The bottom is in, declares Oliver Gross of Der Rohstoff-Anleger (The Resource Investor), and the bulls are ready to charge. In this interview with The Gold Report,Gross says that the woefully undervalued juniors will exploit their leverage advantage, with best-in-class companies gaining as much as 500% to 1,000%—or more. And he lists more than a dozen gold, silver and copper companies most likely to soar.
The Gold Report: Gold has fallen in the second half of March. Why?
Oliver Gross: I think it's a correction after the strong rally since December. And the situation in Ukraine has quieted down. We've also seen a strong uptrend since the beginning of 2014 and now it feels like a healthy consolidation.
TGR: Since December, we've had a very significant rise in gold equities. What is the cause? Gold rising from $1,180/ounce ($1,180/oz)? Or is it a cyclical change?
OG: It's a combination of bottom-building in the gold price and the end of the bear market, which resulted in one of the heaviest selloffs ever. The gold equities [NYSE Arca Gold BUGS Index (HUI)] to gold price ratio hit a multidigit low in 2013 (HUI:Gold). We have a solid double-bottom formation in the gold price in place and the end of the selling pressure from the gold exchange-traded funds (ETFs) and exchange-traded products.
We also see continuous strength in the physical gold market, especially the huge buying power from China, now the world's largest gold consumer and producer. And you can assume that China isn't a speculator regarding its aggressive purchases, but rather a prudent long-term investor. Maybe it has already developed a gold-backed yuan currency model that could be the new world currency.
The first quarter is always very important for equities. More and more market players have now realized the tremendous performance potential in gold mining stocks and joined the recent rally.
HUI:Gold Ratio (1996–2014)
TGR: The NYSE Arca Gold BUGS Index has risen even as the broader market has been shaky. What do you make of that?
OG: It wasn't a surprise, as valuations in the gold mining sector were not far from complete depressions. In addition, the gold producers have reformed after the big selloff in their equities. We have noted a significant change in business philosophy and a newfound drive to create a more robust and sustainable business model. The gold producers have successfully changed their focus from growth at any cost to maximization of profitability, growth in capital efficiency and real shareholder value.
The gold producers' income margins at price levels around $1,300/oz are still extremely slim. So there is a fantastic leverage in place, and with higher gold prices, the margins are going to explode. With a new gold bull market, which could lead to gold prices far above $2,000/oz in the next two to three years, we might see new, all-time highs in the NYSE Arca Gold BUGS Index. But I believe the next bull market rally will be more specific and focused on the best-in-class stocks.
TGR: Could we see the broader equities markets taking substantial losses, even as precious metal stocks increase in price?
OG: That would make sense, as we have had a very strong bull market in the broad equity markets and a very tough bear market in precious metals and other mining stocks.
TGR: The Market Vectors Junior Gold Miners ETF (GDXJ:NYSE.MKT) has risen significantly higher than the majors. Does this surprise you?
OG: The Market Vectors Junior Gold Miners ETF fell from an all-time high of nearly 180 points at the end of 2010 to a historic all-time low of only 29 points at the end of 2013. So its strong rally didn't surprise me. Most important has been the astonishing rise of trading volume. This is the key in every turning point. The juniors, with their low valuations, usually have far higher leverage, and that is the reason why we see even more volatility in both directions.
It's a very good sign that the juniors have outperformed the majors, as appetite for risk in the junior mining space is essential. We have seen a strong increase in financings and financing volumes in the junior gold equities market during Q1/14. That's a very healthy development.
TGR: There was a significant drop across the board in gold and silver equities in March. Was this mere profit taking, or have we reached an intermediate plateau?
OG: It really feels that we have seen the bottom now, and the bottom-building process always takes some time. The next few years will be a very attractive period to invest in high-quality resource companies.
Next page: Determining price buy limits