any metric. Meaning the value of these gold stocks, particularly the ones that are operating and have decent cash flow or some cash in the bank, they are super cheap. We have maybe never seen them this cheap before. What do you think on the gold stock side? Does it hinge on the gold price and the US dollar going up for this to resume a bull market?
PK: Well, I think that one of the most important things for viewers to actually keep in mind in gold is hated. There is not much else that you can say to elaborate on that. That is exactly why they should be interested! Like you said gold stocks are actually now cheaper relative to gold than it has ever been since the beginning of this bull market if you go back to 2001. I think that the case for gold stocks is in fact extremely compelling. That does not mean that there is no downside left, so investors still certainly need to be cautious. But there is no question. This is one of the absolute most hated sectors out there. If you have the smallest sort of contrarian bone in you, you need to be looking at this sector. I really believe that.
CK: Well, in the notes that you sent over to me mirroring what you just said, you said the case for gold stocks is very compelling but still time to be cautious. How do your readers get instructed to do that? How do our listeners take call it a sizeable bite into this market while still being cautious. What do you suggest?
PK: Well, I would say the first thing is if you do not already own some or if feel you do not own enough, buy some gold. Buy some silver. There are different ways that you can do that, physical gold and silver, of course. For example, there is a particular ETF that I recommend in my newsletter. It actually right now allows you to buy gold at a 10% discount. That is not easy to come by. The reason for that is because it is a closed end fund.
When sentiment is low, when sentiment is weak towards the sector people are actually are willing to pay less for the underlying value. That is something that does not last. This ETF has traded at premiums up to 10% and even 15% and 16% in the past, and that typically was the case when sentiment was very strong. The markets will turn. That will come back. That sort of spread between a 10% discount to, say, a 10% premium on these holdings is 20%. That is essentially baked in if someone is willing to buy now and hope for better days. That is certainly one way to get started.
I am also looking at a mid-tier gold royalty company. This company has outstanding management. They have had major past successes. They are actually very, very well cashed up; hundreds of millions of dollars of cash. They have got no debt, and that is one that I think is actually going to do extremely well over the next, say, three to five year term. Yeah, other than that, this particular company is not in my list of recommendations right now, but an explorer-developer by the name Paramount Gold Nevada. The previous version of the company sold off a property to Coeur D'alene Mines. Today, their flagship is a project that they are developing called Sleeper. I have actually been down to Nevada on site to visit this project.
Now just sort of in a nutshell, what is really interesting and compelling about this company is their cash position is, say, about $9.3 million. The market cap is about $9.5 or $10 million. A recent preliminary economic assessment on this flagship project values it at $167 million with gold at $1,250 and silver at $16 because the deposit has both some gold and some silver in it. Anyone who is willing to buy this company at current prices is getting almost a dollar's worth of cash for a dollar invested and getting the entire development project for free that actually looks quite robust. The value is just tremendous.
Other than that, I am also looking at a smaller mining/technology company. Now what I am really excited about here is this company has its own mine. It is looking to develop in Quebec's Abitibi Region. But next to that what makes it really different and compelling is that it got a mining innovation equipment that they have developed themselves. It is a technology called thermal fragmentation.
To sort of cut to the chase, to tell your listeners what the big advantages are is that because it is such an effective way to mine, especially narrower veins of gold, it actually cuts cost about 50%. It cuts time of extraction to a fraction of normal mining methods, and it actually cuts down the ore that is extracted to get equivalent amount of gold down to about 20% of what traditional mining methods require. It is also very environmentally friendly. It is actually very low in terms of water use, power usage, and processing and milling is also once again a fraction of what traditional mining methods are because the process of extraction actually produces fragments that are somewhere around zero to 13 millimeters. Processing, milling, crushing, all of that side of treating the ore is much faster and much less expensive. That is how you get the costs to produce gold at somewhere around the 50% range of traditional mining methods. This company, Nippon Dragon Resources, the symbol is NIP, very, very exciting and very compelling. It is certainly a smaller company. It is going to be higher risk, but the potential is actually tremendous.
CK: Yeah, what you are talking about is really a game changer. In fact, we came in to contact this. You wrote up a great piece on Nippon Dragon, highlighting the technology. It was a company I am familiar with. The market recognized the value that you saw. The company is up a couple 100% since then which is great to see for any mining company in the bottom. But really underlying what you are talking about here is you can be cautious right now investing because not only are the bad companies cheap but the good companies are cheap and there is a lot of good stuff out there.
I think that seeking educational information and expert advice from somebody like Peter is very helpful. I do it myself; the more digging that people can do for you, the better that your choices are going to be. Peter, I want to ask you if you have any additional information or ideas or thoughts with the market the way it is right now before we end today?
PK: I think that something to keep in mind is we tend to focus a lot on the daily. We tend to focus a lot on the very short term. I think it is probably a mistake, especially when it comes to this whole sector, I am going to say precious metals in particular, I do not think that there is a way for central banks to have gotten away with all of the money printing and all of the quantitative easing and the low rates that they have had for seven years at this point, at least as far as the Fed is concerned, without there being, eventually, the reaction that they were actually looking for which is inflation, and probably at some point considerable inflation.
We know, historically, precious metals do extremely well. This setup is building up. It is really setting itself up for an ideal scenario at this point. I think that if anybody wants to look at the sector more closely and even if it is simply to prepare oneself for a proper hedge, precious metals is definitely the way to go and worth looking at very closely.
CK: Okay, thank you so much, Peter Krauth, everyone. He is the founder and publisher of Real Money Report, that is www.realmoneyreport.com. Peter, thank you so much for all your thoughts for our audience today.
PK: Collin, thank you. It has been a pleasure.
Disclosure: I am/we are long RCCMF.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.