Why hasn't gold hit $2,000/oz? Doug Silver blames U.S. dollar
If gold really is supposed to shine during tough economic times, former International Royalty Corp. founder Doug Silver wonders why gold prices haven't soared much higher by now.
Author: Dorothy Kosich
Posted: Friday , 27 Aug 2010
mineweb.com
RENO, NV -
If gold does best during times of uncertainty and fear, Balfour Holdings Chief and private investor Doug Silver said it should be doing much better.
In his annual talk to the Geological Society of Nevada, Silver, the founder of International Royalty Corp. (IRC) and founder of Denver-based mining analysts Balfour Holdings, said, "If we ever wanted a time for gold prices to take off, we are there." Silver sold IRC to Royal Gold earlier this year in a Cdn$749 million cash-and-shares deal.
Silver told his audience of exploration geologists that he is "quite surprised that gold hasn't gone to $2,000/oz."
"So, why isn't gold doing better?" he asked the group. It should be much higher in real terms, Silver believes.
As most investors who follow gold already know, gold does best during times of uncertainty and fear. Thanks to spiraling deficits, ballooning government debt, wild volatility in the stock market, fear of economic withdrawal with the end of stimulus monies, and an unusually uncertain Fed Chairman, the environment is ripe for $2,000/oz gold.
Other factors which should spark a higher gold price include a pronounced lack of credit and business confidence, and the stagnation of global gold mine production.
Meanwhile, as the Chinese Yuan exchange rate increases, gold is becoming cheaper to buy which should also increase demand among the gold-loving Chinese.
Even the experts are bullish about gold as UBS found when they interviewed 80 representatives of sovereign funds, central bank managers and multilateral institutions of US$8 trillion of investments. They believe gold will be the best performing asset this year.
They also feel the U.S. dollar will continue to be the primary reserve currency for the next 25 years, with gold the next most popular.
Silver suggests that the U.S. dollar may be holding gold prices back from the $2,000 per ounce mark.
In his analysis, Silver referred to a recently published Wall Street Journal article, which suggested gold has no real correlation with inflation or deflation. Instead, author Jeff Opdyke suggested, gold has a better correlation with the U.S. dollar, especially during the past three decades.
Silver suggested, "If you believe that the U.S. dollar will weaken with respect to other currencies, then gold prices will go up. If you think the U.S. dollar will strengthen with respect to other currencies, then gold prices should go down."
In Silver's opinion, "If you follow the U.S. dollar, it will give you a better sense of where gold is going than all the [rubbish] the gold newsletter writers put out."
Precious metals and base metals investors should keep an eye on the following indicators, Silver advised:
--Negative setbacks from the end of the Federal Stimulus package
--Expiration of tax breaks along with 80 major U.S. tax code changes in 2011 Silver predicted net taxes could go up 30 to 40% mainly due to the elimination of a lot of deductions
--The U.S. Standard of Living needs to decline because "we are living way beyond our means" and federal entitlement programs such as welfare, unemployment and Social Security can't keep up with the growing ranks of the unemployed or under-employed
--Many state budgets are already on the verge of bankruptcy and will look to the federal government for financial bail-outs. Silver is concerned that a number of countries and state and provincial governments are seriously considering raising mining taxes as a way out of debt because mining is currently one of the few profitable global sectors. Worse yet, it is an election year during which many newly elected lawmakers will be looking to mining as an answer to public debt woes.
Meanwhile, Silver also advises investors to keep a close eye of China which has surpassed Japan as the world's second largest economy and surpasses the United States as the world's largest energy consumer. Nevertheless, Silver suggests, If Chinese GDP growth decreases, a huge amount of metals now consumed by the Chinese will no longer be of concern to the country.
The retirement fundamentals of baby boomers are also in big trouble due to lower incomes, less share price appreciation on investments, and way too low munis, banks and treasury rates. The result is less discretionary income that makes fixed-income living increasingly difficult. He believes the weakening financial state of baby boomer retirees will have a profound impact on America next year.
During a question and answer session following his talk, Silver was asked to comment on the outlook of various metals.
"Copper's had a very interesting year," Silver noted. He believes copper can "easily sustain a $3-plus price tag.
Silver also advised that China is now exporting molybdenum, which he suggests is not good news for global moly producers. He observed that China rarely exports any metal due to the country's voracious metals consumption.
The critical rare earth elements shortage in the United States is not exaggerated, Silver advised. Meanwhile, he added, China is buying rare earth deposits outside of China to ensure their REE monopoly.
Silver stressed that the REE neodymium "is extremely important," especially the need to build a neodymium [rare earth magnets] plant in the United States.
A drawback to REE minerals and metals mining investment is the fact that manufacturers really don't require a large volume of these elements. Silver observed.
Although considerable media coverage has swirled around lithium, Silver observed, "Most of the projects I have read about, I wouldn't invest in."
The real sleeper metal, as far as Silver is concerned, is zinc-"the one metal where we really haven't had a world-class deposit in a long time." |
