Gold News

Risk-Free Return vs. Gold

The outlook for gold and Gold Mining stocks as real interest rates stay below zero...

of economics for nearly two decades, John Doody became interested in gold through an innate distrust of politicians, says The Gold Report.

In order to serve those that elected them, politicians always try to get nine slices out of an eight slice pizza, debasing the currency via inflationary economic policies. Success with his method of finding undervalued Gold Mining stocks led John Doody to leave teaching and start the Gold Stock Analyst newsletter late in 1994. In the last decade, Doody has seen his top-listed equities skyrocket a combined 1000%, including an eye-popping 130% in 2009.

Subscribers pay a lot for his knowledge and expertise in the Gold Stock Analyst; but in this exclusive interview with The Gold Report, you get a few of his favorites Doody-free.

The Gold Report: We're about 1.5 years into the Obama administration's multi-trillion dollar bailouts and expansion of the Fed balance sheet to $2.3 trillion from about $800 billion. What are your thoughts on that?

John Doody: I think it's a bailout that continues with $1 trillion-a-year deficits as far as the eye can see. There's no end to it; unless we get some significant tax increases and/or spending cuts, there's no hope to ever to pay down the debt. The best hope is to get the economy growing faster than the debt so that, as a percentage of GDP, the debt level shrinks.

TGR: Do you agree with the administration's fiscal policies?

John Doody: Oh, yeah. I really don't know where we'd be if we didn't undertake all these remedies from the Treasury side on the deficit side, as well as the Federal Reserve side. The mess that this economy was in as a result of the Wall Street and housing collapse continues. You go by a strip mall here in South Florida with 10 stores, and at least one or two are empty. Almost 10% of workers are still without jobs. I was surprised to read that about 11% of all prime mortgages – these are the best mortgages – are either in foreclosure or delinquency. People are hurting.

TGR: How do you see all of this affecting the gold market?

John Doody: Everything that's being done creates inflation. You don't really care if somebody gives you a $1000 government bond as payment for a debt or $1000 cash. They're equivalent. We're creating a tremendous amount of money trying to get the pump primed to get the economy moving, but it's obviously a very difficult task.

TGR: You mentioned inflation and, in your last interview with The Gold Report, you said: "Bernanke and the Fed are pursuing a loose monetary policy with a 0% interest rate. There's actually no way we cannot end up in inflation." We're starting to see signs of it now. How is gold going to act in an inflationary environment and, perhaps, even in a hyperinflationary environment?

John Doody: Gold's going up now; it's going to go up more. One of the uses of gold is to protect your purchasing power from inflation, and it's done a damn good job! It always drives me crazy when these talking heads on TV talk about gold now vs. $850 in 1980. They say, "Oh, look where it's gone!" It's gone nowhere. That was a one-day high. The next day the Gold Price was $738. More important is to look at the Gold Price from when it was set free in 1968. It was fixed at $35 for over 30 years. If you just took that $35 from March '68, and I did in a recent issue of the Gold Stock Analyst, and adjusted it by the Consumer Price Index (CPI), gold would have grown from $35 to about $225. That's your inflation protection; everything above $225 all the way up to the current price and the next $1000 – that's all investment gains. From '68 to the present, gold had had an 8.6% compound annual growth rate that was 4.4% above the inflation rate for the period.

TGR: But you hold Gold Mining equities, and you don't hold bullion. In the last market crash, everything crashed – even the gold equities.

John Doody: That's true. The reason that I hold gold equities is because you get better leverage to the Gold Price. We always have to remember that while the stocks are derivatives of gold, they are stocks first. If the buyers disappear for stocks, they disappear for gold stocks too. But when they come back, they come back with a vengeance. In 2009, the Gold Price was up 28% and the XAU was up 37% but the Gold Stock Analyst's Top 10 was up 130%. That's the leverage you can get from owning the right stocks.

Investors in exploration stocks got killed in the 2008 crash. There were no fundamentals underneath those stocks. All the stocks I cover are producers or very near producers. We know there's something there, so we're not just arm waving over some drill results. That's one of the things that makes Gold Stock Analyst unique: We don't cover the exploration stocks, because I'm not a geologist. I can't interpret drill results. I want data. I want data that you can analyze and that's productions and reserves.

TGR: In a recent issue of Gold Stock Analyst you said: "As we're in a bull market underpinned by negative real interest rates, loose monetary policies and exploding government deficits, it's best to keep riding the bull and don't let it throw you off." How high can the bull ride through the end of 2011?

John Doody: First we've got to understand what the real interest rate is. That's the risk-free return on money, such as short-term US Treasuries. The US Treasury can't default. They can always print more dollars and give them to you. I like to use 90-day T-bills. Or you can use savings-account rates, which are about 0.1%. It's trivial. If you have in a savings account or in 90-day Treasuries and you start the year with $100, at the end of the year you're going to end up with $100 plus 0.1% interest. But if inflation is 2%, the money is going to buy you only $98 worth of goods. When real interest rates are negative, and people can't get positive return on their money by putting it in the bank or risk-free situation, they naturally flock more to gold to protect the purchasing power of their money. Gold has been a sanctuary in monetary crises and inflation for centuries. In the 2000s, Chairman Greenspan lowered the Fed Funds rate to 1% and the inflation rate has generally been higher. That's why gold has done so well.

TGR: What Gold Price will we be looking at through the end of this year and 2011?

John Doody: Well, I'm not a guy who predicts the Gold Price because my philosophy is I can find value at any Gold Price. I'm just looking at the next $100 ahead. People who predict $1,500 or $2,000 or $5,000 are foolish because there's no basis for that. I don't doubt gold will get to those levels, but I have no idea when. I find undervalued stocks now and profit as Mr. Market discovers them. So, if gold does nothing, we can still profit. If gold goes up, then we've got two ways to profit.

TGR: Alright, how long do you think gold's bull run will last?

John Doody: I think it's got a lot longer to run because the negative real interest rate environment is going to run a lot longer. When's the Fed going to raise interest rates significantly? They can't raise them now. We've got almost 10% of the country unemployed and that much, again, underemployed. So, until the economy gets going, we're not going to see any real change.

TGR: What about holding Gold Bullion vs. equities?

John Doody: The reason the stocks give you more leverage than Physical Gold is because all of the ounces are yet to be mined. Typically, a gold mine is going to have 10 times or more reserves in the ground than what they're producing in the current year. If a company is producing one million ounces a year and the Gold Price goes up by $1, that dollar falls right to the bottom line. That's $1 million more in profits. But because they've got 10 million ounces still in the ground, those ounces are now worth $10 million more than before.

That's what gives you the leverage that owning bullion just doesn't give you. If you own bullion and gold goes up $1, your coins are worth $1 more. No big deal.

Looking for Physical Gold instead of leverage, management, political and equity risk? Start with a free gram, vaulted securely in Zurich, Switzerland right now, by using Bullion Vault...

The Gold Report is a unique, free site featuring summaries of articles from major publications, specific recommendations from top worldwide analysts and portfolio managers covering gold stocks, and a directory, with samples, of precious metals newsletters. 

See the full archive of Gold Report articles.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

Follow Us

Facebook Youtube Twitter LinkedIn



Market Fundamentals