Denver (Kitco News) - Gold mutual fund managers and mining analysts attending the 2013 Denver Gold Forum say they remain upbeat about the metal’s prospects for the longer term despite the slide in prices in 2013.
For one thing, they suspect that monetary accommodation will be here for a while, despite all of the fretting about when the Federal Open Market Committee might start tapering the bond-buying program meant to push down long-term interest rates, known as quantitative easing. Further, there are expectations for inflation, uneasiness with rising U.S. debt and continuing debasement of currencies.
Several outlined their views on the sidelines of the annual gathering that allows investors, analysts, mining executives and others to hold a series of one-on-one meetings.
“We think generally gold is going to continue to deserve to be a good portion of investors’ portfolios and probably an increasing percentage as we go down this current road with U.S. government fiscal and monetary policy,” said Thomas Winmill, president of Midas Management Corp.
Gold slid since the start of the year largely due to expectations of Fed tapering.
“It will come at some point,” said Ralph Aldis, a portfolio manager for gold and natural resources with U.S. Global Investors. “But a lot of that has been factored into the market.”
Therefore, he doubts gold will fall to the $900 to $1,000 area whenever the Fed does act, as some bearish analysts have suggested. He said the U.S. economy still does not appear to be overly strong and the country is not solving its debt problems.
“I do think gold will trend higher,” he said of the longer term.
Others cited a view that monetary accommodation isn’t going away, even if there is some Fed tapering. Even if the Fed does pare quantitative easing, there may well be a continued need for some kind of monetary stimulus, whether it be another bond-buying program or something else, said Christos Doulis, mining analyst with Stonecap Securities
Brian Hicks, co-manager of U.S. Global Investors’ Global Resources Fund, offered similar sentiments, especially after policymakers last week opted to not start tapering when financial market had already factored this into prices. In fact, after seemingly going to great lengths to be transparent and signal a scaling back of bond purchases to the markets, policymakers seemed like they were retracting at the last moment, Hicks pointed out.
“With the Fed delaying their tapering, it’s a signal that it will be difficult to break away from the liquidity that the Fed is providing,” Hicks said. “It will be difficult for them to stop printing money.”
Winmill said his firm anticipates that gross-domestic-product growth in the U.S. will be limited, inflation moderate in the near to medium term and unemployment perhaps leveling off at current levels.
“This environment…is going to continue to foster a negative real interest rate environment, which is typically good for hard assets,” he said. Otherwise, if investors hold short-term Treasury notes with a yield below inflation, they will lose purchasing power.
Meanwhile, the U.S. continues to spend more than it collects in taxes, meaning rising deficits, Winmill continued. He cited July data showing government expenditures of some $300 billion but revenues of only $200 billion.
“So one of every three dollars the government spends is borrowed money,” Winmill said. “In fact, the current fiscal imbalance is accelerating the moment of some kind of very difficult event for the United States government.”
He listed three potential ways for the government to deal with the debt. One is to hike taxes, although the debt is so large that “you cannot tax your way into solvency.” Another is to renege, which would be a “political time bomb, particularly as the United States population ages.” The most politically acceptable way to deal with the debt is through “reflation,” he continued.
“We see those three courses of action – taxation, reneging on obligations and inflation – as probably very conducive to someone owning gold,” Winmill said.
Inflation Expectations, Currency Issues Gold Supportive
Doulis and Hicks see prospects for building inflation to underpin gold.
“I do think we are seeing inflation in prime commodities, things like oil and steel,” Doulis said.
Some might argue that broader inflation has not kicked in yet despite monetary accommodation. But, Doulis and Hicks said, inflation likely will as money moves more from bank balance sheets and into the hands of households, meaning increased spending in the economy.
Currency issues were also cited.
“Long term, gold can only go up because of the lack of fiscal discipline of the major world economies, which then translates into overall weaker currencies as countries print money,” said Dan Hrushewsky, senior analyst for gold-mining equities with Jennings Capital. “Weaker currencies, especially the U.S. dollar, would mean a higher gold price.”
Hicks also cited pressure on governments in a globalized economy to allow their currencies to weaken to maintain a manufacturing base.
Other factors that have weighed on gold so far this year, Hicks said, is the creep higher in Treasury yields and a movement by some investors out of precious metals and into other assets such as equities. The Dow Jones Industrial Average and S&P 500 hit record highs.
“Gold has seen a cleansing, which is natural,” Hicks said. “It is natural that you would see a bit of a correction, consolidation and then another advance.”
One Analyst Favors Contrarian Investing
While he described himself as bullish on gold for the longer term, Doulis said he also favors what he called “contrarian fundamental investing.”
“You might have a great thesis that could ultimately play out correctly,” he said. “But in terms of getting to that end point, it can be a very bumpy road. So, what I would suggest is when everybody is telling you to buy gold and the pundits on TV are trying to outdo themselves with forecasts as to where the price is going, it is probably time – even though the longer-term prognostication is positive – to get out.”
As an example, he recounted a couple of years ago when gold got up the $1,800-$1,900 area and forecasts abounded for $2,200 to $2,500 gold.
“Of course, we all know where it went from there,” he continued. The yellow metal began a slide that briefly took it below $1,200 an ounce earlier this year, although it’s now just over $1,300 again.
“I think that the fundamental thesis for gold is still intact,” Doulis said. “But when do you buy it? You buy it when everyone on the television is saying there is no need to own it….Buy when others are selling.”
Despite the price fall, many longer-term investors remain in gold due to its role as a safety net against unforeseen events that roil other markets, rather than being preoccupied only with capital appreciation.
“They still believe in diversification and the benefits of gold – the fact that it’s an inflation hedge,” Hicks said. “It’s also a hedge against monetary instability.”
Aldis said volatility in gold bullion over time is actually less than in the S&P 500. “In reality, you should have both as a part of your mix,” he said.
