"Wow! Gold $1000 Was Cheap..."
Why sheer weight of money – not jewelry demand – is driving gold higher...
PETER SPINA launched the highly-ranked GoldSeek.com website in 1995, developing the service as this decade's secular bull market in precious metals took shape.
Peter's technically focused subscription newsletter, Gold Seeker Report, joined forces with three-decade gold analyst Julian Phillips to create GoldForecaster.com in 2005, and in addition to advising clients on mining-stock and precious metal investments, Peter now frequently appears in the media, including Investor's Business Daily, the Wall Street Journal's MarketWatch, Reuters and TheStreet.com.
Here he speaks to the Gold Report about why, a year from now he believes, we'll look back on $1000 gold as a bargain...
The Gold Report: We've seen some big bumps for gold several times this month, with the price nudging the $1,050 mark now. What's behind the spike?
Peter Spina: There's a lot of confusion out there now, but the bull market in gold is not about jewelry demand; it's about money. As gold keeps reaching new record highs, it's becoming more apparent what's driving it. The true issue at hand is trust (or lack of it) in the value of paper money – specifically the US Dollar. What's really made this country so strong has been the value of its currency.
We're seeing a shift away from US Dollar reserve assets. The value of the Dollar had been primarily driven by demand in its global use, including trade in Dollars, specifically, the oil trade. There are growing rumors about shifting some of that oil trade away from the Dollar, and at the same time, central banks around the world are diversifying away from it. Combine that with other factors we're experiencing – trade deficits, internal deficits, the incredible amount of printing of Dollars to bail out banks and provide stimulus and so on. It can't go on.
The US internal deficit is nearing $2 trillion a year and growing, especially in the last year. Now they're talking about projections from the recent financial bailouts total obligations exceeding $20 trillion. That doesn't take into account future banking and derivative issues, which are upcoming. Already, we do not have the ability to finance our debt. It requires about 80% of the world's savings to support our debt habits, and we're just increasing our debt load so quickly – our appetite for a debt is increasing.
How do we continue to finance this kind of system? This has to play itself out at some point and I believe inflation will be the outcome from all this paper printing via growing monetization of US debt. It will cheapen the debt load, but there will be some severe consequences to pay. The price we'll pay will be reflected in devaluation of the US Dollar along with a degree of influence such power provides. Gold will benefit from this process. As people look for sound money and a safe-haven asset, gold will be the obvious choice.
TGR: Aren't most governments printing more currency to do some form of stimulus in their own countries, and not just the US?
Peter Spina: Yes, they are. Gold is actually moving up in foreign currencies as well as US Dollar terms, and we could see a widespread devaluation of paper currencies versus gold. A global paper currency problem really brings gold to the forefront.
TGR: Why didn't Gold take off earlier in the year, when a lot of that activity you described was already taking place? This is not news.
Peter Spina: It's a process. In relative terms, gold is such a tiny market that it commands quite limited attention in the financial world. That's changing, but it's a process that takes time. Some heavy accumulation behind the scenes helps support the Gold Price to this point, but some other factors tended to calm down the price appreciation. Primary among these factors has been general stabilization of this turmoil that engulfed us toward the end of last year and early this year. The mass psychology of the markets has shifted and is actually quite good, all things considered. Removal of the fear factor has driven away tension and stabilized things.
I just think there's not a broad understanding of the process, which is ongoing. I believe the US Dollar is going to really start losing its footing but the stock market is going to continue to stay firm and grow. As the Dollar begins losing its value and gets to the point where that may happen very quickly, the situation will change and people should realize quickly what's going on. The squeeze on the Dollar will be reflected in the Gold Price taking off.
TGR: How high can gold go? Won't people who aren't invested in it already going to get minimal return because it's already spiked up so much?
Peter Spina: There are definitely short-term risks after spikes. Gold reached $1000 a couple of times and then pulled back to the $900 for most of this year. Now, after breaking through $1000 again, it could rally to $1100 to $1300 and then pull back somewhat. That said, same time next year I believe we'll look back and say, "Wow, $1000 was cheap; it was a bargain." So $1500 to $2000 gold in the next 12 to 18 months seems definitely within sight.
TGR: Do you see a situation where we might use gold as actual currency and actually go back to a gold standard?
Peter Spina: Direct use of it, while possible, is not likely. But I believe we'll be using gold in form or other in trade and/or in backing a new currency. We'll see central banks holding more gold in attempt to stabilize their currencies. They've already shifted from disposing gold on a net basis to accumulating gold to their reserves.
TGR: As you look at the gold sector just in the last year, the spot Gold Price has gone up 20% to 25% up until these recent bumps. But during that period, the gold equities have doubled, tripled, quadrupled. It's been amazing. Is the play here in holding Physical Gold Metal or the Gold Mining equities?
Peter Spina: When you invest in mining stocks you take on a greater degree of risk; for that you are entitled to a greater reward. As we saw last year when the markets collapsed, mining equities dropped quite severely. Valuations on many of the stocks went down 70%, 80%, 90% – so these equities are a lot more volatile and sensitive to general market conditions. There are arguments for and against, but I believe a good portfolio should contain both bullion and mining stocks and, within the mining stocks, include more stable mining equities and some high-risk speculative investment opportunities such as exploration plays. But I believe the mining stocks, the gold stocks, will outperform the metal itself.
TGR: You mentioned that an investor should be looking at fairly stable equities along with some more speculative exploration opportunities. Do you define "stable" as the majors?
Peter Spina: Yes, those that would be classified as senior Gold companies, with annualized gold production in the multi-millions of ounces. With a basket of those companies, you can march down to the mid-tiers and the smaller-cap gold stocks for more leverage.
TGR: A couple of years ago, when we had a handful of uranium companies, uranium had a run up, and then suddenly hundreds and hundreds of uranium companies flooded the market. Does that happen any time a mania begins? Are we likely to see the same thing in gold, except that hundreds of gold companies may multiply into thousands? If that happens, how do you decide where to invest?
Peter Spina: As the Gold Price rises, I think we will see some companies coming in that people should be very careful about investing in. They may do well in the bull market, but when all is said and done, if there's nothing really behind them, they will be the ones that will go away first. As you know, we saw a bit of a washout last year with the market correction. Some good quality companies took a hit and went under or emerged as somewhat different companies. But there were others that I would never have invested in, kind of moose pasture want-to-be Gold Investments. When those faded away while the good assets remained, that was good for the market.
TGR: So what would a careful investor look for?
Peter Spina: When investing in junior exploration gold and/or silver stocks, I first look at the management, look at their history. A company comprised of solely financial backgrounds who have no mining experience should be an obvious red flag. Junior explorers typically have to go to the capital markets to raise equity to explore and develop a project, so company with a bloated share structure to start off with will have a difficult time building a strong share price as it develops these assets. So in the junior exploration stocks, share structure also is very key.
With any of these small capitalization companies, it is typically about raising money in the public markets. So has the company been capable of obtaining a proper value of their assets for their shareholders? So ask yourself some questions: Are they communicating with the public? It's a publicly traded company; are they telling their story to the public? That's very important factor to attract investors and to preserve a small capitalization's primary key advantage which is share structure
And then, of course, the property. You want to look at various criteria in that respect including geography. I prefer locations in Mexico, Canada and Nevada for mining companies. Grades, environmental location, etc. are all very key investment decision makers.
Also look at the business model. Does the company provide any cash flow or is it expecting any near-term cash flow perhaps because it's close to production? You don't want to get into another situation like last year where your business model is entirely dependent on raising capital in the equity markets and the capital markets fall apart. However, that seems to be less of a threat if the Gold Price continues to rally and new capital sources, interest in the gold sector continues to grow. That would keep investment capital flowing into the sector at an accelerated pace
Those are several of the criteria that I look at. All things considered, you have to be very careful. The best thing an investor can do is to just do your research. Call up the company and speak with them and really get a feel for who's managing the company. Public filings provide excellent insights into the financial condition and management discussions. The resources available online add other easily accessible data and information.
TGR: It was in the mid-'90s – 1995 to be precise – that you founded GoldSeek.com. What did you see then, when everyone else was looking at the high-tech bubble?
Peter Spina: At that time, interest in the gold market related to the imbalance of supply and demand. A declining supply was coming from the major gold-producing countries, specifically South Africa, and demand was well above the supply. Investors perceived the imbalance as a market opportunity. But unfortunately it was too early. Central-bank selling closed a big part of the gap along with gold producer forward selling.
The Gold market bottomed out in the late '90s-early 2000. At that time it was about that opportunity to buy low. Today it's different. It's the interest in gold market and gold itself as money that led us to the point we are today. Gold is now finally becoming more and more recognized for historical attribute as money.
TGR: GoldSeek.com is still going strong, and more recently, you've also co-founded GoldForecaster.com. Could you tell us a bit about major trends you're recommending there?
Peter Spina: GoldForecaster.com follows the gold markets from a global perspective on a weekly basis. Right now, we're of the view that any pullbacks are excellent opportunities for Buying Gold.
It looks as if the sub-$1,000 gold phase may be coming to a close, so we're looking for gold to move up to a much higher range and, in the process, take these mining companies to much higher values. So we see a lot of opportunity in all parts of the Gold Mining stock sector. As the price gets higher and the bullishness and excitement grow, the smaller caps and the juniors will start getting a lot more interest, too.
TGR: Are we in the mania stage yet?
Peter Spina: No, not at all. I believe we're entering the next phase of this global market, which will bring it more into the mainstream. Right now the average investor still doesn't own gold. They're starting to know what's going on. They know gold is getting to a record price but not exactly fully understand why. The big institutions, the big buyers are just starting to get coming in, but it's still not a mainstream investment yet. That still may take years – not just months – to develop. The mania stage is still quite a way off.
TGR: Thank you, Peter. Any parting thoughts that you want to give to our readers?
Peter Spina: I believe the key here in the gold market is what Gold represents, what it has been and that's honest money and as we see this bull market develop, the reason for it is going to be from investment demand. It's going to from people looking for stable, honest money and with declining trust and confidence in paper currencies and as they continue to devalue, gold will become one of the choices for investors to preserve wealth.
I think we'll see some extreme volatility continuing on forward. We saw some examples of that last year and mining stocks will just amplify that. So you have to recognize that there will be some extreme wild swings in this market. Taking profits on the way up and diversifying those profits, I think, is always a great idea. Personally I am more overweight in the mining stocks. My strategy at this time would be to wait for the next significant rally and then start monetizing those profits into physical gold and silver.