The New Year's fall in Gold Prices is "much needed"...
CORRECTION? What correction?
Chris Berry, founder of House Mountain Partners, and Michael Berry, publisher of Morning Notes and Discoveryinvesting.com, think the 2011 correction in Gold Prices is nothing but a passing fancy, and that gold and silver will be back on their respective ascents by year-end.
If anything, gold and silver equities are currently on sale. In this exclusive interview with The Gold Report, Chris and Michael share their market insights for the present and future.
The Gold Report: Gold and silver are off to rocky starts so far this year. But some gold pundits are still bullish on gold, predicting the yellow metal could finish 2011 at about $1600 per ounce. Is the roughly 4% drop we've seen in the 2011 Gold Price simply profit taking by gold investors, or is something more fundamental behind gold's price weakness?
Michael Berry: Well, I don't think there's anything fundamental about it. The Gold Price ran up toward the end of the year. There was a lot of positioning by the buy-side investors in gold and silver. I think the situations of both gold and silver are fundamentally different today – particularly silver, which could soon have reasonable position limits in the futures markets. We don't yet know what they'll look like.
Legislation on the horizon is going to force hedgers and manipulators of these markets to reduce their short positions. I think it's remarkable that gold traded above $1400 per ounce. When I was first involved with silver a few years ago, it was trading at $4.20 per ounce.; in late December, it traded over $30 per ounce. I think this current pullback is simply a correction – a needed correction. I don't think it's a fundamental change in the precious metals market at all.
If you look around the world today, you see everybody printing money. Economies are trying to drive their fiat currencies down. It's a race to the bottom – Brazil, China, the United States. There is weakness in Europe because of problems with sovereign debt, and those problems aren't completely solved; neither are the problems in the US.
I just read a report this morning about the state of Illinois needing to raise personal income tax by 75%. People are very leery of the Dollar and of fiat currencies in general. Gold and silver will both benefit from that. Maybe gold will go down another 5% or 6%, but then we'll have a nice bounce back.
I should also add that the Dollar's been stronger. When the Dollar is strong, commodities fall. The Dollar is still in demand because it's the world's reserve currency. You've got to have Dollars for both deleveraging and paying off debts.
There are these periods when the Dollar gets stronger and that has a dramatic, negative impact on commodities. It has been a bit painful, and we could still see some weakness in the precious metals and shares; but, in the long term, I don't think fundamentals have changed. I think they have only become stronger.
TGR: What's the average price we're going to see for silver and gold in 2011?
Michael Berry: I think gold is probably going to average $1500 per ounce., and possibly reach as high as $1600 per ounce. That would be a good move for gold if it could do that. I hesitate to predict an average for silver. There will be a short covering in silver. There are still a lot of commercial traders, including JP Morgan, which were significantly short in the silver futures market. The mints around the world are producing several million 1 oz. silver coins a month. We could really see silver go quite a bit higher. But I think we will easily have $35 per ounce. or $40 per ounce. If geopolitical and economic trends continue down their current paths of excess liquidity, these metals will move up.
TGR: For the sixth consecutive year, China boosted its gold production. It produced a record 340 tons of gold in 2010 – a record – while it imported another 210 tons of gold. What does this tell us about China's potential to impact the Gold Price and its view of the yellow metal in general?
Michael Berry: Stepping back in history, China was on a silver standard for several 100 years. It was pulled off the silver standard through a deflation and a hyperinflation caused by FDR's administration in the 1930s. China has always been a proponent of hard – not fiat – money. As the country eventually allows its Yuan to appreciate, it's going to want to have that back. I think what China is doing is very shrewd. It is mining a lot of gold and importing a lot of gold; that will, in essence, back its currency.
China is now the largest silver producer in the world. It will not be a formal precious metal backing, but it will certainly bring power to the Chinese currency as, ultimately, it floats relative to the Dollar. The country will have to float its currency at some point because its economy is suffering from inflation. Already it is moving toward convertibility. China really needs a higher Yuan to stem investment inflows into the country and douse inflationary tendencies. I think it's very important that the country mine as much gold and silver and import as much gold as it can with its vast foreign exchange surpluses, which continue to accumulate.
TGR: You and Chris recently gave some presentations on The Yukon Room, an online investment conference focusing on the Yukon. Please outline what you discussed there.
Chris Berry: A lot of the work my father and I do focuses on the emerging quality of life cycle associated with the emerging world. Natural resources really underpin this cycle and are the backbone of any economy. I'm referring to the hard assets needed to make the refrigerators, cars and iPods, etc. that add to one's quality of life. With that concept in mind, I visited the Yukon last summer on a property tour. I consider the area an emerging market, but not in the same sense as China or India or Colombia. I think the Yukon shares a lot of similar characteristics with those places, albeit on a smaller scale. There are very few untapped mining exploration areas in developed countries these days. The Yukon is a perfect example of a location with high exploration upside. With The Yukon Room, we advanced the thesis that the Yukon is this generation's emerging market from an exploration perspective.
TGR: Mike, we continue to see consolidation in the Gold Mining sector – especially among the junior stocks. In a growing number of cases it's a cash-rich/project-poor junior merging with a cash-poor/project-rich junior. Are we going to see more mergers like this?
Michael Berry: There should be quite a few of these kinds of consolidations if, as we believe, gold holds its own over the next few years
TGR: Do either of you have some parting thoughts on precious metals, gold and silver in particular?
Chris Berry: There's been a bit of a blowoff in the precious metals to start the year, but I think it's largely because those metals had such a huge run in the fourth quarter of 2010. People ask me, "Is the bubble bursting?" I don't think there is a bubble in precious metals. I just look at the macrofundamentals. I look at the Eurozone. I look at the fiscal condition of the United States. I look at inflation in China. What has fundamentally changed with these metals since the beginning of the year? Nothing. Nothing has happened to change my opinion that gold is going to continue its upward trajectory, as will silver.
TGR: Thank you for taking the time to talk with us, gentlemen.
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