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Will US Growth Hurt Gold Prices?

Gold Prices could prove less vulnerable to US growth than buoyed by US debt...

FORMERLY director of research at Brawley Cathers, investment strategist at both Blackmont Capital and Hampton Securities, US economic forecaster at Bank of Canada, senior commodities manager at Bank of Montreal, and a 10-year veteran of the oil industry with Gulf Canada, Chevron Canada and Petro Canada, Mark Lackey has three decades' experience in energy and minerals' research and banking.

Mark Lackey is now investment strategist at Pope & Company Limited in Canada, an up-and-coming institutional resource boutique dealer. Currently forecasting modest growth and slight inflation, here he tells The Gold Report why that shouldn't drive a continued correction in Gold Prices – and also shares his insights into what makes Gold Mining companies prosper...whether they've got an NI 43-101-compliant estimate or not.

The Gold Report: Mark, when you worked for the Bank of Canada, you made regular forecasts on the US economy. What is Pope & Co. expecting from the US economy in 2011?

Mark Lackey: We're expecting the gross domestic product in the second and third quarters to be in the 3% range with inflation around 1%. We're not looking for huge growth, but there could be some improvement in the labor market and in industrial production in a scenario with little inflation. Unlike some people who think deleveraging is going to continue and cause subpar growth in the US, we see potential growth of 2.5-3.0%. That's not bad.

TGR: That might not necessarily be good for Gold Mining stocks or the gold market in general...

Mark Lackey: We don't think there will be much of a decline. We thought there would be a little bit of a correction in the short run – and that has happened – and we think the Gold Price could go a little bit lower. But I don't think the strength of the US economy is so much an issue with gold. The bigger issue is that investors will look at the debt problems in the US and ask themselves how those are going to be resolved.

Gold Prices could be back up to close to $1600 an ounce by the end of the year. Some people on the Street are forecasting $2000, but we are not quite that bullish. The underlying factor is that some investors in the world aren't comfortable with any paper currency and they're more comfortable owning gold.

TGR: What will push gold to that level?

Mark Lackey: Investors will start to realize that commodity prices are rising. There's been a pretty large rise in copper and a big move in silver. Companies are going to try to pass production costs through, which could lead to inflation coming out of the commodities sector. In addition, as the unemployment rate decreases in the countries comprising the G-7, the market is going to realize that inflation can come back. It won't be at the same levels as in the '70s when inflation hit between 16% and 20%, but there are some indications that inflation is going to start to come back and will feed into gold's performance.

TGR: Will gold be the only beneficiary, or are we going to see continued upward momentum in other precious metals like silver or platinum group metals like platinum and palladium?

Mark Lackey: We like silver because it doesn't get recycled. Also, 90% of the silver in the world comes from secondary sources as a byproduct of copper or nickel. There aren't many pure silver mines out there. The demand for silver has increased as well, because investors use it as a hedge against currencies and it also has a number of industrial uses. Although silver had an incredible year last year, we don't expect that performance to continue. However, we certainly expect that Silver Prices will rise again this year.

Palladium could benefit from any continued rebounding in the auto sector because it is used in catalytic converters.

TGR: We saw some interesting things in the Gold Mining space in 2010. Namely, a number of companies entered production without an NI 43-101 resource estimate. Do you expect more companies to move forward without those technical reports?

Mark Lackey: I think the technical reports were instituted when there were scandals in the '90s and the market was looking for a standard approach in order to determine the size of a company's resource. The regulators said, Okay, we're going to try to protect investors, and these reports will provide investors with inferred and indicated results that will provide an estimate of the resource size. The flip side is that companies will have various types of deposits like a gold deposit that is very nuggety that turns out to be a higher grade in a bulk sample than when it is drilled. But in order to be NI 43-101 compliant, they have to drill the property. Sometimes, there are cases where the 43-101 actually understates the resource.

TGR: Do you see that as a positive trend, though? Doesn't that open the door to somewhat less-reputable companies perhaps exploiting that trend?

Mark Lackey: There's no reason to worry because the companies that have the labs that determine the drilling results have rules and regulations that must undertaken or they will be out of business. Also, the vast majority of companies are likely to get their 43-101s quickly.

Earlier you said you doubt that silver will see another increase of 83%, but could we peg that down a little bit? Could it maybe go to $40 by year-end?

Mark Lackey: Silver Prices could reach the high $30s, somewhere around $37 or $38. In about three years, we could see $50 silver. I think we've got a 10-year cycle for commodities left; so, silver could be $75-80 down the road.

TGR: Do you have some parting thoughts on precious metals, in general?

Mark Lackey: I was at a meeting yesterday where a number of people were suggesting that the tide had turned when they saw the weakness in Gold Bullion and Silver Prices, but I don't think that's the case. Not every country in the world feels comfortable with paper currencies. Russia and China are trading with each other in their own currencies – they're no longer using the US dollar. Also, there is a limited amount of gold and silver in the world. It's been hard to increase the supply of gold. The supply/demand issue is one of the reasons that I anticipate a higher price by year-end.

TGR: Thanks so much for your time, Mark.

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