If gold is for capital preservation, what happens to Gold Prices in a recovery...?
VICE-PRESIDENT of research for Fundamental Research Corp., Siddharth Rajeev is ranked a 4-star analyst in the energy sector by Deutsche Asset Management, a division of Deutsche Bank, notes The Gold Report.
With his 2009 picks in Gold Mining, energy and other hard-material producing sectors outperforming their respective benchmarks after transaction costs, Siddharth Rajeev now suggests the price may dip back to the $750 neighborhood by 2012, thanks to economic recovery pushing Gold Investment demand lower.
Even at that level, however, and as he tells The Gold Report in this interview, "most projects can still make very good profits at very high margin..."
The Gold Report: What are you projecting as trends for gold in 2010, Sid?
Siddharth Rajeev: We believe the economic recovery in the US and increasing investor confidence will limit the upside potential of Gold Prices from current levels. This will result in a drop in investment demand as investors move from capital preservation assets – such as gold – into assets with higher expected returns.
We saw that the US GDP grew at 5.7% in Q4, which was the fastest in the last six years and in Q3 posted growth of 2.2%. Therefore, we are definitely seeing very positive signs in the US
Yes, inflationary pressures are looming, but we expect the Fed to start increasing interest rates in the second half. We expect Gold Prices to converge to our long-term forecast of $750 by 2012. But remember that most gold projects will still make good profits even at $750 gold considering the historic average is only $360 per ounce.
TGR: So you're among those who see what people are calling "gold shoots of recovery" and are projecting sufficient positive growth within the US in 2010 to prompt the Fed to start to increase rates.
Siddharth Rajeev: Yes, because once we see economic growth in the US, there's no reason the Fed should not increase rates, especially because of inflationary pressures. We believe the increase in interest rates would be able to limit the inflation rates in the next two years.
TGR: A lot of people are speculating that with the massive debt the US government faces already – plus the potential for additional stimulus and radical healthcare changes – the US will not go into recovery this year and possibly not even in 2011. Considering that projection is almost the exact opposite of yours, what are you seeing that they're missing?
Siddharth Rajeev: The main thing is that the US Dollar is still extremely weak compared to other currencies, which would benefit their exports. We believe the combination of a weak US Dollar and the stimulus package would result in an economic recovery in the US
TGR: And you say with recovery, Gold Prices will decline as people move away from it as a preservation investment?
Siddharth Rajeev: Gold Bullion has always been perceived as a capital preservation asset, so when the economy recovers, when the investor confidence improves, there is no reason why they would hold on to gold. They would rather put their money into investments that give them higher returns. One of the primary drivers of the increases in Gold Prices we have seen has been investment demand. As that declines, we don't see gold increasing significantly from current levels.
TGR: What about other metals? Will there be enough recovery in the US and/or in the BRIC (Brazil, Russia, India, China) countries to start seeing some increase in base metal prices?
Siddharth Rajeev: We've started seeing positive signs in the US in terms of base metals, and do believe that the global economic recovery will have a positive effect on demand for most of the base metals. China recently raised interest rates and has much stricter lending policies now. Both indicate that China is confident in its economic growth and is taking steps to curb potential inflation.
TGR: If at least in the BRIC countries and North America are in recovery, are there other sectors besides base metals that you think will perform well?
Siddharth Rajeev: One of the sectors that we have a very positive outlook on right now is uranium. We've not really seen any increase in uranium prices, even though all the other metals performed really well in the past few months. It seems like investors have totally ignored this commodity versus all the other commodities, which have responded well to economic recovery. All the money that's being put into infrastructure growth has helped the base metals, but uranium prices have not really responded to the positive news in terms of demand that we've seen over the last six months to one year.
TGR: How do you see uranium demand as you look ahead?
Siddharth Rajeev: Basically, there have been no significant changes on the supply side with uranium, but we have seen very positive news on the demand side, especially long-term demand. Most governments worldwide are realizing the importance of cleaner energy. Uranium has the most potential on the clean energy side. Obama really stresses nuclear energy. In the long term, two years out, we believe the demand for uranium will be very strong.
I think we will see uranium companies probably doing well in the next 12 to 24 months, and uranium prices are something to watch.
TGR: You mentioned earlier on that you expect Gold Prices to actually begin to decrease as all this positive GDP information comes out. You also said that many gold miners can be profitable at $750 gold. But will capital resources flow to those companies that need it to bring projects into production with gold at $750?
Siddharth Rajeev: I think so, because even at $750, most projects can make very good profits at very high margin, so we expect capital to continue to flow towards exploration , development and production.
TGR: Part of the whole logic of the price coming down is demand coming down as well. So is there a change in the types of projects you're looking at – for example, closer to production versus more speculative?
Siddharth Rajeev: Especially because we don't expect Gold Prices to stay at current levels, we like projects with lower operating costs, and capital costs.
TGR: As you look at the landscape of hundreds if not thousands of companies, do you find that operating costs of gold juniors will force many of them out of business in the future? Or are most pretty well established that all of them will be sustainable if gold goes down?
Siddharth Rajeev: Although margins will drop from current levels if and when Gold Prices drop, we believe that most of the currently producing gold projects should be sustainable at $750 per oz. Having said that, projects with extremely high operating costs would be negatively impacted.
TGR: Would that negative impact go to the extent that you would see constriction in the gold junior miner sector?
Siddharth Rajeev: We could see a drop in exploration spending from current levels, but, as I mentioned, the gold sector should be strong at $750 per oz.
TGR: We appreciate you sharing your news and information with us, Sid. It's always educational chatting with you.
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