What Currencies Mean to Gold Miners

Weaker commodity currencies are boosting some gold miner earnings...

RALPH ALDIS rejoined US Global Investors as senior mining analyst in November 2001, and is now responsible for analyzing gold and precious metals stocks for the World Precious Minerals Fund (UNWPX) and the Gold and Precious Metals Fund (USERX).

Now in 2016 he says mining-stock investors have to pay attention to the way currency moves affect earnings, as he explains in this interview with The Gold Report...

The Gold Report: This year started with a bang as China's machinations rocked markets all over the world and set off a gold rally. Is that sustainable? What did we learn?

Ralph Aldis: China was the main driver of the volatility that started out the year. The economy is not collapsing. Growth will just be a little bit slower than expected.

I also think people are losing faith that the Federal Reserve will be able to maneuver the markets this year. What's really been disturbing to me is how much central banks all around the world are intervening in stock markets. To me, that's a recipe for disaster.

Gold was the beneficiary of these dark notes. Investors need to understand that, regardless of what the pundits are saying. All investors need an asset plan designed around individual timelines. Then they have to stick to it and rebalance.

TGR: Frank Holmes points out on his Frank Talk blog that gold actually performed well in 2015 in some currencies. Where are you looking for gold to do best this year? What does that mean for North American investors?

Ralph Aldis: The Canadian Dollar was a standout last year. We are looking at $1600 per ounce gold prices in Canada right now. The same is true for Australia. In other countries – Russia and Brazil for instance – it has been even more pronounced because of the Ruble and the Real, but there just aren't that many names to invest in there right now.

I think the Canadian Dollar is still going to weaken a little bit more this year. We saw the Bank of Canada hold off on cutting rates at its last meeting. I still think the bank is going to end up having to cut rates at some point in the not too distant future. The Canadian Dollar will get weaker and that will be very positive for the metals prices. On the Aussie side, I see the same trends happening. Gold companies operating in those regions have an advantage over some of the other miners out there.

TGR: And do you believe the US Dollar will continue to be strong?

Ralph Aldis: Yes, but I don't think we're going to see a runaway US Dollar. Cornerstone Research has shown that historically the Dollar rallies up into the first rate hike and then generally tends to fade after that. With the emerging markets' currencies down so much, that's probably going to trigger some growth in those regions, too.

TGR: One of the things that you and Frank follow is the Purchasing Managers Index to measure economic health. What is the cross-above trend telling you about global growth?

Ralph Aldis: The most recent global manufacturing chart showed cooling in December, which resulted in the one-month reading falling below the three-month moving average. The average had been rising slightly since September, but the last two data points from November and December were kind of trending down. The recent market turmoil indicates we are probably still looking at some weakness this year.

TGR: The other thing that you've written about is the strategy of royalty companies to buy when the streams are on sale. What does that tell you about where we are in the cycle?

Ralph Aldis: That's an interesting dilemma right now. The royalty companies have traditionally been one of the best places to be long term, and I think that still probably holds because they have a very diversified risk portfolio. The big challenge now is they don't have the capital available to do more. They could borrow.

TGR: With all of this going on, how are you adjusting the US Global portfolios to prepare for what could happen in 2016?

Ralph Aldis: We haven't changed too much. Most of our big positions are still oriented along the same weightings. If we do get a gold rally, some of the highly leveraged names may be the bigger beneficiaries. I always have to be cognizant of that. Last year, I avoided some of the highly leveraged names, but that may change this year. I do feel that we're getting closer to a turning point.

There are a lot of reasons for that. The Fed is trying to raise rates. In a news article recently, Goldman Sachs advised selling the 10-year Treasury bonds, and Morgan Stanley was saying buy the 10-year because its analysts are expecting 10-year yields to drop another 50 or 60 basis points. All of this stress could lead to a big pull away where the market just loses confidence. Historically, when the Fed and all these governments make a mistake, people decide it is a good time to own some gold.

TGR: How about some last words of advice for investors looking to make the most of their portfolios in 2016?

Ralph Aldis: Investing is a discipline. I always stress the importance of an asset allocation plan and rebalancing that plan regularly. Gold is always an important part of that asset allocation mix, which so many investors just don't consider. Even brokers don't always know what's going to happen, so a good balanced asset allocation plan tethered to where you are in life is the key to building wealth.

TGR: Thank you for your time, Ralph.