All Aboard!

Standard & Poors' equity analyst on where gold's headed next...

WITH GOLD PRICES riding ever-higher peaks lately, it's hard to imagine any investor is still remain in the dark about the potential of gold, reports Hard Assets Investor.

But despite the record-breaking prices, says S&P equity analyst Leo Larkin, the greater investing public just hasn't jumped on board the gold train. That could mean even higher Gold Prices ahead, he says here, speaking to Hard Assets Investor, as well as for selected Gold Mining stocks...

Lara Crigger, HardAssetsInvestor.com (HAI): Gold's been on a tear lately. Is there a risk this rally will become overheated?

Leo Larkin, equity analyst, Standard & Poor's: It certainly looks overbought. It's looked overbought for some time now. Maybe what will happen is that it will consolidate sideways before going higher, but it just doesn't seem to be giving up an awful lot of ground.

Frankly, it's stronger than I thought it would be. My year-end target price for gold was $1,050 an ounce, and we're there already.

HAI: Your colleague Mark Arbeter said that $1200...even $1500 an ounce wasn't that far off.

Leo Larkin: Well, Mark was using technical charting patterns to derive that target, and that's fine. My own target is still $1050, and although it may look like it's out of line for what we're seeing now, I haven't changed it, or my target of $1200 an ounce for 2010, although some might say now that that's too conservative.

HAI: Do you expect that we'll see a bit of a pullback?

Leo Larkin: I think there's going to be a little bit more ebb and flow to the market, although so far, that doesn't seem to be the case. It's not pulling back very much. And it's not giving people who haven't yet invested a chance to get in at a lower price. That tends to happen in a bull market; people wait around for a correction, but it never goes down far enough to give people an opportunity to get in at a more favorable price.

HAI: So have investors missed their opportunity to jump into gold, then?

Leo Larkin: Not necessarily. I think the trend is still higher. Like I said, I'm looking for $1,200 at the end of next year. Again, that may be too conservative, but even that is a big increase from where we are now. It's roughly a 14% gain.

I've seen numbers near $2000 in that same time frame, and I suppose that's possible, but it's an awfully large gain. If you adjust the Gold Price for inflation to where it was in 1980 – it peaked in 1980 at about $850 an ounce – people are coming up with a number of $2000 today. So I don't think a number like that would be too out of line. But it's not the type of number I'd expect to see in the next several years. Then again, it did surprise me on the upside.

HAI: So ultimately, can the good times continue?

Leo Larkin: There's quite a bullish consensus for gold right now, and sometimes, that can be a bad thing for prices. But even with gold where it is, it still strikes me as something of a "stealth" bull market.

HAI: A stealth bull market? Really?

Leo Larkin: Yes, because when you think of how much gold has risen since 2001 – it's nearly quadrupled – it still doesn't seem to have excited an awful lot of people. There doesn't seem to be much public participation yet. There's no sense of a mania, at this juncture. One day, there probably will be, and then it will be really big. So some people who suggest that this is a bubble already, I think are probably mistaken.

But professional investors are taking a different attitude. For a long time, I think they dismissed it. Now, gold has done so well, it's starting to attract attention from institutions that heretofore would not have bothered with it. I see it even gets more coverage on CNBC, which has been pretty hostile toward it over the years.

HAI: Which fundamental factors do you think are most going to influence Gold Prices over the next six-12 months?

Leo Larkin: I think that we'll start to see fears that inflation is going to pick up, and that the dollar will continue to weaken. The dollar has already dropped quite a bit. It's a kind of a stair-step decline that would obviously help gold. Plus, if the dollar keeps falling, people are going to look to commodities as the ingredients for economic recovery.

But if you look at what's happening in base metals and petroleum, they're both making recovery highs. They're on the track up from 2008. As it appears the world economy is beginning to grow again, people will start to worry about inflation, and that will help push up gold.

HAI: What are your thoughts on gold miners?

Leo Larkin: I'm actually not recommending any at the moment. I'm neutral on them. They're holds, based on valuation.

HAI: Okay, I won't ask for stock picks. But what factors are underlying the outlook for this group?

Leo Larkin: The price of gold itself, for starters. Also, the moderation of input costs will probably start to change as you get further into the fourth quarter and the first half of 2010. For a lot of 2009, the comparisons were pretty easy; input prices for the mining companies – like diesel and so forth – were a good deal lower in 2009, compared to 2008. Now we're starting to turn the corner, so those rising raw material costs – costs for things like petroleum and steel and other mining inputs – it's going to start to put a little pressure on the margins.

HAI: Who will fare best in the coming months: big gold miners, juniors, the mid-tier producers?

Leo Larkin: Probably the midsized producers will benefit most, but they'll probably all go up. I don't follow any of the juniors, so I can't talk specifically about that, but I would guess that as the price goes up, the smaller, more speculative mining companies will probably outperform the big blue chips like Newmont Mining, Barrick Gold and some of the other companies that people are familiar with.

The mid-tier producers might attract more money. When you're as big a company as Newmont or Barrick, it's very hard to replace reserves. The law of large numbers starts to work against you, as opposed to Yamana Gold or Agnico-Eagle, where your base is much smaller. There's more blue sky in the smaller or midsized producers.

HAI: How do you think geopolitical risk will play into the outlook for gold miners moving forward? I'm thinking specifically about Mongolia's Oyu Tolgoi mine, and how it's just taken forever to get the ball rolling, due to internal government squabbling.

Leo Larkin: Well, that risk is there not just for gold miners, but also for copper miners, and others, too. Anyone involved in the mining business has to try to cope with that risk. There's nothing unique to the Gold Mining companies about operating in politically difficult environments.

But I suppose to the extent that it constrains supply, it's good for gold. It may not be so good for the individual company that's trying to expand its production. But in a macro sense, it probably helps the price of gold.

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