"There are more than enough impetuses to keep gold prices from falling"...
RICK MILLS hosts Aheadoftheherd.com and invests in the junior resource sector. He has been published on over 300 websites, including: The Wall Street Journal and USAToday.
In this interview with The Gold Report, Rick Mills explains why investors should Buy Gold at $1500, not cash out...
The Gold Report: Last week, gold reached above $1,540/ounce (oz.) as fears escalated over Greece defaulting on its sovereign debt, most of which is owed to European banks. One telling figure is that the risk of default is so high that the interest rate on two-year Greek bonds is about 29%.
Should we expect a continuing upward trend for gold throughout the rest of the year as Greece's debt story and the fears of contagion play out in Europe?
Rick Mills: Greece is going to be bailed out. The EU cannot let Greece default and there is no precedent for leaving; the legal complications would be horrendous.
Greece defaulting would trigger a train of defaults — European lenders reduced their risk tied to Greece by 30% to $136.3B, but they still have almost $2 trillion linked to Portugal, Ireland, Spain and Italy. Gold will hang out at the $1,500/oz. mark for a while and may be a little soft during the summer. But come fall, we're going to see gold continue its uptrend.
There are more than enough impetuses to keep Gold Prices from falling. Massive structural problems exist in the US as well. The housing sector continues to be a problem and the fiscal deficit is large.
TGR: The Fed plans to stop buying bonds at the end of the month and interest rates are expected to go up, in turn strengthening the Dollar. Could "safe haven" purchases of gold ease at that point?
Rick Mills: No, I don't believe that will be the case. In fact, I believe that the US is going to have a third round of quantitative easing, or QE3. The US has committed itself to doing anything that it can to prop up its economy and is going to continue monetizing its debt.
TGR: Where do you think gold's psychological floor is right now?
Rick Mills: For me, breaking the $1,000/oz. mark was extremely important. When India came in and bought the equivalent of 8% of a year's production at $1,045/oz., that put a solid floor under gold at $1,000/oz. Now as gold consolidates around the $1,500/oz. mark, I think that's going to be the new floor and the support for climbing even higher.
TGR: How do you think silver will react to gold? Will it continue to track gold much as it's done historically? Or will their paths begin to diverge?
Rick Mills: Silver is definitely going to track gold.
TGR: Do you think silver could get back to that $50/oz. high that it reached earlier this year?
Rick Mills: I see no reason why not. Historically, the gold:silver ratio has been 15:1 but since silver made its nominal high in 1984, the gold:silver ratio has held fairly steady at 45:1. With gold at $1,540/oz. and silver at $36/oz., the gold:silver ratio stands at roughly 43:1.
Silver will have to rise to $102/oz. to get back to the historical average with gold at $1,540/oz. The higher Gold Prices go, the more consumers will step down to silver. As the much cheaper precious metal, silver will win market share from gold buyers — especially if they think silver is undervalued compared to gold.
There was news that gold and silver bullion buying in India was up 222% over one month. The country spent $22B on bullion in 2010 and in one month in 2011 they spent $9B. There's also something going on in the Chinese market that most people don't realize — we're so worried about inflation in the Chinese market, but they actually want some inflation.
China needs to have its currency strengthened against the US Dollar so they don't get branded a currency manipulator. What that does for silver buyers in China is that it gives them a little bit of an advantage over the US Dollar buyer's base. Last year, China's currency went up about 3.5%. This year it is expected to rise 5%. That's added leverage when it comes to the silver market. The manufacturing use of silver went up 16% in China and the demand is growing as well.
TGR: In an article posted on your website, Toby Connor of Gold Scents said, "Don't let the perma-bulls fool you, this is not a normal correction, and it has nothing to do with Greece or Spain. This is the beginnings of the next leg down in the secular bear market and the start of the next economic recession/depression. And this time it's going to be much, much worse than it was in '08." What are your thoughts on that statement?
Rick Mills: The US and EU are going to do anything that they can to keep their economies afloat. Beyond credit creation and debt monetization, I think that means we'll see more investments in new infrastructure.
Upgrading and maintaining power grids, railways, roads, bridges, sewers, water, airports and hospitals is another way of putting money into the consumer's pocket. Greece is not going to be allowed to default. I really don't see the worst case scenario happening here. I don't believe it's all gloom and doom. There are bright spots and I think they're going to grow.
TGR: Is there a situation where Greece could default, but still stay in the Euro?
Rick Mills: I don't see how. If Greece defaults it would lead to an implosion of the EU. The only way out for many of the EU economies is to weaken the Euro and this isn't something the stronger economies want.
TGR: If the only way out of it is to devalue the Euro, the US Dollar could rise against the Euro and that's generally bad for gold.
Rick Mills: Yes, if it happens from the coming bailouts. But in the meantime, European economic problems will continue, the US economic recovery will continue to disappoint and doubts about China's short-term growth prospects and the ongoing fighting and tensions in Africa and the Middle East will provide support for gold at $1,500/oz.
There is still a lot of demand for gold. Consumption in China was 700 tons last year. The Chinese government has been doing everything it can to encourage gold buying by its citizens, including expanding the number of banks allowed to import bullion.
The World Gold Council believes that annual demand for gold in India will increase to more than 1,200 tons by 2020. Everything I see is bullish for gold. Gold is integral to all Indian wedding ceremonies — purchases relating to Indian weddings typically account for 50% of annual jewelry demand.
With 50% of the Indian population under 25 and approximately 150 million weddings anticipated over the next decade, the World Gold Council estimates that wedding-related purchasing will drive approximately 500 tons of gold purchases a year.
The Reserve Bank of India has granted licenses to seven more banks to import bullion; this too has helped push up demand.
TGR: Some pundits are telling investors to sell their shares in junior gold companies and take profits if there are profits to be had, and then buy those same stocks once they bottom out. Do you agree?
Rick Mills: Investors in this game need to look at the best times to buy and sell. Historically, the best time to pick up junior resources is during the summer doldrums. A company goes to work all summer, there is very little news flow and no one around to pay attention anyway.
It does a large drill program and news from the drilling comes out in the fall. That's traditionally when you want to be a seller. Then the cycle starts all over again in the late winter and early spring as companies put together work programs and a budget.
Right now, investors should be looking at the stories, looking at the management teams and slowly picking up promising stocks. I look for a mine that's going to get bigger or a property with the propensity to give up discoveries. I'm looking for the strongest management teams that I can find.
TGR: You believe that gold and silver plays are ultimately going to hold their value over the long term?
Rick Mills: Absolutely, look for companies that you can do due diligence on and feel confident that you have a management team dedicated to increasing shareholder value through the drill bit, or acquisitions, and who put together a properly managed exploration and drill program. Investors want to pick these companies up during market weakness in the summer doldrums so positions can potentially be sold for a profit in the fall.
TGR: That seems like sound advice. Thanks, Rick.
Rick Mills: You are welcome.
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