Faceoff: Precious metals

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.

Patricia Mohr, VP, economics and commodity market specialist, Scotiabank, Toronto

Stance: Platinum’s the new gold

Price leadership within precious metals has shifted from gold to the platinum-group metals (PGMs) — palladium in particular. While the market remains volatile, as of December 2012, palladium prices are up about 9% and platinum is up by 6%, while gold is down by about 3% and appears to be consolidating.

One of the key factors driving gold on its bull run since 2001 was the expectation that central banks would apply quantitative easing to kick-start their economies.

Prices seem to be leveling now due to recognition in the markets that the Federal Reserve won’t further intensify quantitative easing. This view is supported by comments made by the Fed Chair before the U.S. Congress and from Federal Open Market Committee meeting minutes, which are released to the public.

There might be additional quantitative easing in the Eurozone and possibly Japan, but not in the United States. Jitters over Eurozone turbulence and sovereign debt could once more boost gold, but the American quantitative easing is at its peak.

Palladium takes the podium

Palladium, on the other hand, looks quite promising. It’s a precious metal, but also an industrial metal; its biggest use being in auto-catalytic converters for gasoline-fuelled cars.

With the demand for motor vehicles on the rise in Asian and South American emerging markets, palladium is a big growth story. Platinum is a bigger story in Europe, where consumers drive diesel-run cars that use the metal in auto-catalytic converters.

According to our internal global auto report, car sales in China are slated to increase by about 10% in 2013, up from 6% last year (sales surged in January, up 49% year-over-year). Until quite recently, hedge funds have been going long on palladium.

The supply balance shifted last year — from surplus back in 2011 to deficit — and demand is now higher. That story has only been further strengthened by the many labour strikes in South Africa, which accounts for about 34% of the world’s mined supply of palladium.

In addition, the Russian stockpile of palladium, mined in northern Siberia, is fast depleting. Last year saw a huge reduction in sales from that cache.

This makes the growth story for palladium quite compelling. Russia’s MMC Norilsk Nickel, the world’s largest palladium producer, should sharply cut sales from its stockpile this year before ending them in 2014. It supplied about 15% of the global demand for the last 40 years. (The company trades on the Moscow Exchange.)

Among precious metals, palladium would be my top pick for investors this year. ETFs are the easiest way to invest in palladium. Investors can also look at mining company stocks.

Silver surge

Silver often trades in lockstep with gold. But it is a more industrial metal, used heavily in imaging, photography, electronics, water purification, medicines, jewelry, etc. With China’s economy coming back, there’s renewed interest from investors in silver. Over time, the percentage price increase for silver could very well be greater than that for gold.

Investors looking to buy precious metals should buy with a hold period of at least a year; maybe two. As a rule, about 5% of client portfolios can be safely invested in precious metals.

Timing the market

Certain indicators in the market can help predict which way precious metals might be headed. They include:

• Monetary policy from central banks, particularly the extent of quantitative easing (the more this occurs, the better it is for gold);
• The relative strength or weakness of the U.S. dollar against a basket of key currencies; the weaker the U.S. dollar, the stronger gold and other precious metal prices become;
• Interest by central banks in buying gold for reserves (the higher the demand, the better for gold);
• Investor sentiment toward equities. One of the factors that hurt gold recently was a shift from gold to equities, particularly to stocks that make up the Dow Jones Industrial Average in the United States. This shift was driven by anticipation of a stronger pace of U.S. economic growth in the second half of 2013 and throughout 2014;
• Inflation expectations are another factor investors could examine, though it’s not been a particularly good guide recently, with well-contained inflation across the G7 (the higher the inflation rate, the better it is for gold).

Kanupriya vashisht is a Toronto-based financial writer.