Analysts at Mackie Research Capital crunched the data to stress test which junior miners would thrive, survive or die at $1,000/oz gold and $18/oz silver. In this interview with The Gold Report, Barry Allan, director and vice chairman of Mackie's mining group, delves into details on some of those companies and offers hope that the sector, instead of going to hell in a handbasket, actually is rebounding.
The Gold Report: We last talked in April 2012. What has happened in the junior mining market since then and where is it headed?
Barry Allan: Defining junior mining as single-mine producers and exploration companies, the sector has been decimated over the last 12 to 18 months. We're still in a period of skepticism and suppressed valuations. That will continue for the balance of 2013 and perhaps into 2014.
However, in spite of this general malaise, the entire sector isn't going to hell in a handbasket. Good companies can still conduct business, raise money and advance their projects. We suspect that in 2014 the market will be a bit more palatable, but not offer a dramatic shift.
TGR: In 1999, you watched the gold price hit a low of $252.80/ounce ($252.80/oz) and until 2004, struggle to rise above $300/oz. How is today's market for precious metals equities different?
BA: The protracted bear market that led to the bottom of the gold price was a steady grind down from the end of 1997.
That is not the case now. We remain in a bear market, but the price drop has been rather moderate. That is not a very bad gold price environment compared to where we were back then.
There's more optimism, in that gold—the amount of bullion held in exchange-traded funds (ETFs)—remains at a very good level. Bullion has reasserted itself as a legitimate asset class.
TGR: The Federal Open Market Committee meeting showed strong support for tapering quantitative easing due to an improving U.S. economy. Can a steadily growing U.S. economy and a rising gold price coexist?
BA: It should be entirely possible. One of the big concerns about the future of the bullion price has been what happens in the event of sharply higher interest rates in the U.S.
We expect bullion to show better resilience in this environment because of the emergence of other world economies—China being the primary example, but also India—that have stated the importance of bullion to their currency holdings.
I anticipate that while a higher U.S. interest rate and a stronger dollar will have an impact, it won't be of the magnitude that it would have been 10 years ago.
TGR: What will be the key price drivers for gold over the next 12 months?
BA: In North America, real interest rates and the performance of the dollar will be the drivers.
But the caveat is how the China sovereign entities respond. Their stated goal is to diversify out of currencies and into bullion. If we see this transition of money out of gold ETFs, it is likely to move into the hands of the world's sovereign funds to diversify their currency risks. As a result, we anticipate a more balanced market overall.
TGR: And silver?
BA: When you correlate silver with gold, you get an R-square of 0.94 over the very long term. Short term, the only thing you can say about silver is that it sometimes lags or overreacts to the gold price. Fundamentally, if you're positive on gold, you should be positive on silver in the short term. By short term, I mean up to six or nine months.