Gold News

Bad News for Gold from the Strong Dollar

Expect a drop to $1200 near-term, says a man who called the bull market in 2001...
 
ERIC COFFIN is the editor of the HRA ( Hard Rock Analyst) family of publications.
 
With a degree in corporate and investment finance, plus extensive experience in merger and acquisitions and small-company financing and promotion, Coffin has for many years tracked the financial performance and funding of all exchange-listed Canadian mining companies, and has helped with the formation of several successful exploration ventures.
 
One of the first analysts to point out the disastrous effects of gold hedging and gold loan-capital financing in 1997, he also predicted the start of the current secular bull market in commodities based on the movement of the US Dollar in 2001 and the acceleration of growth in Asia and India. 
 
Now Coffin tells The Gold Report how the continuing strength of the US Dollar is bad news for the price of gold, and believes that in the short term a price of $1200 per ounce is possible, though there is room now for an oversold bounce...
 
The Gold Report: You told us last year you were "neutral" on the state of the US economy. Since then, the headline unemployment number has improved. Even so, as David Stockman, former director of the Office of Management and Budget, says, there have been no net new jobs created since July 2000, and jobs paying over $50,000 per year have disappeared by 18,000 per month since 2000. What is your view of the health of the US economy?
 
Eric Coffin: I'm more positive than neutral these days, but I do agree somewhat with Stockman. As unemployment falls toward 6%, we would expect an increase in wage gains. But we're just not seeing that. And five years into the latest expansion, we're not seeing the economic growth spurts that tend to occur coming out of a really bad recession. I don't see how the US economy keeps reproducing the 4% growth of Q2 2014 if we don't see higher wage gains and higher paying jobs created.
 
TGR: You've used the term "smack down" with regard to the recent falls in the gold price. What do you mean by this?
 
Eric Coffin: It's a wrestling term and means being thrown to the mat. This is what has happened to gold time after time, after every uptrend. The current smack down is due more to strength in the US Dollar than anything else. Gold does trade as a currency sometimes and for the past few weeks it has held a strong inverse correlation to the US Dollar. I think physical demand will ultimately determine the price level, but ultimately it can be a long time when you're trading.
 
TGR: Why isn't physical demand determining the price now?
 
Eric Coffin: It's because of trading in the futures market. When somebody dumps 500 tons there, gold has to drop $200 per ounce. The futures market can overwhelm the physical market in terms of volume and often does. Most traders in the futures market (NYMEX or COMEX) are not buying gold and taking delivery. They are trading as a hedge, or just trading. The physical market, the place where people actually buy bullion, coins and bars, is not predominantly in London or New York but rather in China and India. And because of the smuggling that has arisen in India to circumvent increased tariffs, and imports moving to cities that do not release import statistics in China, it is difficult to know how much bullion Asia is buying right now.
 
TGR: Large short-term trades in paper gold could be used to manipulate the market, and an increasing number of people believe gold is being manipulated downward in this manner. Do you agree?
 
Eric Coffin: I'm not really a conspiracy guy. That said, when we see things like the sale in August of 400 tons in about 10 minutes, we have to wonder what's going on. Again, when Germany requests its gold from the US and is told delivery will take seven years, it makes you wonder how much of that gold has been hedged or lent already.
 
TGR: Where do you see gold going for the rest of the year?
 
Eric Coffin: I think we are going to be trapped in this currency trade cycle for a little while. The European Central Bank (ECB) cut its rates. One of its deposit rates is now negative. Mario Draghi, the president of the ECB, is talking about starting up quantitative easing. If that happens, or if traders believe it will, the Euro, which has already fallen from $1.40 to about $1.28 to the Dollar, could fall to $1.20 or $1.10. And this strengthening of the Dollar is not good for gold.
 
The other factor of gold being traded on a currency basis is the possibility of Scottish independence, fear of which has already resulted in a significant decline in the British Pound.
 
TGR: Will $1250 per ounce gold lead to gold miners suspending production?
 
Eric Coffin: If gold stays at $1200-1250 per ounce for an extended period, there will be mine closures. Obviously, not all mines have the same costs, but the average all-in cost per ounce for gold miners is about $1200 per ounce. Already, some mines are high-grading to keep profit margins up.
 
Most of the large miners have already cut exploration budgets pretty significantly. We can assume that the pipeline is going to get smaller and smaller when it comes to new projects, even high-quality projects.
 
TGR: How badly will this gold price decline hurt the junior explorers?
 
Eric Coffin: It's hurt a lot of them already. It's much more difficult to raise money than it was two or three years ago, although it's probably slightly better now than early this year. That could change on a dime, of course, if the gold price falls to $1200 per ounce or rises back through $1300 per ounce. Already, quite a few companies are keeping the lights on but not much else. We desperately need a few good discoveries – companies going from $0.20 to $5/share and getting taken out. 
 
TGR: You've been visiting mine sites in the Yukon. What do you like about this jurisdiction?
 
Eric Coffin: It's a great area geologically, but it has some challenges. It can be an expensive place to work, so being close to infrastructure or designing an operation that doesn't require a huge amount of nearby infrastructure is critical. Power costs are a big item. There's no end of places in the Yukon where hydropower could be generated fairly cheaply, but that is not going to happen on a large scale unless the federal government steps up, and that would be nice to see.
 
TGR: How does Alaska compare to the Yukon as a mining jurisdiction?
 
Eric Coffin: They're similar in many ways. Alaska, like the Yukon, is not low-cost, but it is mining friendly and even farther down the road when it comes to settling aboriginal issues. The key to success in Alaska is being close to the coast or major population centers or infrastructure.
 
TGR: How do you rate copper's prospects?
 
Eric Coffin: There are several large producers that have either recently come onstream or will come onstream in the next few months. So copper is probably going to be in at least a small surplus for the next year or two. The price could fall back to $2.50-2.75/pound ($2.50-2.75/lb). I'm not terribly concerned about that. Copper should be fine in the long term and a good copper operation can make plenty of money at those prices.
 
TGR: The bear market in the juniors is now 3.5 years old. Should investors expect a general upturn any time soon?
 
Eric Coffin: I doubt it if you mean a broad market rise that lifts all boats. My expectation at the start of this year, which is looking fairly dodgy right now admittedly, was for a 30% TSX Venture Exchange gain for 2014. That is possible with only a small subset of companies doing very well, which is my expectation. Investors always want to look for the tenbaggers. It doesn't matter what the market is like and, obviously, potential tenbaggers often turn into actual one and a half or two baggers, which is just fine. You want to find the projects with the highest potential for resource growth or new discovery and management teams that know how to explore them and finance them on the best possible terms. That is the combination that gives you the potential biggest wins.
 
TGR: Eric, thank you for your time and your insights.

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