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Solid Gold Trading Range

Will gold spike above $1,000 in the near term...?

MINING RESEARCH ANALYST at Wolverton Securities – the oldest member of the Toronto Stock Exchange Group – Mike Starogiannis follows companies with generous enough cash flows to fund expansion without going to the market for capital.

Here he tells the Gold Report why he sees Gold Prices averaging $900-$1,000 an ounce for the next year or two, plus his longer-term outlook for gold and the producers he follows.

The Gold Report: Gold is a big topic of conversation today and, of course, the big thing everyone is discussing is how high it will go. What is your perspective?

Mike Starogiannis: I think that gold is positioned to go higher from here strictly based on the current fiscal policy of the United States in terms of printing cash to fund a lot of new infrastructure projects and economic stimulus packages. Eventually, in the mid-term, that money will trickle through the economy and inflate the US Dollar. Because gold has always been a historical hedge against US Dollar inflation, just fundamentally based on that we could see upward movements.

TGR: If most developed countries are similarly expanding money supply, wouldn't you expect to see inflation around the world? What happens to gold if all the currencies are inflating?

Mike Starogiannis: The US economy out-leverages most other economies, and the economies that really count are probably China and the US China is seeing its own economic slowdown right now and China holds US Dollars. Another impetus for gold to move upward is too many US Dollars coming through the economy.

TGR: Most of what we read suggests that China is getting rid of US Dollars by buying base metals from around the world. Will that help offset the inflation that the US economy faces?

Mike Starogiannis: I don't see that the Chinese buying base metals with US bucks will impact significantly the US Dollar inflation, no.

TGR: So looking at the US as core economy driving the price, how high will Gold Prices go?

Mike Starogiannis: My crystal ball is no better than anybody else's. If you look at the trading pattern for gold historically through economically turbulent times, it can easily spike upwards by 50% of what it's currently trading at, but it'll spike right back down almost as fast. I believe fundamentally that any spike will be a temporary phenomenon. My target for gold pricing mid-term is right about where it is now.

TGR: What do you mean by 'mid-term'?

Mike Starogiannis: We could see gold spike well through $1,000 on a 12- to 24-month horizon, but I think it'll be in the $900 to $1,000 band for that period on average.

TGR: If gold stays in the $900 to $1,000 band, what hope do you have that stock value of any junior or producing company that you follow will appreciate?

Mike Starogiannis: Appreciation will not come if gold stays in this band, based on fundamental valuation and current production profiles. Where appreciation will come from is these companies' leveraging their fairly generous cash flows. These cash flows, basically, are accumulating in cash accounts until these companies come up with good generative projects to invest in – and there are projects out there. I believe the next leg up for some of these juniors will come with spending their cash wisely and investing in good new projects. In other words, it won't necessarily come from fundamental share appreciation based on current production. Many of them are fairly valued at this point.

TGR: Do any of these companies risk financial instability should the price of gold go down to $800 or $850?

Mike Starogiannis: Currently all the producers are unhedged. They may carry some short-term hedges inter-month, which are not required to be reported; but in general they don't carry hedge positions. So, yes, all unhedged gold mining companies  are largely exposed to the downside in gold price.

TGR: Will that cause any of the companies you're following to become cash flow negative?

Mike Starogiannis: Yes. At $500 gold, many companies would probably have trouble remaining going concerns. But that applies to just about everybody. Most senior companies are now boasting cash costs anywhere in the range from $400 to $500 per ounce.

TGR: Given US fiscal policies, isn't seeing it down even to the $700s improbable for the next 5 to 10 years?

Mike Starogiannis: There's always room for short-term stimuli to push commodity prices downward if someone were to flood the market with physical gold for whatever reason; if, for example, one of the central banks decided to sell gold, en-mass, into the market. But in the short term, for the next year or two, I believe that we're in a good solid trading band between $900 and $1,000 per ounce.

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