Bullish on gold since it carried a $400-per-ounce price tag, Blue Phoenix Chief Investment Strategist John Licata expects the king of metals to ring in the New Year with a $1,200-per-ounce crown. As he told The Gold Report in April, he still considers gold one of the best asset plays in the world. With recovery on the horizon, he's also high on silver—in part because a pickup in manufacturing will drive up demand. While he says it's premature to claim economic recovery, he isn't looking to copper to serve as the traditional harbinger of a return from recession this time. His rationale? Good economic news—while too inconsistent to make recovery imminent—is already baked in to copper's climb already this year.
The Gold Report: You weren't too bullish on seeing a recovery in 2009 when we caught up with you in April. We've seen some good Q2 reporting from a variety of companies and some encouraging economic data. The government is starting to claim we're in recovery. What's your take on this?
John Licata: I do think we've seen some better domestic economic data, but it's premature to think we're totally out of the woods. In terms of corporate earnings, a lot of company profits might have surprised to the upside, but they're still down 50% to 70% from quarters before or the prior year.
Many companies have been trying to compare Q1 and Q2. You're still not seeing dramatic differences to the upside. Quite frankly, some companies are still living within cash flow and I think that's one of the reasons why we could have a problem with supply and demand imbalances as we come to the end of 2009 and enter 2010.
Unemployment is likely to keep rising. Although the last numbers were much better than anticipated, I don't think we've seen the green light that will cause people to start hiring again. We could hit 10% unemployment by the end of the year, and that's going to be a precursor to some weaker retail heading into the holiday season. Net-net, you probably could put the word ‘inconsistent' toward most of the economic data coming out of the U.S.
The industrial numbers that came out of China a couple of weeks ago [August 10] were actually below expectations as well. While everyone wants to be bullish and the data is somewhat better than many expected, it's still not great. So I think to claim victory right now is definitely premature.
TGR: You mentioned a supply-demand imbalance. What do you see on that front?
JL: Companies are not putting money back into infrastructure. For that reason, once demand actually starts to increase, supply levels will be shockingly different from what people might expect.
TGR: Are you differentiating between the BRIC countries and North America in that regard?
JL: I'm not just looking at the BRIC countries as the barometer for the economic pulse. I don't even think China is the saving grace for commodities. But I do think what is going to be indicative for a recovery is to see demand pick up, to start seeing jobs pick up again, more consistently; not just one month out of six. We need to see consistent job growth.
TGR: When do you think demand might pick up?
JL: Q3, perhaps Q4, is when we probably can start seeing demand start picking up and I think that's when we're going to start to see overall a global economic recovery. I'm skeptical that it can happen before Q4.
TGR: Is that worldwide demand pickup you're anticipating?
JL: I'm referring to North America.
TGR: Can demand pick up before unemployment abates?
JL: It can happen before, but I think demand and employment will increase in tandem.
TGR: In our previous conversation, you compared the investment opportunities in oil, natural gas and gold to one another. At this point, which of these three sectors do you think offer the greatest return?
JL: Because of the upside that I think could happen over the next 12 months, I would rate natural gas first, gold second and oil third. For right now, I'm conservatively optimistic on oil. Although short term we might have a pullback, I'm still bullish on the price of oil. I think oil will trade north of $80 by year end, and I think we'll again see triple-digit oil within the next two years. A lot of major wells in the world are not as productive as they once were and when it comes to demand increasing because the overall economic health around the world is picking up, we could be in trouble in terms of supplies. That relates to the metals as well as energy.
TGR: Speaking of metals, your outlook for gold?
JL: I continue to maintain that we could see $1,200 gold prices by year-end. I think gold is very much on the way to hitting that pretty aggressive price target. The miners themselves seem pretty confident on the upside for gold. We've been hearing CEOs from various gold companies, including Goldcorp (TSX:G) (NYSE:GG) and Agnico-Eagle Mines (TSX:AEM), saying that we're probably going to end the year with gold north of $1,000.
TGR: In April, you described gold as one of the best asset plays in the world and your recommendation to investors was to focus initially on physical gold. Have you changed that viewpoint?
JL: No. I've been bullish on gold since it was below $400. But now I am starting to see some opportunities in the equity side of the gold market that are becoming very appealing and I didn't see that when we last spoke. For example, Gold Fields Ltd. (NYSE:GFI)(JSE:GFI) is paying a dividend of 1.77%; that might start to draw some attention. Outside of the dividend plan, their costs have been improved relating to Eskom in South Africa. If they can keep those costs balanced, that's another reason investors should take a look at GFI.
Agnico-Eagle actually might raise the dividend in 2010 or buy assets either in the Arctic and Mexico. That's pretty interesting, too, considering the move they're expecting in gold prices.
TGR: Any others that appeal to you?
JL: I've been high on NovaGold Resources Inc. (TSX:NG) (NYSE.A:NG) for a long time. They have partners, including Barrick Gold Corporation (NYSE:ABX) and Teck Cominco Ltd. (TSX:TCK.A) (TSX:TCK.B) (NYSE:TCK) and I do think that they could gain the external financing they need develop their properties and get them up and running. Their assets are very rich. I also love Golden Star Resources Ltd. (TSX:GSC). So those are names I'm looking at right now in the gold space that I think would be quite attractive for investors.
TGR: How about Fronteer Development Group (TSX:FRG) (NYSE.A:FRG)? Anything new with them?
JL: I'm still very much a fan of Fronteer, but at the moment more for their uranium assets than their gold assets. A third-party surveyor is supposed to announce uranium results for Fronteer before October. That should go a long way toward showing Wall Street some economics around the company's uranium business and that Fronteer has a robust profitable project in Michelin. Fronteer has about 100 million pounds of uranium in that project in Labrador.
TGR: Are you still bullish on platinum and palladium, too?
JL: I am still enthusiastic, but not as bullish on either of them just because we have seen a bit of a run since April. I'd rather be in silver. I think silver gets forgotten when we start talking about precious metals. As opposed to platinum or palladium, I would rather be in the silver space and possibly look at a company like Hecla Mining Company (NYSE:HL).
TGR: What's about Hecla captures your attention versus the hundreds of other silver equities?
JL: They're the largest U.S. silver producer. They've been doing a really good job of paying down their debt. The company has cut down its costs and is on track to meet their full-year production guidance between 10 million and 11 million ounces of silver. In addition, Hecla recently announced a 24% increase in quarterly silver production. The fact that they have record silver production—thanks to, I guess, more stringent management and better mill optimization—speaks volumes for this company. And they said on their last conference call that they could have a record-breaking Q4.
TGR: Given the rally we've seen in the last four months or so, hasn't the market already priced that in?
JL: I don't see it. I think there's more upside to come.
TGR: Is there anything in particular in silver that you're finding appealing?
JL: I just think if we're talking about an economic recovery in the back half of this year into 2010 and silver is mostly used for industrial purposes, I honestly think that silver prices are just forgotten. When people start talking about the inflation hedge, they jump into gold. If they start talking about the economy improving, they jump into copper. They tend to forget that silver is actually used for much manufacturing. So I think that is the forgotten metal and I do think that silver prices can move a lot higher, especially as gold prices march through $1,000.
TGR: As you say, people look to copper as the leading metal to point to in terms of a recovery. What's your feeling about copper?
JL: You hit the nail on the head. Everyone starts to talk about copper, but nothing has jumped out at me to say that copper prices have much more upside. Copper prices are up nearly 100% year-to-date, so I think a lot of the recovery that many people are talking about has been priced in already. In addition, Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX)—the world's largest publicly traded copper company—is up north of 150% year-to-date. It seems to me that a lot of the good news is baked in already. So I think the upside in both the futures and in the bellwether—Freeport—is definitely limited.
Beyond that, the Baltic Dry Index, an index that just had the biggest monthly drop since October (down 28% in August), has been down because people fear that China might cut back on buying iron ore and coal. If that happens, copper prices won't be immune. Copper supplies have been tight for the last couple of quarters. If anything, we're trading about 35 cents or 40 cents above the recent 50-day moving average. I think copper is over-extended right now.
TGR: Any last comments before we meet again?
JL: Only that while it's a difficult marketplace and I do expect tight markets around the world to continue, some of the plays we've talked about have the makings of a pretty successful portfolio.
DISCLOSURE: John Licata
I personally and/or my family own the following companies mentioned in this interview: None
I personally and/or my family am paid by the following companies mentioned in this interview: None
After studying economics and graduating from Saint Peter's College in New Jersey (where he received the Wall Street Journal Award for economic excellence), John J. Licata set his sights on Wall Street. During his career, John has held both trading and research positions on the NYMEX, Dow Jones, Smith Barney and Brokerage America. Early in 2006, he founded Blue Phoenix, Inc., an independent energy/metals research and consulting firm based in New York City. John, the company's Chief Investment Strategist, has appeared regularly in the media (CNBC, Bloomberg TV/Radio, Business News Network (BNN), Barron's, The Wall Street Journal, Chicago Sun, Los Angeles Times, etc.) over the years for his insights/forecasts in the commodity spectrum.
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