Precious metals analyst Jeff Clark says financial consequences of dollar debasing haven’t hit home yet, but will in the form of double-digit inflation, and will push gold and silver much higher.
Jeff Clark, senior precious metals analyst at Casey Research, is a favorite interview subject for Hard Assets Investor. So in the wake of the Federal Reserve’s third round of quantitative easing, we thought we would catch up with one of the few gold experts who also works his family’s placer claims in California, Nevada and Arizona. For Clark, it’s easy to be bullish on gold when he sees a huge wave of inflation bearing down on the country from the debasing of the dollar. According to Clark, it’s not a matter of if inflation hits hard, it’s a matter of when, which in turn will spark a precious-metals mania.
HAI: What is your characterization of the boost that gold received from QE3? Was it what you expected?
Jeff Clark: The surprise for me was not about gold. Gold did what it was supposed to do. The surprise about QE3 was that the Fed announced an open-ended program. Most of the market expected some level of money printing, and they got that. What they didn’t necessarily anticipate was that it would be open-ended, and that was the surprise. That’s why gold responded the way it did.
Quite frankly, though, it’s less about the short-term movements and gyrations in the market and more about what the most likely consequences are as a result of QE3. For me, it’s less about the price and more about how many ounces you own. We don’t think what’s coming is a pretty picture. I’m not saying we’ll are going to be grubbing for berries, but we’re not optimistic about the health of the global economy. Therefore, gold is more about protecting your standard of living than trying to make some money.
HAI: More of the idea of store value?
Clark: Right. Because it’s more about what is coming, and how to protect yourself against that. Gold will be one of your best financial assets to hold in that environment.
HAI: What do you think is coming?
Clark: What Casey Research sees ahead, quite frankly, is some type of inflationary recession or inflationary depression. We don’t think the economy is going to be vibrant. We’re not going to be able to grow our way out of our massive debt—that seems pretty clear at this point. I would go so far as to say there’s no way out.
So this implies that they’re going to continue printing money. And of course the more you print, the lower the value of the currency and the higher the value of the gold price. To prevent this, politicians would have to suddenly become responsible and the Fed would have to immediately stop printing. But even if they did all that, we have yet to experience the fallout from what they’ve already done. It’s a punch line, but it’s still accurate: Inflation is baking the cake here. At some point, all that money is going to hit our economy. Inflation will trump deflation, because inflation always gets another turn until it wins. And that’s the path politicians are pursuing.
We’ve all gotten so used to a low CPI [Consumer Price Index] now that at some point it’s going to catch a lot of people off guard. And once inflation starts, it’s really hard to control. I would go so far as to say it will be game over. The world will be a different place at that point. It won’t be like what we have now, where prices stay reasonably calm. And when that happens, I think it could be the spark to a mania in precious metals. That’s not a prediction necessarily, but certainly a highly probable outcome.
HAI: And what are we talking about, a doubling of the CPI, 4 percent maybe?
Clark: No, I think it will be more like double digit at some point, and the reason I think that is simply because of all the money that they’ve printed. You can’t do these kinds of things and expect to have no consequences forever. It’s not free. It feels free of consequences right now because official inflation is low, but there are going to be ramifications. And this is one of the core arguments for holding gold right now. When that fallout hits, gold is going to be one of the best assets you can hold for protection.
HAI: Is inflation going to have the biggest influence on gold prices going forward?
Clark: Inflation is certainly the biggest. The other issues that will influence the gold price going forward are going to be negative real rates, weak or negative growth economies around the world, ongoing deficit spending, debt and printing money.
HAI: Where do you see gold and silver prices at the end of the year?
Clark: Everyone wants a target. But the best answer is: higher. And in the long term, the answer is a lot higher. We have a long way to go in the precious metals bull market. The Fed’s been printing a lot of money, our debt is really high and our deficit spending has no end in sight—but we haven’t experienced the consequences from those things. When those things hit, it will be critical to own bullion.
HAI: Do you prefer the bullion itself? Are there coins that you would purchase? What would be the difference to an investor?
Clark: Well, the bars are cheaper, but the coins are probably more practical. They’re more recognizable. And larger bars could require an assay in order to sell, especially if you take possession of them.
You don’t have that issue if you buy a government-minted coin. Coins are more expensive and their premium is higher. But the interesting thing is, if you sell during a bull market, you’re going to get a lot of that premium back. They might be more practical for day-to-day currency—you’re not going to turn your gold coin in at the gas station, but you can sell one to cover your expenses for that month. That’s going to be one of the great advantages to owning gold when inflation does hit. Plus, coins are prettier.
HAI: The last time we spoke in June, you recommended Eldorado Gold Corp., whose stock is up almost 25 percent since then. Is there more upside to Eldorado?
Clark: There’s absolutely more upside. The stock is up 62 percent from its July low to its September high. The stock has had a tremendous run, and that’s the kind of surge we’re going to see more frequently going forward. Not just in Eldorado, but in many of the other higher-quality stocks, too.
The reason I’m so bullish on Eldorado is because they’re going to increase production by 125 percent by 2016; that’s an incredible growth rate for a large company. The more you grow your production, the bigger your market cap. With their production more than doubling in four years, that implies the market cap is going to get a lot bigger. And a bigger market cap almost certainly means a higher stock price. So I do like them for a big stock gain if you’re planning on holding it for the duration of the bull market.
Like many mining stocks, though, it’s not risk-free. The company has one project in Romania, which is not high on the list of your safest political jurisdictions. And there were some rumblings last month about one of their permits getting annulled, though we think there’s some political gamesmanship going on between two opposing parties. But the bottom line is that we think Eldorado is a top pick. I wouldn’t necessarily load up on it today after such a big run-up, but I would definitely buy the dips here over the next month or so.
HAI: In regard to miners, what is your feeling with GDX (Market Vectors Gold Miners ETF) and GDXJ (Market Vectors Junior Gold Miners ETF) and the idea of buying an index of miners versus selecting a single stock like Eldorado?
Clark: We actually have GDX in our Big Gold portfolio. But the only reason it’s there is for the person who has, say, only $500 to devote to gold stocks. GDX is the best way for that investor to get some exposure to this sector. You’re not going to buy five gold stocks for $100 each because the transaction costs would make it too expensive. So it’s designed for the small player.
Other than that, we wouldn’t buy GDX because we would rather pick the stocks we think are best, the highest quality with the biggest growth going forward. With GDXJ or any index, you’re getting the good with the bad. We don’t want that. We don’t want to own stocks in South Africa, for example, nor Barrick when it’s buying copper deposits instead of gold. So we would rather create our own little index.
HAI: Is there a price peak for gold? Or do you just constantly keep in your time frame what you just discussed in terms of the potential for inflation, and at some point you’ve got to pay the piper?
Clark: When you see a big surge in prices like we saw in silver in April 2011, where it touched almost $50/oz. for no real strong fundamental reason, that’s a mini-frenzy, and it was only natural there was going to be a pullback at some point. So I wouldn’t buy after a big surge. I would buy during a dip or after a correction.
But for me, taking profits or even selling out won’t be based on a specific price. It’s going to be based on one of three things.
First would be some kind of runaway mania. If we get a true bubble, then I think it would only be prudent to take some profit. Even though it’s gold, I would sell some of it to capture those runaway gains. I wouldn’t sell all of it. I’m going to hold some of it and pass it on to my heirs.
But if we get a true mania, prices wouldn’t be sustainable. And I’m talking about a true mania, where the gold price doubles in six weeks like it did from December ’79 to January ’80—I don’t mean the 20 to 30 percent annual increase that some in the mainstream have called a bubble.
The second thing would be positive real rates. And by that I don’t mean rising interest rates. A lot of people assume that when interest rates start rising, the gold trade is over. That’s not true. If the CPI is also rising and stays above the interest rate, then you still have a real negative rate. The gold trade would still be on, and that’s what we expect to occur when rates do eventually rise, at least initially.
And then the third thing would be if all of a sudden politicians proposed and followed through on a responsible plan to deal with the debt and deficit, and they stopped printing money. That’s highly unlikely at this point. We’re going the opposite direction of that.
So those are the three things I would look for. And until one of them occurs, I’m still buying gold and silver and the stocks. (my emphasis)
When not looking for the yellow metal, Clark can be found researching mining companies, analyzing big trends in metals and looking for safe and profitable ways to capitalize on the gold and silver market for subscribers to Casey Research’s BIG GOLD newsletter.
By Drew Voros for Hard Assets Investor
By permission Hard Assets Investor
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