The end of the gold bear market
When the New York markets run out of steam, the gold market gets hot. HRA Editor Eric Coffin has been watching the companies with the best assets, waiting for just this moment. In this interview with The Gold Report, he shares the names of the best in the gold, silver, copper and uranium spaces and tells you where you can go to talk to the CEOs.
Market Vectors Junior Gold Miners 1-Year Chart
The Gold Report: You singled out negative bond rates and a downward New York stock market as two of the factors that would make gold look more attractive in 2016. What are the other forces pushing gold to the $1,200 an ounce ($1,200/oz) level?
Eric Coffin: I think we're simply getting to the end of the gold bear market. We may just be running out of sellers. I think all of the hot money—and even the warm money—is pretty much out of it. Most of the funds were completely out by late 2015. That's part of the reason why I suspect that even though the major markets in New York are likely to fall at least 20% from the highs this year, I don't expect a repeat of 2008 and the wholesale selling in gold stocks.
Back then, gold and gold stocks bottomed four months before New York did but that came after selling that ended a multiyear bull market. Everybody and their dog owned gold stocks heading into 2008. At the start of 2016 "nobody" owned them. I don't think we have a similar situation where a fall in New York means gold stocks get thrown out like the baby with the bath water. I think this time around you'll actually see more buying than selling because most traders are still very underweight gold stocks and gold itself, for that matter.
Plus, central banks seem to be running out of rabbits to pull out of their magic hats. Some hedge fund managers are expecting Quantitative Easing (QE) 4. Maybe we'll see it, but Congress would go nuts if the Federal Reserve announced another QE program during an election year. There is a chance of a return to near zero rates later this year in the U.S. We already have negative rates in some countries.
There's no indication that's going to change any time soon. The European Central Bank is making noises about going even more negative, and Japan may too. I don't think this is a short-term thing; it's a trend that's going to take a while to resolve. That's positive for the gold market.
TGR: How big of a factor is China for gold and other commodities?
EC: Gold is a funny market. There's a large contingent of traders and most trading occurs in the futures market where it's paper rather than actual bullion changing hands. It's hard to argue that physical gold buying in China, India or anywhere else matters when trading volumes in the futures markets are so much larger and drive the price most of the time.
That said, there is no doubt that saleable global physical gold supply has been shrinking for some time. Gold generally moves from West to East and gets put into people's safety deposit boxes and central bank vaults. The day may come where that movement is large enough that it's really going to start pushing the price. I don't think there's a lot of doubt that central bank buying and buying out of China is taking all of the annual production and then some.
Plus, I think we've seen peak gold production for the foreseeable future. We're far enough now from the highs of the gold price and the funding capital expenditures (capex) for new mines that I don't think we're going to see growth in mine production now for probably several years. All of those things are positive.