The Gold Report: We are only a month into 2015 and already the economic news has been dramatic. Switzerland decoupled the franc from the euro. The European Central Bank (ECB) has announced quantitative easing (QE). The Russian ruble is crashing along with oil prices, but the U.S. stock market seems to be soaring. What indicators are you watching and what are you expecting in the global economy in 2015?
Pamela Aden: Never a dull moment. The biggest beneficiary of all this turmoil has been the dollar. The dollar index is at 10-year highs. Meanwhile the euro and the Canadian dollar have gotten caught up in a deflationary cycle along with oil and commodities.
Mary Anne Aden: We are watching the exchange rate and the cross rate. The strength of the dollar is the key because it has become the world's favorite safe haven in these times of uncertainty. Everyone is quite concerned about what's coming next. With the renewed liquidity from the ECB and the Bank of Japan, the decoupling of the Swiss franc and the collapse of the oil price, fundamental factors like gross domestic product and debt levels have almost been tossed by the wayside. The wild events in currency markets are impacting the stock markets in a big way.
PA: It is also having an effect on the bond market. A year ago the bond market bottom was rising. It became one of the biggest surprise investments for 2014. Even the end of QE in the U.S. in October didn't preclude another leg up. We think the bond rise is going to continue this year. And with all the liquidity in the system, the stock market could keep rising too.
Another shock was that when the dollar really started taking off, we saw the gold market bottom and start to rise. Technically, it was poised to fall under the $1,140 per ounce ($1,140/oz) low of November, but it didn't. It held and started the new year rising sharply, becoming a safe haven with the dollar. Gold shares are following the gold price and so is silver. We were thinking 2015 would be a very likely time to see a bottom in this bear market, but we weren't expecting to see the strong rise right at the beginning of the year. It's certainly looking good right now.
TGR: Is the fact that the gold price has been flirting with $1,300/oz significant in the long term?
PA: When gold touched above $1,300/oz everyone got excited. We are still watching closely to see if it stays above $1,265/oz in the next few months. That would be the sign of a solid bottoming action and turning bullish. Ideally, we would like to see it well above $1,300/oz and then a renewed strong confirm above last March's high around $1,380/oz. It's looking good so far. This is going to be a very interesting year.
TGR: What is the fundamental foundation for that support? Is it Chinese buyers, central banks?
PA: It's funny. In 2013 we saw the biggest leg down in this bear market starting with exchange-traded fund (ETF) selling versus physical buying. Now that the price is relatively low, we are seeing Chinese buying and Russian buying. For the ninth month in a row, Russia is buying gold in spite of the low oil price. A lot of central banks buy when the price is low. And there is safe-haven demand too.
TGR: What about on the supply side? Is less gold being mined because companies are holding back when the price is so low?
PA: Yes, the supply has not been as abundant as it could be. That goes back to years ago when miners were hedging so much they never really caught up to full speed. There is still a drag on the gold mining business in general.
TGR: We have been talking about gold, but not all the commodities are the same. What are your charts telling you about gold and silver patterns compared to the dollar?
PA: Gold and silver both look good. Gold has been stronger than silver since the beginning of the year, but silver certainly looks good. If we see copper bottom a little bit from where it is at this terribly low level, we could see a much stronger silver price than gold, but for the moment gold is stronger than silver. We like them both.
We think silver has a lot of upside potential over the next couple of years. This is the year for buying on weakness and holding. If you're still invested we wouldn't recommend selling at this point. We'd ride it out because we feel we're coming to the end of the bear market. We may have already turned the corner, but it's still to be seen. We recently increased our metals portion of our portfolio to 15%. We'll probably raise it more if these metals keep rising.
TGR: You have called gold shares the most hated market today. Sprott US Holdings CEO Rick Rule would say that's a sign that it's a good time to buy. How are you managing your precious metals positions right now?
MAA: Even a month ago gold shares were probably the most hated market out there. They were totally ignored. They had dropped far more than any of the other markets. Now with gold going up, gold shares are looking so much better.
Some are at very good buying levels, including Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX). We also like the Central Fund of Canada Ltd. (CEF:NYSE.MKT; CEF.A:TSX). We like the Market Vectors Gold Miners ETF (GDX:NYSE.Arca), which encompasses quite a few of the shares. We like Silver Wheaton Corp. (SLW:TSX; SLW:NYSE). Those are the shares that we like, but there are an awful lot of them that are looking good. We just want to see a little more development before we start recommending any juniors.
PA: If you just want to look at value for value, we totally agree with Rick. Some companies with great value are clearly on sale. The energy companies are also totally on sale. There are some values there to be picked up, but we are a little apprehensive until we see a clear bottom.
MAA: I'm sure this will be a very good year for picking up good value companies.
TGR: Two of the companies that you mentioned are royalty companies, Royal Gold and Silver Wheaton. What do you see as the role of royalty companies during a bear market like this and are they a long-term leverage play on the future of commodity prices?
MAA: Royalties have held up so well compared to gold shares during the bear market. They have the money and the power. We think they do well on the upside and they aren't so bad on the downside. They actually are the best during both the bull and bear markets.
TGR: Why these two royalty companies?
MAA: There are others that look good, but Royal Gold has been performing very well. We like to have our foot in the door on silver and Silver Wheaton is our favorite way to do that. They are both solid companies with good backing.
TGR: On platinum group metals, what is the supply and demand outlook for this year?
MAA: Palladium has been bucking the trend of the precious metals for the last few years by rising. It moved with the car industry, as it is a key component in catalytic converter systems. Improving global car sales boosted the metal, but the slowdown in global growth might put an end to that upward trend, at least compared to the other metals.
Platinum is starting to look perky, but it's not convincing yet. It was the darling of the bull market up to 2008, then clearly took a backseat and never really recuperated. Platinum is still below its 2008 low and it is a dull precious metal compared to gold and silver. It needs to prove itself more before we would consider buying.
TGR: Any advice for natural resource investors going into 2015?
MAA: Keep your eye on Dr. Copper. It has been falling with oil in recent months. When copper starts to bottom, it clearly reflects growth in China and the world. We would steer clear of resources until we see a little bit of a turn in copper and oil.
TGR: Do you agree with that, Pamela?
PA: People ask us that all the time: Do you two always agree on everything? Usually we do. When we disagree, it is usually on the resource sector. No resource looks very tempting on a value level. BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK) is totally bombed out. It looks almost like the oil price, and the Australian dollar has been terribly weak.
MAA: I agree that BHP Billiton is bombed out, but I think it is a good value. The problem is that a market can stay bombed out for a couple of years. That is where I tend to disagree with Pam. Yes, there's value, but there could be value a year from now and with this deflationary drag on the world economy I would not be quick to jump on those yet.
That is why I am watching copper. If it starts to show some life and strength on the upside, it would be a good sign that global growth is probably going to be right behind it. That would be a real good sign for the resource sector.
TGR: Thank you both for your time.
Pamela and Mary Anne Aden are the co-editors and publishers of The Aden Forecast, which specializes in the U.S. and global stock markets, the precious metals and foreign exchange markets, as well as U.S. and international interest rates and bonds. The Adens are the directors of Aden Research, based in San Jose, Costa Rica. They have authored dozens of reports and articles and have spoken at investment seminars around the world. Their work has been featured in newspapers in several countries, in such publications as Bloomberg Businessweek, Forbes, The Wall Street Journal, Money Magazine, Smart Money, Barron's, The London Financial Times, as well as CNBC and the international television documentary, Women of the World.
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