These days, monetary policy moves stock prices more than economic data releases, says Mike Niehuser, founder of Beacon Rock Research. While the potential for higher gold prices is compelling, the decline in the number of discoveries and grades of resources makes mining stock selection intriguing. Niehuser has scoped out jurisdictions and finds the stars are aligning to put Nevada on top. In this interview with The Gold Report, Niehuser shares the names of companies that he feels have the right stuff.
The Gold Report: Now that the election is in the rearview mirror and we are well into the new year, what are your thoughts about gold prices and mining stocks for 2013?
Mike Niehuser: In my interviews with The Gold Report over the last couple of years, I have attempted to steer toward moderation but with optimism for higher gold prices, similar to Pierre Lassonde's forecast leading up to the end of the last decade. Early on, Lassonde, the chairman of Franco-Nevada Corp. (FNV:TSX; FNV:NYSE), saw the potential for annual increases of about $100/ounce (oz) in the price of gold through 2010, reaching $1,000/oz. He was surprisingly accurate.
I have taken this a step further, believing that gradual increases seem inevitable given government and central bank policies in the U.S. and globally. Because inflation, as well as the gold price, is a monetary phenomenon, price levels of products and services are managed by central bankers to trick investors and consumers, allowing them to function on a day-to-day basis. This is money illusion. Bankers and policymakers think people are incapable of separating reality from illusion. This is difficult in real time but becomes more obvious looking in the rearview mirror.
TGR: What was your prediction for gold prices in 2012?
MN: For 2012 I expected gold to trade between $1,400 and $1,700/oz with the potential with some catalyst to trade on the upside to $1,800–1,900/oz. While this is what roughly happened, it didn't happen in a way I expected. I thought gold prices would be more volatile and would follow seasonal demand with highs coming at year-end. Interestingly, prices were pretty flat within my range and came close to $1,800/oz. The range and high for 2012 was about $100 more per ounce than my previous estimate for 2011, which was also close. While my forecasts are a little broad, they are moderate compared to the extremes expected by some experts. I am not a gold trader. My focus is on my level of confidence for gold prices to be generally above costs of exploration and operations for the mining sector to be viable for investment. I then try to assess development risk of projects of which stable gold prices are an important part.
TGR: Do you expect the same $100/oz increase for 2013?
MN: I don't see much changing; higher gold prices appear inevitable. I think that the lower end of the range is fixed, but the potential for higher price levels above my range are more than possible if there is a black swan event. For 2013, let's put down $1,500 to $1,800/oz for the gold price and look for a high of $1,900/oz for the year. It may seem a little wimpy to keep $1,900/oz at the high end of the range, but a lot of things could tamp down gold prices, especially in the near term.
TGR: What are the risks that gold prices may fall or even drop below your lower range?
MN: In the big picture, a novice technical analyst may look at a 10-year gold price chart and say that gold has had its run, is losing momentum and should be ready for a long slide to historic levels. There may be some credibility in this assessment; certainly the government requires taking into account trailing averages for calculating resource models. This may be an argument but it's not realistic. We are not in the world of three years ago much less than 10 years ago. Besides, these nominal price charts are not real prices because they don't take into account inflation.
TGR: What makes gold risky in 2013?
MN: Monetary policy has more impact on moving stock prices than economic data releases—labor data, for example. The recent increase in the price of gold follows quantitative easing (QE) by the Federal Reserve Bank. Gold sputters when the Fed starts talking about stopping its Treasury buying programs. Gold prices have increased among nations that show the linkage of global currencies.
The Fed believes in the Phillips curve and has a full employment mandate, so if the Fed sees inflation increase over 2% or unemployment drop below 6.5%, we can expect it to increase interest rates. Friedrich Hayek said the micromanaging of the economy is the "Fatal Conceit." If the Fed can convince itself that the economy is strengthening, then quantitative easing may end and investor sentiment fade for precious metals. If the Fed starts increasing interest rates, it could crush gold prices in the near term.