When, not if' for $2 000/oz gold – Coxe

Matthew Hill - Mining Weekly

May 16, 2012

JOHANNESBURG (miningweekly.com) – The rout in gold stocks in recent weeks has been “truly stunning”, with investors rushing out of them in a near-manic fashion, but BMO Financial Group strategy adviser Don Coxe continues to believe their fortunes will change.

“When (not if) gold breaks out through $2 000/oz in response to massive central bank monetisation, we expect to have huge rallies in our gold mines that are now selling as if their reserves were dwindling and they faced extinction,” he said in his May issue of Basic Points.

Gold has lost some 12.5% in the past six months to scrape $1 549/oz on Wednesday, while the S&P/TSX Global Gold Index, comprising 64 mainly Canadian producers, has shed 34% over the same period.

Investors fretting over the possibility of Greece splitting from the European Union has sent most asset classes southward this month, with gold being no exception, as investors flock towards the perceived safety of US dollars.

The yellow metal had scaled a new peak just above $1 900/oz in September.

“Remember that the price of gold has risen for ten straight years—something no commodity had ever achieved previously,” Coxe commented.

“Remember also that central banks are continuing to buy gold in impressive quantities, and that sales to Chinese consumers have skyrocketed, thereby offsetting the shrinking demand from India due to the recent sharp drop in the value of the rupee.”

Gold miners will need a price $3 000/oz in five years simply to stay afloat, World Gold Council CE Aram Shishmanian said earlier this week.

French financial institution Natixis earlier this month predicted bullion would average $1 540/oz. Any further stimulus from the US Federal Reserve would be key to the metal's performance, it said.

Coxe, meanwhile, went on to note that many other money managers continued to advise clients to buy bullion exchange-traded funds (ETF) instead of the companies that produce it. Gold miners were the way to go for him, however.

“Our group's gold analyst, Sonny Tahiliani, recently did a calculation of how much gold one buys with $1 000 invested in the ETF compared with a representative major, intermediate and junior operating gold mining company.

“Based on the prices that day, with the ETF, you could buy 62% of an ounce; with Goldcorp nearly four ounces, with Eldorado, more than five, and with little Perseus Mining, nearly seven ounces. We like those comparisons. “

Coxe went on to say the euro crisis would hurt North American stocks, but not break them.

Reason is, the US Federal Reserve “has a licence to print money... so North America will not be driven into recession even if the euro plunges into the Mediterranean”.

Gold mining equities are not the only stocks Coxe likes.

In fact, he is bullish on most material suppliers that will benefit from growing Chinese and Indian consumption. He even titled his report “Is It Now—Finally—Time for Stocks for the Long Run?”.

“Although we agree that North American equity markets should soften near term, their valuations generally no longer reek of 1990s greed and delusion,” he said.

“Stocks – in particular the beaten-down commodity stocks – are now far better bets than bonds. Assuming the US escapes a double-dip recession, equity prices should soon be considerably higher—while interest rates will stay stuck near zero.”

As usual, agriculture features prominently on Coxe’s radar screen.

“We view this sector as having the lowest downside earnings risk within the four commodity stock groups (energy, base metals, precious metals and agriculture).”

Cheers

West Coast Guy