Peter Krauth, resource specialist for Money Map Press, considers the precious metals space an overarching requirement for investors. He sees value in every sector, although he admits it takes a contrarian mindset to see the opportunity among stocks that have been trending down for as long as 18 months. In this Gold Report interview, Krauth shares names from majors to mid caps to royalty companies, including those in the platinum group metals space, where supply-and-demand tensions will move the price of palladium up.
The Gold Report: Peter, playing equities is all about timing. With many resource equities trading near all-time lows, it seems like a buyer's market. Do you agree?
Peter Krauth: Central banks have been on a fiat money printing binge since 2008. In the last 18 months, that is starting to have the desired effect. The global economy seems to be healing: Demand for goods is coming back strongly, the Dow Jones Industrial Average is setting new records. But at the same time, there will be a serious price to pay with inflation. Commodities tend to benefit from inflation. This is a very good and important space that investors need to include in their portfolios.
TGR: Does that hold true across all commodities?
PK: The entire secular commodities bull market is not completely over. It has been going for 12 years, but the average tends to be closer to 17 years. This bull market might last 20 years or even longer, if you consider development in China and India—home to nearly one-third of the world's population—along with the rest of the developing world. These populations are improving their standards of living, growing their incomes and looking for a better lifestyle. That means someone will have to make all the stuff they will want to acquire.
However, there could be a serious low or even a setback in the form of seriously reduced economic demand or an inflationary crisis. That would quiet things for a while, but would also do a lot of cleansing. After that, we will be back on our way.
Nonetheless, investors have to be picky. Every resource has its own cycle. It takes a lot of research to decide where you should be and when.
TGR: What are you telling the readers of your newsletter about increasing their exposure to natural resources in their portfolios?
PK: Right now, I see opportunities in base metals, energy and agriculture. And of course, precious metals will remain an overarching requirement to have exposure to commodities.
The larger gold miners have become extremely cheap, with very compelling valuations. As a group, they have not been cheaper since the secular bull market started. Gold may have been in consolidation mode since it reached $1,900/ounce ($1,900/oz) in September 2011, but I believe the secular bull market is far from over, despite the possibility of some sideways or downward price action.
The Market Vectors Gold Miners (GDX), an exchange-traded fund (ETF) that many consider a proxy for the Amex Gold BUGS Index (HUI), has a price-to-earnings ratio (P/E) of 10, far better than the average blue chip stock, which is closer to 16–17 P/E.
TGR: Some say the gold price is like a ball when you drop it. The first bounce is the highest, and the bounces keep getting smaller after each drop. Does that pattern worry you?
PK: No. As the consolidation moves forward in time, the price range gets narrower and narrower. At some point, that will have to change. The price will either drop down or break out of its narrowing price range. I believe it will break out.
The gold price is unlikely to stay very stable for an extended period. There is too much political and economic instability. The run on the banks in Cyprus is an example; a lot of Southern Europe has too much unemployment and sovereign debt. Ongoing gold purchases by the central banks provide renewed support for the gold price. All of these factors, and others, will support the gold price, at least in the $1,500/oz range. It could continue sideways for some time, but the bias is very much on the upside.