The different drivers of Gold Prices and base metal prices...
BASE METALS and precious metals companies both have to obey the basic laws of physics and economics to be profitable.
In this interview with The Gold Report, geologist turned analyst Vishal Gupta of Fraser Mackenzie discusses how small-cap companies can successfully take advantage of the marketplace to produce profits.
The Gold Report: You are an analyst and a geologist. Can you explain the fundamentals behind investing in base metals compared to precious metals?
Vishal Gupta: The fundamental difference is that base metals can be fairly straightforward in quantification when it comes to supply-demand balances. The world needs a certain amount of base metals to keep up its growth rate. Growing economies like India and China require base metals for their industrialization initiatives. For instance, copper would be required in electrical wiring and zinc would be required in steel galvanization. There is a specific purpose for base metals in industry.
Gold is valued more from a currency standpoint. There are actually very few uses for gold. That is why it is difficult to quantify the supply-demand balances for gold. This leads to the turmoil we see in the gold market. Any material piece of macroeconomic information that hits newswires will have some sort of an effect on the Gold Price because it is traded as a currency.
TGR: You have talked about how even when there is a downturn in global economies, jewelry demand remains. Why is that?
Vishal Gupta: I am originally from India and I lived in that country for about 16 years before moving to Canada. India is by far the biggest retail market for gold. The Indian wedding season, which runs from September to December, is typically the high time for gold markets. The reason for this traditional demand for gold in India goes back to what I said about gold being used as a currency.
People in India treat gold as a commodity that holds its value better than paper currency. So when they give gifts of gold jewelry, it is because they want to invest in something that is going to hold its value. The result is that in lean times, when the markets are down and unemployment is high, people have that reserve in gold that they can take to the market and sell.
TGR: When North Americans think of Gold Investment, we think of investing in maple leaves, Gold Bars, coins or other physical forms of gold. But in India, they think of purchasing a necklace, bracelet or gold earrings. Is it the same investment dynamic in a different package?
Vishal Gupta: That's absolutely right. Gold has held its value better than paper currency in the past, especially relative to Indian currency. The Indian rupee has devalued significantly over the last few decades, so people put their faith in a physical commodity, such as gold, rather than the paper currency.
TGR: We've seen a lot of volatility in the US stock market. We haven't seen a whole lot of industrial growth, but the price of copper seems to be holding up right around where it is today at $3.74. Turning to the base metals, what is your outlook on the supply and demand fundamentals for copper going into Q212 and through next year?
Vishal Gupta: I always view copper as the leader of the pack when it comes to base metals. You'll see in the past, whenever the base metals markets have turned around, copper is the one that has led the charge. We are going into a lean time for commodities right now. However, when the commodity markets do turn around in the next five to six months, driven by the traditional surge in demand for commodities during September/October, I would expect copper to again lead the charge for base metals. Copper is the London Metal Exchange's flagship metal. Whenever we talk about base metals, we first talk about copper and then we talk about everything else.
TGR: Do you focus on the small caps?
Vishal Gupta: Yes. My educational background and my work experience are in geology. As a geologist, I believe my maximum value add is analyzing companies at a very early stage where I can use my knowledge to estimate which of the junior companies' assets have the best odds of becoming producing mines and generating cash flow in the future.
TGR: We haven't discussed the investing scenario behind silver. Are you equally bullish on the copper, silver and gold commodity spaces?
Vishal Gupta: I think silver is a very undervalued commodity right now. The market seems to follow what the Gold Price is doing but silver has so many industrial uses that you can view it as a precious metal or a base metal. Many of the silver names are just starting to come into prominence. Very few silver-only production companies exist today. What is out there is starting to get the value that traditionally has been reserved for gold and base metals.
TGR: You're an unusual analyst in that you're bullish on gold and silver and copper. Any final words of wisdom about investing in today's volatile markets?
Vishal Gupta: I know that the commodity markets have been in great turmoil. People say, oh, gold has fallen from $1,750/ounce (oz) down to about $1,670/oz and the commodities have started coming off now. That is not the case. If you compare where the commodity markets were in 2008–2009 and where the commodity markets are now, we've gone through a huge growth spurt. We have found a level where things have stabilized. $1,500/oz gold is ideal for a lot of companies and could lead to a lot more production coming online. Anything over $1,500/oz gold to me is beautiful. When you're looking to invest in the commodity markets, it helps to have a longer term view. If you have a solid, longer term view on gold, copper or silver, you should make a lot of money.
TGR: Thank you so much, Vishal.
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