Calling gold the ultimate money, Jay Taylor, editor and publisher of Jay Taylor's Gold, Energy & Tech Stocks, watches the real price of gold with a gimlet eye. These days, he pays particular attention to producers, noting that this is not a good time to be an explorer that needs to raise capital to put holes in the ground without the certainty of finding gold. In this Gold Report interview, Taylor shares promising names in each of the four categories in his model portfolio.
The Gold Report: Jay, in the June 20 issue of your newsletter, you made the case that gold has broken away from the downtrend that started in late 2011. Why is gold a better investment now?
Jay Taylor: At the time, I was convinced we were looking at a breakthrough in the junior gold index on the Toronto Stock Exchange (TSX). Now, it seems it may have been a false breakthrough.
The S&P/TSX Global Gold Index was as high as 450 back in September/October 2011, dropping to 270 by May 2012. Today, it is around 282. I see the junior gold index as a barometer of the industry as a whole. Although I was getting optimistic, I remain concerned about the possibilities of much lower levels in gold shares as a whole.
The companies that have to raise capital and put money in the ground are my greatest concern. I am less concerned about companies that are in production and generating cash flow from operations, many of which are doing extremely well.
TGR: In that newsletter, you wrote that the value of gold, "vis-à-vis. . .the Rogers Raw Materials Fund. . .had a rocket ship trajectory following the credit deflationary Lehman Brothers event and has remained on a gradual uptrend."
JT: I was referring to the real price of gold, not its nominal price. I am absolutely bullish on gold's real price. There is a distinct uptrend since Lehman Brothers in terms of what an ounce of gold will buy. That, not the dollar price, is what matters.
The recent record highs in the real gold price reflected the anxieties caused by the European crisis. To give you an idea, in July 2008 an ounce of gold would have purchased only 17% of the Rogers Raw Materials Fund. By March 2009, it had skyrocketed to 44%. After quantitative easing one and two, commodities, stocks and gold all rose. Then gold fell back to 30% of the Rogers Raw Materials Fund until the first Greek crisis. It rose again to 44%, and then got worse as Europe seemed to be falling apart. Recently, it has come back a bit.
The anxiety about the world monetary system is driving gold prices. Forget about jewelry or about gold as a commodity. Gold is money, and that is driving its real purchasing power higher and higher.
I am much less confident in the dollar as gold continues to rise. Gold could actually break below the $1,550/ounce (oz) support level.
TGR: Will it drop beneath the 52-week low of $1,480/oz set roughly a year ago?
JT: It could in nominal terms versus the dollar. If that happens, I would expect oil, copper and other commodities to fall even more. I think the dollar could be surprisingly strong for a number of years, which would make gold weaker relative to the dollar, but not relative to other commodities.
I am bullish on gold and especially gold mining in a deflationary environment because the cost of producing tends to go down more than the metal does. Contrary to most public opinion, a severe deflation is historically extremely bullish for gold mining.
TGR: The biggest threat seems to be the euro, which is trading at about $1.20 to the U.S. dollar. A euro in the $1.15–1.16 range could be a big hit to the gold price.
JT: I agree, and I think it is a strong possibility that the dollar could get stronger relative to other currencies. But the strength of the dollar is itself driving up the real price of gold; growing numbers of people do not trust the dollar as the ultimate currency.
As long as there is faith in the dollar and fiat money as a whole – and by and large there is – I see the system holding together for quite a while. I think it's Ian McCavity who calls the dollar the prettiest horse in the glue factory; in other words, the dollar is the least worst of all the manipulated currencies.
In the long run, the dollar could be stronger because it has the most debt. When there is a credit deflation, the margin clerk calls and wants the debt paid. So people have to sell and buy dollars to pay the margin clerk. Because the dollar has the most debt, it stands to have the most short covering against it when the margin clerks call.
The world is not short of liquidity; it is insolvent. Debt has grown so much more rapidly than the income to service it that there will be forced fire sales for years to come. The central banks will keep pumping in liquidity, but that money is made out of debt, not out of gold dug from the ground.
I am not saying the nominal price of gold will not rise. It may ultimately reach unbelievably high levels. But for now, I watch the real price of gold. It is such a macro statistic, very important in terms of my confidence in the mining industry and the producers.