The Lull for Gold Mining Stocks

Tight liquidity is impacting on equity valuations...

JUNIOR Gold Mining firms are giving Wall Street something to talk about. Despite what seems like a market dominated by bad news, promising companies with good balance sheets do exist. In this interview with The Gold Report, Philip Ker, an analyst with Vancouver-based Union Securities, takes a look at the situation. 

The Gold Report: Kitco reports that gold-specific exchange-traded products (ETPs) attracted $570 million (M) in net new funds, and holdings of gold ETPs hit an all-time high of around 77 million ounces (Moz) during the second quarter. There were also inflows into silver ETPs of $269M. Will this impact mining equities?

Philip Ker: We're in a period of extremely tight liquidity within capital markets. Any capital that's not being deployed into equities and transformed into ETPs will definitely impact equity valuations going forward. Keep in mind that exchange-traded funds do offer variable perks, such as diversification and lower management fees versus other managed investment options, which is why a lot of investors are beginning to favor them. 

TGR: On a macro level, the problems of the Euro continue to plague the US Dollar-denominated Gold Price. The International Monetary Fund recently said that there was "a sizeable risk" of deflation in the Eurozone. What is Union Securities' view of what's happening in Europe and the possible effect on the Gold Price?

Philip Ker: We believe that this is just a temporary shift out of the Eurozone, which is ultimately strengthening the US Dollar while consequently weakening the Gold Price. In the longer term, we see the Gold Price going much, much higher. The substantial leverage created by escalating US debt will cause investors to shift away from these temporary investment vehicles and back into the safety of gold. 

TGR: When we talked to you in February you were predicting an average 2012 Gold Price of $1,725/ounce (oz) and $34.50/oz for silver. Have those numbers been revised since?

Philip Ker: We're maintaining those targets until some macroeconomic things evolve and answers begin to be known, particularly concerning the skepticism within the market about the Eurozone and US debt issues. There are also several significant elections globally, including the US presidential election in November. 

TGR: You must think that gold's going to have a strong finish this year then?

Philip Ker: That's correct. We are pretty optimistic for a strong run later this year and view the current lull in precious metals and relative equities as only a temporary phase of market sentiment.

TGR: Small-cap resource equities are down an average of roughly 40% since September 2011. Why should investors continue to hold these companies?

Philip Ker: The overall perspective of the investment community is that we are in a fairly bearish cycle. Fortunately for investors, markets are never static and there's always an upside. I prefer the view to buy and accumulate when no one else believes there is money to be made. Buying at opportune times such as now positions one ahead of the herd and can churn much more profitable investments. If investors are well positioned and ready to take advantage of the market, they can be very prosperous in the long run.

TGR: When adding positions to a portfolio would you suggest Dollar-cost averaging or looking for value in this market?

Philip Ker: At this time I would first look at companies with strong balance sheets and growth profiles. You know these companies won't have to go to the market and end up with any equity dilution, especially at depressed prices. Then, if investors already hold those equities, I'd definitely take a look at the Dollar-cost average if their portfolios are down. It could make the timing of the break-even point come faster and they could dissolve the position and look at other investment opportunities.

TGR: Could you please provide our readers with a bit of a pep talk to raise their spirits before you go?

Philip Ker: It's an ugly time in the market but it's a great time to be a value shopper for cheap mining stocks. I suggest taking advantage of this market to perform due diligence in order to pick the next winners, because there is always an upside to the market and there will always be more profits to be made. We've seen several good spikes out there, with parabolic-looking charts for some explorers, even in these tough markets. Investors should prepare and not be last on the train when the next upward ride in the market comes.

TGR: Thanks, Phil.

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