Rising Gold Prices to Boost Mining Stocks

Gold Mining and exploration stocks sit at the riskier end of the spectrum...

INTRIGUED by the Gold Price soaring even as inflation has stayed low, Beacon Rock Research founder Mike Niehuser won't be surprised if it crosses the $1500 threshold in 2011, says The Gold Report.

Here Mike Niehuser explains why he thus sees further upside in Gold Mining producer stocks, and how Beacon Rock Research is advising clients to benefit...

The Gold Report: Considering the turns we've seen in the relationship between gold and the US dollar, what is your view on Gold Prices these days?

Mike Niehuser: We are really quite happy with where the prices are now. Our beginning of the year guess for gold in 2010 was a range of $900 to $1200 per ounce. We saw a greater potential for gold exceeding that range and going to $1500 than for retreating to below $800. While Gold Prices have been closer to the high end of our range, this has pretty much been the experience so far this year.

Over the last eight years, precious metal prices moved up beginning in the early fall through spring, due to increased seasonal demand in Asia, then flattened over the summer months. This pattern broke in 2009 as investor demand offset reduced demand by jewelry fabricators. For 2010, Gold Prices have remained surprisingly strong given the increasing perceptions of a double dip in the economy, low inflation and low interest rates.

It is fascinating to see gold at record highs during a period of record low inflation. It makes one think something else must be supporting current prices. In any event, with renewed seasonal demand coming in August and September and the potential for government monetizing debt or other stealth stimulus programs, $1500 Gold Prices at year-end are not out of the question.

TGR: Do higher Gold Prices translate into opportunities for gold stocks?

Mike Niehuser: Obviously, higher metal prices should bode well for gold stocks, but this is not necessarily so across the board. For a company's stock to do well we would assume that there must be some combination of improving company-specific fundamentals or interest in the mining sector. On the continuum of investor tradeoff between risk aversion and return requirement, institutionalized concerns over a double dip in the economy has led fear to win out over greed.

Gold Mining and gold exploration stocks are considered to be on the riskier end of the spectrum for all equities. Over the last couple years, even companies with good projects and a track record for meeting guidance are not getting the respect they deserve. There are probably a number of concerns weighing on the minds of investors that will persist through the end of 2010.

TGR: Are you implying this is a good time to reduce mining and metals company holdings?

Mike Niehuser: Not at all. It is really more a factor of time horizon and expectations for return. We continue to believe that companies with improving fundamentals will outperform companies that do not create value. A lot of pessimism may be priced into the market now, which creates an opportunity for careful stock selection opportunities for investors looking for companies with the potential to increase fundamental value. We are living in historic times, and growing expectation of a double dip in the economy is all too reminiscent of the stagnation in the economy during the 1970s.

TGR: What parallels or factors do you see influencing the economy?

Mike Niehuser: It is starting to look a lot like the Nixon and Ford years. As if the '60s were not unsettling enough, the Nixon administration brought forward new regulations including the EPA and OSHA, deep-sixed Bretton Woods for a floating exchange rate, enacted wage and price controls, and introduced the earned income tax credit, which was a redistributionist negative income tax.

The current administration has accelerated deficit spending and intervention into private markets. Clearly, deficits can either be reduced by increasing tax revenues or financed with more debt. Fortunately, we are in global markets and for the time being, the Chinese are maintaining an artificially low exchange rate while the US dollar has been strong against the euro. As the exchange rate moves into balance, interest rates in the US should increase and the government may be forced to monetize the debt.

This is why we like gold producers; while the government produces and monetizes debt, diluting intangible assets, gold miners are producing the ingredients of real currency. From a stock point of view, many companies with operating mines are still trading below levels seen just years ago before the mines were built or in operation. These appear to be among the best opportunities to preserve principal with some upside potential.

TGR: Given the uncertain outlook for the economy and investing, what do you look for in gold stocks?

Mike Niehuser: It would appear that the market may become less efficient, not more. Small investors have a bad taste in their mouth and computerized trading by institutions suggests stocks are being influenced by factors that aren't company-specific. It is not clear what the market will identify in an individual company stock that will lead to a full valuation. If metal prices appreciate rapidly, the market may look for exploration upside. If metal prices are flat and investors more defensive in looking for value, they may want production and cash flow, or improving balance sheet fundamentals.

It makes sense to me that good Gold Mining stock selection would look for one or the other, and if possible both. This may include companies that have improving production profiles in the near term, project pipeline to expand production or reserves in the near term, and competitively promising exploration prospects on the horizon. As the market may not currently recognize more than one of these characteristics, when it does it would be logical that those stocks have a better-than-average opportunity for performance.

TGR: That's a lot of good information. Thank you.

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