gold-and-platinum-bars

John R. Ing, President and CEO, Maison Placements Canada Inc., Toronto

Stance: Gold still golden

I belong to the dogged minority that remains bullish. Technical indicators suggest gold is oversold and the U.S. dollar overbought. We’ve hit bottom with gold — or close to it. I expect a sharp rally, maybe even a new high of $2,500 an ounce this year.

We’ve actually raised our new target to $10,000 an ounce before the end of this bull run, which could last another six to 10 years. While that number may seem outrageous, gold rose nearly 2,500% from $220.60 in July 1971 to $1,763.60 in July 1980, but is only up 550% from the lows of 12 years ago. There’s definitely a lot left in this bull market.

Pyramid approach

Buy gold when no one wants it. When gold went higher than $1,900 in September of 2011, everybody was looking for opportunities to buy and waiting for pullbacks. Gold’s been pulling back for six months now.

Ten percent of client portfolios should still be in gold or gold-related investments. I take a pyramid approach to buying gold: the foundation should be bullion because it’s portable; the rest should be shares that provide leverage.

Gold bullion comes mostly in the form of bars and coins sold at the prevailing market price, plus a premium for manufacture and shipping. It can be purchased through most major banks, coin dealers, foreign currency exchange offices, and brokerage houses. The Royal Canadian Mint offers some interesting products, including the Maple Leaf bullion coins, gold kilo bars, trade bars and gold wafers.

Investors can also hold gold certificates issued by individual banks, which offer a way of holding gold without taking physical delivery. They confirm an individual’s ownership while the bank holds the metal on the client’s behalf.

Gold is a long-term investment. The majority of investors should stay put. Having weathered a 20-year bear market in gold, my expectation is we’ll have a 20-year bull market. By that count, we’re just a little more than halfway through the cycle.

Inflationary impulse

Gold does particularly well during inflation or hyperinflation because the dollar and its purchasing power do so poorly against gold.

When I look ahead, I see hyperinflation. Deflation only happens when there’s a starvation of credit. Today, it’s the opposite: money has never been so cheap and so easy. The threat of another U.S. credit rating downgrade looms as the debt ceiling negotiations to raise the $16.4 trillion borrowing
limit begin.

The price of credit is abysmally low, forcing investors to take bigger risks in the quest for yield. Interest rates are near zero and real rates remain negative with no signs of inflation. The last time monetary policy was so liberal was in the 70s, and insidious inflation ballooned
to hyperinflation.

I studied 25 inflationary episodes across more than 50 years: Chinese hyperinflation in the 1940s, then in Zimbabwe, Argentina, Russia and Israel. The U.S. came close in the 80s, but Volckerism averted that. The common thread has been deficit spending.

Quantitative easing is more than just interest-rate manipulation. It has resulted in the creation of new forms of money proxies, which are part of a shadow banking system that has grown to $67 trillion. These derivatives are not anchored to anything concrete. It was this way in 2008, and almost broke the system. Today, despite Dodd-Frank, Volcker and Basel III, it is the same.

Central banks, including China, have become big buyers of gold, with more than 15 banks on the buy side in an effort to diversify reserves in response to growing concerns about a weaker U.S. dollar. Under Basel III, gold was rerated from a Tier 3 asset to Tier I, allowing banks to buy or hold gold instead of sovereign bonds.

Other metals

I’m bullish. I like silver because there’s an actual physical shortage. I also like copper because I believe in the China story with a continued growth rate of 8.5%. China is beginning its fifth five-year plan with new leadership and new plans.

With more than 300 million Chinese migrating to cities and attaining middle class status, the country will need more infrastructure — everything from new homes to airports to roads and railways.

An invigorated construction industry bodes well for metals such as copper and iron ore. I’m also bullish on uranium. Despite a sluggish spot price and fears that Japan might not restart the nuclear reactors shut down after the Fukushima meltdown, money is starting to flow back into uranium equities. China, India, Russia and South Korea remain committed to aggressive programs that could foster enormous demand for uranium, and the supply going forward will be short. Russian recycling — converting weapons-grade uranium to reactor fuel — ends at year-end.

Favoured stocks

The bigger companies, such as Agnico-Eagle, Barrick and Eldorado, remain attractive and have good managers. Agnico-Eagle is Canada’s largest producer and recently raised its production guidance to 650,000 ounces due to the turnaround at Meadowbank in Nunavut. It operates mines in Canada, Finland and Mexico and has restored its premium position to its peers due to favourable geographic risk, low operating costs and a dramatic turnaround
in operations.

Junior miners have been decimated: more than half of the companies on the TSX Venture trade at less than 10 cents. A lot of them are not going to make it.

But there are some with good deposits, and I anticipate consolidation. Excellon has $11 million in cash, an experienced board and promising exploration upside, which makes this junior a top pick.

We also expect a shortage of physical gold as miner production has peaked. The only other source is the estimated 22,000 tonnes of in-situ reserves held by gold miners, but that could cost $1,000 an ounce to extract. We believe the in-situ reserves will go up in value, causing a reversal of the equity downtrend.

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