Gold News

Optimism on Gold?!

The only reason for cheer, says this mining analyst, is the gloom...
CHRISTOS DOULIS, a mining analyst with PI Financial, has spent 20 years in a wide variety of roles within the mining industry.
Previously a mining research analyst at Stonecap Securities, and a partner at mining advisory Gryphon Partners Canada before that. Doulis began his career as a research associate in 1994 at Scotia Capital. Now covering a variety of gold and silver companies in the small- to mid-cap market – and with a focus on producers and late-stage development companies – Doulis here tells The Gold Report why the bear market in precious metals is well into its fourth year and could persist into 2016.
The Gold Report: In September 2014, you told us that investors needed to own bulletproof, low-cost producers that can survive lower gold prices. What is your investment thesis for this point in the bear market?
Christos Doulis: Unfortunately, not much has changed. We certainly do not appear to be in a bull market for gold. All of us would like to see higher prices. They may come at some point in the future but no one knows when that will be. So in the short and medium term, I would continue to recommend owning the lower-cost producers in order to protect oneself from the chances of insolvency.
TGR: What is your technical analysis of the recent performance of gold telling you about what we're headed for?
Christos Doulis: I am still negative. When I look at the trend over the last year or so, there's been quite a bit of volatility, but in general, the highs keep getting lower, and the lows are getting a bit lower as well. For instance, in January 2014 we had a rally that went close to $1400 per ounce before it petered out. Then we had another rally in January of this year when gold got closer to $1300, not to that $1400 level, before it started to give back the gain.
If you draw a channel on the gold price, it certainly looks as if we have not reversed course yet. The highs keep getting a bit lower on the volatility, and the lows have been lower. Then again, gold popped $20 per ounce in early April. If gold could sustain a rally to $1250, I would start feeling a little more enthusiastic about the space.
TGR: What is your prognosis for this bear market?
Christos Doulis: My personal view is that I'm hoping for higher gold prices in the second half of 2015, and hope to see a return to an upward trend in the metal's price. My view is that we are still in a long-term bull market for gold but that after a 10-year bull run, we needed some pullback. This pullback has been particularly vicious, but what else is one to expect after gold went from $300 to $1800 per ounce in a decade?
TGR: What price would gold have to sustain before you were willing to declare the bear dead?
Christos Doulis: If I saw gold trading north of $1350 per ounce, I would start to think that even higher prices might be coming and the bear market was dead.
TGR: What are your price decks for gold and silver?
Christos Doulis: We use $1250 per ounce gold and $19 per ounce silver.
TGR: You have seen a few cycles in your 20 years in the space. What are two or three things you have learned about this bear market that were perhaps not evident in others?
Christos Doulis: The one thing I've taken away from this bear market is the longer the run-up, the more painful the correction. I thought that last year would probably be the worst. When gold peaked in 2011, I was not surprised to see a correction. I certainly thought that $1300 per ounce gold was in the cards, but I did not see $1150 per ounce gold as likely. I have definitely concluded that the market can be much more pessimistic than you can, and it certainly isn't going to turn just because you want it to. As I said, I was thinking 2014 would be the year when we would see a reversal in gold prices. Now, I'm hoping for the second half of 2015.
TGR: Miners have reduced their costs in order to boost margins at $1200 per ounce gold, but some, not all, are doing that by mining the higher-grade portions of their deposits. Were miners high grading to the same degree in previous downturns?
Christos Doulis: My take on it is some miners are definitely high grading, but good miners aren't. They understand that if you high grade a mine, you not only reduce its longevity by removing the high grade, but in effect you reduce it even more because all that you have left is low grade, which might never be economic. Imagine you have a deposit that has different zones grading various grades. If you blend them all, you can deliver, call it, 8 grams per ton to the mill, but if you high grade it, you can deliver 12 grams per ton. The problem is that means you deliver the high grade for a couple of years, but then you're stuck with delivering 6 grams per ton or 4 grams per ton material to the mill. It could mean that entire portion of the deposit is no longer economic. Good CEOs are loath to high grade and, instead, they focus on cost reduction. That is the bigger trend.
TGR: Do you learn more about a management team in a downturn?
Christos Doulis: Absolutely. When gold is trending upward, it covers a lot of mistakes, and the market is more forgiving. When gold is trending downward, we see who the quality executives are because they're the ones who are able to reduce costs without jeopardizing the longevity of their operations. It goes back to the concept of high grading. Good CEOs in the last couple of years have been the ones who have said, "We're going to reduce costs," and have actually done so.
In bear trends like this, if you promise X and you deliver half of X, you get penalized. This is a market where sins are not quickly forgiven. Therefore, the people who don't sin, vis-à-vis the better CEOs who meet their prognostications, are the ones that the market rewards. Also, as an analyst it allows you to figure out what groups really know their asset(s) and understand how to drive the business from a cost perspective.
TGR: Could you give our investors a reason for optimism in this space?
Christos Doulis: One reason for optimism is the abounding pessimism in the marketplace. An old adage is "buy when others are selling." Nothing has changed in the grand perspective of post-financial crisis money creation. The only thing that has not happened is visible inflation, and that's why we've seen interest in this space decline. There has never been an economic recovery that has been solely created by monetary expansion that doesn't come with inflation.
While everyone is worried and nattering about deflation, if we ever see a real economic pickup, which we haven't yet, I think that precious metals will start moving up again. And I want to remind your audience that gold had a run from $300 per ounce to $1800 per ounce before it came back to $1200 per ounce. Even at $1200 per ounce, that's four times where it was at the beginning of the 21st century. One of the biggest cases for optimism is that nobody is telling you to buy gold stocks today. When everybody and their uncle are telling you that this is the asset you have to own, whether it's gold, internet stocks or whatever, it's likely that you already missed the market.
TGR: Thank you for your insights, Christos.

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