The disconnect between Gold Prices and both mining stocks and silver...
NOW running her own independent research firm, Mine2Capital, to provide unbiased research for clients, Alka Singh started her career as a mining research associate with Wellington West Capital Markets in Toronto.
Since then she has worked for Orion Securities and Merrill Lynch in Canada. She then moved to New York City to build the mining franchise for Rodman and Renshaw, where she covered 24 precious metals, base metals and uranium names.
Alka Singh here talks to The Gold Report about the correction hitting Silver and Gold Mining stocks even harder than the metals since last summer, plus ideas that she believes will maximize shareholder value when the markets turn upward in the near future.
The Gold Report: In early 2009, gold began its ascent that lasted for two and a half years until it began to correct at the beginning of September 2011. What were the issues that caused the rise, and what caused the correction?
Alka Singh: Gold Prices have actually been on a rise since early 2002, but you are right that the last leg up started about two and a half years ago. The issues that led to the rise were that countries were printing money to finance themselves.
Gold is considered a safe haven, but the issue that gave rise to the correction is mainly the Eurozone concern – in Greece, Spain, Portugal, Italy and Ireland. Equity markets appear to be stabilizing as a consequence of quantitative easing in Europe, the US and China and the apparent easing of concerns in Greece. This liquidity has forced interest rates down, pushing investors into riskier instruments, including equities, which in turn has lowered perceptions of default risk. The markets appear more confident, hence gold's attractiveness as insurance is fading.
Also, as the Euro was depreciating, a lot of money moved from Euros to US Dollars, and we did see improving economic numbers from the US, which strengthened the US Dollar. Because gold is priced in US Dollars, gold started declining as the Dollar appreciated. There's another factor: India and Vietnam increased their excise and import taxes on gold, which also curbed demand for physical gold. India is one of the largest consumers of gold, so that had a big impact on the Gold Price as well.
TGR: Physical Gold Prices and Gold Mining equities appear to be disconnected. Why the disconnect?
Alka Singh: A lot of times there is a disconnect between commodities and equities. E This disconnect is due to two factors:
- Gold Mining equities are driven by the general market, and
- Gold miners have not only commodity price risk but also operational risk and geopolitical risk depending on where their assets are located.
Why juniors underperform seniors when Gold Prices are going down has something to do with the nature of the junior miner sector itself. When Gold Prices are going down, the gold producers – the seniors – are already mining and selling the gold and making profits. So investors prefer to hold the gold producers rather than the junior explorers. Let me also say that when the prices of the commodity are going down, investors would rather have their money in more liquid names, which are generally the large caps.
TGR: Let's go to silver for a moment. The performance differential is not nearly as wide between silver equities and physical silver as it is between gold equities and physical gold. What does that tell you?
Alka Singh: Pure silver companies are scarcer than gold companies, which is why I think that the disconnect between silver and silver equities and gold and gold equities is different. You and I can name lots of gold companies. However, pure silver companies are much fewer in number.
I also think that silver has more upside potential than gold. If you look at the historical price ratio of silver to gold it's about 16:1, but that ratio is very, very wide right now, about 56:1. And, even at $1575 Gold Price, I think silver should be at $98 per ounce So, I think that there is a disconnect between silver and Gold Prices as well, and I don't expect gold to come down to make that historical ratio closer to 16:1.
TGR: What is your current theme in regard to precious metals miners?
Alka Singh: Well, presently I think investors should definitely take a look at the more liquid large-cap gold and silver names but keep their eyes open. And, at any sign that the market for the juniors is turning up, they should have their top three or four junior gold and silver names that they would like to own. I think the situation is very similar to what happened in 2008 when the juniors were trading at cash value, if not below it. By the time Q1/09 came, the junior miners were up and in some cases over 60-70%. So, I think there will be a very fast turnaround as well for the junior Gold Mining space.
TGR: Alka, you said investors should first go with the more liquid names. Is that right?
Alka Singh: For right now, given the market volatility, I would go for more liquid, larger-cap names for the short term, yes.
TGR: Alka, thank you. It's been a pleasure talking with you.
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