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By Shane Lasley
Mining News 

QE Forever expected to boost gold price

Banks, billionaires see Fed policy pushing safe-haven metal to all-time highs; Giustra, Kaplan gain leverage with junior explorers

 

Last updated 9/30/2012 at Noon



As gold topped US$1,775 per ounce in September, banks and billionaires predicted the safe-haven metal will continue to rocket upward, topping US$2,000 per ounce by early 2013. This bullish outlook is being fueled by continued quantitative easing by the U.S. Federal Reserve and central banks in Europe.

"Loose monetary policies with a scope for more aggressive balance-sheet use in the U.S. and Europe will keep real rates in most reserve currencies low (or negative) in 2012," Michael Widener, a metals analyst for Bank of America said Sept. 5. "We continue to believe this will allow investor demand for gold to remain strong."

A week later, Federal Reserve Chairman Ben Bernanke said the central bank would continue its loose monetary policy on behalf of the United States; committing to buying up to US$40 billion of mortgage backed securities per month. This latest round of quantitative easing, dubbed QE3, is open-ended. The Fed chairman said the central bank will continue to buy these claims to the cash flows from pools of mortgage loans until it recognizes an "ongoing sustained improvement in the labor market."

Due to this unrestricted timeline of QE Forever, as some are calling this latest round of quantitative easing, Bank of America sees gold being pushed upwards for the foreseeable future.

In a note to its clients, the bank predicted that the US$480-billion-per-year program will be in place at least until the end of 2014, pushing the price of gold over the US$2,400 mark.

In the interim, Widener said the price of gold will climb to around US$2,000 per ounce by the end of 2012.

Forecasts by Deutsche Bank are similar to the projections by the Bank of America analyst.

"When one has accumulated too much debt, while the right thing to do is pay it back, the easiest thing to do is default and hope your creditor has a short memory.

We believe the Western economies in general are biased towards the latter, whether they will admit it or not," Deutsche Bank explains.

"We expect a soft default will likely be the preferable course of action; a managed form of currency depreciation through various stages of quantitative easing or successive bailouts by central banks of the banking system.

This 'easy' scenario is good for gold, in our view.

We expect the gold market to continue to respond positively to further central bank activity - which in our view is likely to continue to be biased towards further monetary expansion."

The German bank sees gold topping US$2,000 per ounce early in 2013 and climbing another 10 percent, to US$2,200, by the second quarter.

Barclays Capital also expects gold prices to the rise, though at a more modest rate. Barclays forecast gold selling for US$1,810 per ounce in the closing months of 2012 and averaging US$1,860 an ounce in 2013.

"The U.S. dollar has weakened since QE3, although this may not endure if the European Central Bank pursues balance-sheet expansion," according to the British investment bank. "Real interest rates remaining negative for longer also bodes well for gold, particularly as concerns over inflation have started to build, given that asset purchases are open ended and focused on labor conditions. Meanwhile, continued central-bank buying has offset some weakness that otherwise was seen in the physical market."

Golden billionaires

A notable group of North American billionaires agree with the banks' bullish outlook for gold prices. Three of these tycoons - George Soros (15), John Paulson (28) and Thomas Kaplan (311) - ranks on the Forbes 400 Richest Americans list for 2012.

Frank Giustra - who did not make the list, partly because he is Canadian and partly because it is hard to pin down his worth given that the largest portion of his wealth is held in gold - believes the price of gold is far from its peak.

The son of an Ontario nickel miner, Giustra amassed his fortune through his investments and involvement in mining ventures, including playing a key role in the formation of Goldcorp Inc.

In an interview with Cambridge House reporter Tommy Humphreys, Guistra agreed that the loose monetary policies of the United States and Europe will continue to drive up the price of gold. He takes issue, though, with the terminology used to sell it.

"Quantitative easing, it sounds very calming and sophisticated … its money printing," he expounds. "The reason why they don't call it money printing is because it is less alarming to say quantitative easing."

Guistra sees inflation as the unavoidable consequence of this money printing.

The Canadian billionaire, who is noted for predicting the bottom of gold prices in 2001, avoids the pitfall of predicting where the value of the inflation hedge will peak but is confident that it will make a sharp rise before it reaches the top.

"It will be at some level, and who knows what that level will be, and it is going to have a parabolic spike caused by some event or some major loss of confidence - a U.S. dollar crisis would be a perfect example - and that will cause gold to go through the roof and then everybody will want to own it," Guistra said.

When the masses are buying, the mining mogul said he will be selling his stores of the precious metal.

Hedge-fund managers Paulson and Soros have a similar outlook on gold as their northern counterpart.

Mid-year filings by Paulson & Co. Inc. revealed that Paulson's hedge fund increased its stake in the gold-based exchange traded fund, SPDR Gold Shares, by 26 percent. The 21.8 million shares owned on June 30 are worth about US$3.74 billion at late September prices.

Soros Fund Management LLC increased its stake in SPDR Gold Shares to 319,550 shares by mid-year, worth some US$55 million at current prices of the gold ETF.

Kaplan - who has been tagged with the title of "Gold's Evangelist" - believes the bull market for the precious metal is only beginning.

In a 2010 Wall Street Journal article, Kaplan declared, "I've reached a point where I feel the only asset I have confidence in is gold."

The Oxford-educated historian turned resource investor points to the precious metal's longstanding role as money - an observation he emphasized at the 2011 Buttonwood Gathering.

"Gold is not a commodity, it is a currency with the longest known provenance we have - actually gold and silver," the historian asserted. "And, that is extremely important because when you start looking at something no longer as a commodity but as a currency, you have to really assess; what is that market, is it deep enough to give people the opportunity to play?"

Kaplan says gold currently only represents about 0.6 percent of global financial assets compared to 4.8 percent in 1968. With central banks and fellow billionaires now buying up the monetary metal there is not enough to go around.

"At a time when mining companies can barely find enough gold to replace their reserves and production growth is anemic, central banks have not only stopped selling their gold but are now aligning with investors to accumulate it," he penned in the Wall Street Journal article.

Leveraging juniors

Both Kaplan and Guistra see the junior resource sector as an ideal way to leverage the price of gold.

"As it dawns on the wider market that the bull market in gold is real, the impact on gold mining equities will probably be dramatic," according to Kaplan.

His privately-owned Electrum Group of Companies is believed to hold one of the largest collections of precious metals exploration projects on the planet.

Included in this portfolio is at least a 21 percent interest in Novagold Resources Inc., which, in turn, owns a 50 percent stake in the 40-million-ounce Donlin Gold project in Alaska.

Kaplan is also the chairman and champion of this exploration company on the cusp of becoming a gold mine developer.

"Thinking back on just how much the world has changed since 2008 is proof enough that we live in unpredictable times. For reasons ranging from this same unpredictability to more fundamental reasons of simple supply and demand, we are, however, confident of one long-term theme, and one theme alone: that the case for gold is strong, and getting stronger all the time," said the NovaGold chairman. "This unambiguously bullish commitment to gold, and only gold, underpins our corporate strategy ... and the firm belief that Donlin Gold is on the path to being built into one of the world's biggest and best gold mines."

Despite owning a 50 percent stake in Donlin and Galore Creek, a world-class deposit of copper and gold in British Columbia, NovaGold stock has been pummeled over the past year. Peaking at C$11.77 in November, 2011, the company's share price bottomed out at C$3.67 in August. Most junior exploration companies and many gold producers experienced similar downhill slides in their equity.

"The junior sector is as bad as I have ever seen it," Guistra said in his conversation with Cambridge House. "You have got share prices trading at levels I would have never imagined and these are companies with real assets - I am talking about companies with world-class assets or developing world-class assets that are trading for pennies on the dollar."

The Canadian mining magnate attributes much of the suppressed share prices to investor fear.

"People usually connect irrational and stupid market behavior with peaks of markets but it takes place at bottoms of markets too," Guistra said. "When you think about it, fear is a much greater and stronger emotion than greed - the sense of fear and hopelessness people might have about the resource sector right now."

With the junior sector in shambles, Guistra said he has made a significant investment in a number of these metals explorers.

When making his picks, the golden investor said he sought out grossly undervalued companies with great assets, great management and the ability to weather the current turmoil without going to the equity markets while their shares are trading at pennies on the dollar.

Keeping these criteria in mind, Guistra advises investors to look for junior explorers to buy stock in.

"Pick right, sit tight and you will make a lot of money, eventually," he recommends.

At Sept. 27, NovaGold shares were trading at US$5.60, reflecting a broader upward trend across the junior resource sector in recent weeks.

 

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