Andrew Kaip, managing director of mining equity research at BMO Capital Markets, does not expect near-term higher prices for gold or silver. However, due to continuing cost cutting and other efficiencies, he argues that the senior gold producers can now make profits above $1,100/oz gold. In this interview with The Gold Report, Kaip names two seniors as Sector Outperformers, and touts the virtues of a half-dozen undervalued near-term gold and silver producers.
The Gold Report: You recently became managing director of mining equity research at BMO Capital Markets. What kind of overview of the gold and silver sectors does this position entail?
Andrew Kaip: Taking one of the lead roles at BMO Research has given me the opportunity to step away from the day to day of covering stocks. Supervising a team of analysts allows me to spend more time thinking about where we are in the gold and silver cycles and the implications for investors. That's precisely what we did when we launched coverage on the senior gold producers.
TGR: So where is gold in its current cycle?
AK: At BMO, we've kind of stuck our neck out after some deliberate thought, and we're suggesting a lot of similarities between 2001 and 2015. The price of gold was low then, just as it is now. Similarly, the gold producers of 2015 have come to resemble those of 2001, in that they have finally, after a long struggle, stabilized their operations such that they can contend with low prices. They have shut down unprofitable mines and lowered costs at those that they have kept.
I believe that gold producers are now in the early stage of a new cycle.
TGR: What are your 2015 and 2016 forecasts for the price of gold?
AK: Quite flat. We forecast a 2015 average price of $1,200 per ounce ($1,200/oz) and an average of $1,180/oz for 2016. Beyond that, we expect a slow and gradual rebound to about $1,250/oz long term.
TGR: And your forecasts for silver?
AK: Very much the same story. We forecast a year-end 2015 price of $16.43/oz, $16/oz for 2016 and $17/oz for 2017. We expect silver will then move toward $21/oz long term.
TGR: Despite the continuing massive expansion of global money supply and a host of geopolitical crises, most recently the possible exit or expulsion of Greece from the Eurozone, the gold price slid. Isn't this counterintuitive?
AK: At first glance, it would seem counterintuitive. One might have expected that the Greek crisis would have supported a high gold price. I recently returned from a marketing tour throughout Europe and discussed this issue with investors. The reality is that the Greek contagion has been mostly isolated. To be honest, Greece is a very small component of the European economy, and so the crisis has a quite small global macroeconomic effect. It is not regarded as having any serious implications for the United States.
More pertinent to the current price of gold is the discussion regarding whether the Federal Reserve will raise the prime rate in September.
TGR: We have heard talk of the Fed raising interest rates for years. U.S. gross domestic product fell 0.2% in Q1/15. Would the Fed really increase rates when the U.S. economy could be heading into a recession?
AK: No, it wouldn't. But many economic data points must be released before it can be said that the U.S. economy is in recession. Right now, the data are mixed. We go through periods where the U.S. economy starts hitting good numbers, and investors get quite constructive about it. Then we see a couple of soft numbers, and the discussion changes to the unlikelihood of higher interest rates.
I believe the U.S. economic trend continues to be more positive than negative. That is why, for instance, we've seen job numbers improve over the last few years, and quite frankly, why the U.S. dollar is as strong as it is. BMO is forecasting that by September the Fed will be in a position to raise the rate and will do so by that first quarter point.
TGR: A recent story in Al Jazeera suggests that China intends to move aggressively to make Shanghai the center of the gold world. What do you make of this?
AK: It's a significant development. China has spoken often of its desire to increase its reserve holdings of gold. We don't really know how much gold China holds, but we do know that China has become the world's largest gold producer. China is certainly seeking to increase its control over the pricing of gold. This is a reality that not many investors are paying attention to.
TGR: As ownership of physical gold continues to shift from West to East, would Shanghai's more powerful role lead to a higher gold price?
AK: A long-term trend has been established. Is it constructive for the price of gold? It has the potential to be, but ultimately, the price will serve as a barometer measuring the health of the larger economies in a global perspective.
In the meantime, this shift to Shanghai will increase the desire for investors to know more about the health of the Chinese economy and how that will impact the price of gold, just as today the price of gold is to a great extent determined by considerations of the health of the U.S. economy.