"Gold to Glitter" in 2010

Mapping the path of Gold Prices in 2010...

PROUD and avowed Keynesian economist Victor Gonçalves has built a track record of accurately picking winners and calling market direction, says the Gold Report.

In 2007, for instance, he correctly predicted the Dow Jones topping 14,000 points and pegged uranium reaching $136 per pound. Now, in this interview with The Gold Report, Gonçalves – who writes for many leading journals, including the Canadian Institute of Mining's CIM Magazine as well as his own Equities and Economics Report – says Gold Prices will generally see more strength than weakness in 2010, coming to hover around $1500.

Gonçalves is also enthusiastic about some undervalued juniors and the prospects for rare earths, saying "a lot of projects are looking very economic and attractive..."

The Gold Report: Victor, when we last spoke in October you predicted the Gold Price would see more strength through the end of the year and we'd see another market rally before a correction. Gold has indeed strengthened and we saw a Gold Mining stock rally, but not a deeper correction yet in 2010...

Victor Goncalves: I think we are due for a correction, yes. By how much and when, it's a little difficult to tell. One thing I can say is the market is rolling over now. We're seeing a bit of a top in the sense that the Toronto stock exchange's TSX index has seen 12,000 for the first time in a long time. The TSX Ventures rallied very strongly. The Dow is kind of trending. We are in an anomalous situation, and could see one of the two things. We could see a sideways market and then a correction or a bit of a correction now, another rally, and then probably a bigger correction.

If you look economic fundamentals, they're not stellar. They haven't warranted the market doubling in price, basically. The TSX has gone from 7,000 to 12,000 in a year where the market hasn't strengthened a whole lot. On the Dow, for example, which has gone from 6,000 to 11,000, we've got a doubling in equity prices with a stagnated economy. Something's got to give in 2010.

TGR: Were some of the lows more fear-based and not based on economic fundamentals?

Victor Goncalves: I don't think the lows were more fear-based; I think the lows were a little more realistic, quite frankly. I don't think they were going to stay there forever. For example, the Dow went to somewhere in the mid-6,000 range. I think that was too low based on everything, but I don't think that at 11,000 the Dow is realistic. I would wager a guess somewhere between 7,000 and 8,000 is probably where the Dow should have landed due to economic fundamentals.

All this growth we've had is not employment-based. It was credit driven and debt driven. The run we had in the equity markets, particularly in the US – I don't like using the word because everyone else uses it – but it's a bit of a bubble. So 11,000 on the Dow is a little rich. The market doesn't think so and, based on that, I think the Dow could see a bit of strength or at least stagnation at this level for a little while.

TGR: You mentioned earlier that we're in somewhat of an anomaly because we have gold and equities both doing well. To what do you attribute that anomaly and how long will that last?

Victor Goncalves: Basically, what I attribute that anomaly to is the market really doesn't want to go down and people don't want the market to go down. It hurts; it doesn't feel very nice. So what has happened here is we've had an unusually high amount of money and liquidity injected into the system. All the institutions that receive this liquidity have actually used it more in the equity markets. For example, in a market that goes down like this, we should have seen the interest rates rise a little and they've stayed down, so money stayed cheap.

So we have capital injections, cheap money, here at the start of 2010. We've got every government around the world trying to avoid a major recession, so all this money is in the system. Well, when the crash happened, the good stocks and a lot of the equities got hammered, so we're seeing a lot of people going to the equity markets because they're getting good returns. When you can just buy the Dow and double your money, people are going to do that.

So we've seen a lot of liquidity, but the Gold Price has gone up because the fundamentals of the market are not good and anyone who understands the flight to safety would be Buying Gold. Additionally, as we discussed last time, the Chinese buying of gold is also very important. Up until the Chinese as a population started Buying Gold, we've had only 80% of the world's population participate in the gold market because 1.5 billion were not allowed to Buy Gold. So now we've got the Chinese buying as well. Obviously, there are other groups buying too, and buying on the premise that the US is not in a good situation and that gold is a good investment. So you've got a bit of both.

Now, to answer your question, how long will this last? It'll last as long as liquidity is in the market, quite frankly. Now I suspect liquidity in the markets in 2010 could go on a pretty long time. Those printing presses can print a lot of money, but that will at some point come to an end and that may be soon.

I don't think we'll see equity prices continue on a strong rally much longer. Again, there are a lot of variables that go into determining exactly how long that is, but I do expect a decline in the equity markets, if not a small decline now, then a pretty major decline in several months.

TGR: Gold is now trading pretty firmly above $1000. A lot of people are starting to say that $1,000 is a base now. Some say Gold Investment is going to take off...pushing the price to several thousand Dollars...and others think it's going to trade somewhere plus or minus $200 around $1,200 an ounce. What's your feeling on the Gold Price?

Victor Goncalves: Plus or minus $200 from $1200 to $1300 is probably a fair number over this year. Interest rates and monetary injections are already priced into the Gold Price and those will play out as well, but unless something changes I don't see having anything much more than $1500.

Now we also have to understand that we're going into a seasonally weak period for gold in February and March. So we should see the price of gold actually drop off a good 15% to 20% between now and April 2010 before the base around $1000 comes back again.

Any appreciation in price probably won't happen until about June when we get back into the seasonally stronger period for gold. So we do have a headwind right now on the price of gold. I'm not keen on it going up from here during the early half of the year, but the latter half of the year we could see a similar rally to what we saw late last year.

TGR: Gold Mining equities have had, in many cases, a huge run up, even better than the general market performance. If gold's going to be trading in a range of plus or minus $200, what should we expect the gold equities to do?

Victor Goncalves: When we saw Gold Prices start to run up, it took some time for the equities to start moving up. Now because of the liquidity in the market and the fact that gold is over $1000, a lot of projects are looking very economic and attractive. So a lot of people on the equity side are interested in gold because of the viability of $1000 gold.

TGR: Are there other metals? A lot of people look at gold and they say if gold's going to really go up based on the fear factor, silver will go up as well. Are you looking at other metals along with gold?

Victor Goncalves: Silver certainly is going to track gold to some degree. I see silver as a poor man's gold. It has more industrial uses than precious metals per se. So for silver to do well, it's going to have to get that monetary value, that investment value. For that to happen, the price of gold is going to have to go up appreciably because it's still reasonably affordable to buy an ounce of gold for $1000. It's obviously a lot more than it was, but it's still something in that price range where you can buy it and make some money on it.

Once gold really starts trending up, let's say $1500-plus, the price of silver is going to have to catch up and actually continue going higher because silver is, at the end of the day, a precious metal and will become the precious metal of choice probably. We've seen a little bit of that in India. When gold started breaking $700-$750 in '06 or '07, the price of silver ran up quite heavily because silver was trading between 70 and 65 ounces per one ounce of gold and it traded as much as 50:1. So we can see that happen, but only when the price of gold starts moving away from people's ability to purchase it or wanting to purchase it.

TGR: Let's move on to rare earths, which have been getting a lot of buzz at the various mining conferences. What's your viewpoint on them and the investment opportunities they represent?

Victor Goncalves: Rare earth elements and rare earth metals, in general, are going to be a huge phenomenon. It's like in '07 when we had a uranium boom and uranium went from $8 to $136.

What it comes down to is these rare earths are needed for so many things. For example, hybrid cars are really the driver for rare earths' increase in price. But not just hybrid cars. You've got tantalum and niobium being used in a lot of other things and these rare earths are going to be in huge demand.

I don't think we've gotten ahead of ourselves with the demand or with the price of these rare earths. We don't have enough to supply the markets fast enough. That's partially what's causing the price to move up. There's also supply constraint out of China. China controls 95% of the rare earths and says, okay, we'll just keep them for ourselves, thanks. You've got to fight for the rest of the 5% of them out there. So that's obviously causing major upswing in the price of rare earths. That has been the main driver. But that coupled with a shift in how we do things – we're going to see a ton more hybrid vehicles go on the road over the next couple of years and each one of them is going to require 50 pounds of rare earths. That's going to add up.

TGR: Jack Lifton, who speaks at conferences about the rare earths, asserts that it's really a rush to production. When the next two or three companies actually get to production, the amount they produce will probably satisfy demand for decades to come.

Victor Goncalves: Yes, it is a race to production. Like with uranium, for example, there's plenty of uranium out there for the market. It's just whoever does it first will obviously satisfy a lot of the market and I think that's quite the possibility for rare earths.

The best part for an investor is that it's not going to happen today or tomorrow or next year. We've got a little bit of time. We've got some idea as to which companies have been in the space for a long time and have had more lead time to develop a project and get to the stage where they're working the economics of it. Those are the companies I'm really interested in. Obviously, there's a lot of brand-new companies coming out of the gate who will represent an excellent investment opportunity because of the sizzle in the market, but I would have to hear something incredibly compelling from a very small junior to sway myself from some of the larger companies.

TGR: We appreciate your time once again, Victor. This has been very interesting.

Buying Gold today? Avoiding wide spreads and storage costs – but still own your physical Gold Bullion outright and off risk – using BullionVault...