The Gold Report: Byron, many gold investors spent the early part of December exiting their long positions in gold. Is 2013 the year the gold bull market ends?
Byron King: I don’t think the gold bull market will end any time soon. I believe that much of the recent gold exit has been a reaction to the impending tax changes on Jan. 1, when tax rates will go up unless there is Congressional action. I don’t think very many investors are selling physical gold or silver. I do think people are selling paper and electronic gold to lock in gains and pay capital gains at the lower 2012 tax rate. It is tax-driven selling, not a reflection that the world’s monetary or economic system is getting well.
TGR: How should investors handle the tax-loss selling season?
BK: People have to make their own decisions. If investors own a physical precious metal, the last thing they ought to do is sell out. Really, never sell actual gold or silver if you can avoid it. With the paper gold, or electronic gold, or gold shares? It depends on the investor’s situation. If you have large gains, perhaps you want to lock in the gains, sell and pay a 15% capital gains rate in 2012, versus selling it after Jan. 1 and paying a higher rate. If that’s your case, then sell now and buy it all back next year. Everyone is different, however.
TGR: How should investors position themselves in gold for 2013 and beyond?
BK: Right now, an investor ought to have cash, which is dry gunpowder, as well as physical precious metals in one’s possession. I don’t mean own a certificate, own a call on gold or gold in somebody else’s storage locker. I mean, own the gold!
TGR: What should that portion be approximately?
BK: That’s a matter of individual taste. My view is 10–15% of your portfolio ought to be in precious metals. Some people say 5%. Some people say 25%. The University of Texas at Austin, which has a very large endowment, owns over 663,000 ounces (oz) of physical gold. Kyle Bass, a wealthy Texas resource investor, convinced the board of directors of the endowment to put 5% of the endowment into physical gold, and more importantly, to take delivery.
TGR: You say that the sector is poised for a rebound. Which part of the sector is most likely to rebound first?
BK: Large producers are refocusing and re-emphasizing capital discipline. In the last 10 years, as gold went from $300/oz to $1,700/oz, many gold mining companies—most, really—added new ounces for the sake of adding ounces. They expanded their resource base and added reserves without any real regard to the profitability of each ounce.
TGR: Perhaps the biggest issue with gold mining companies right now is steadily creeping costs. Some analysts believe that mining companies aren’t watching their costs as closely as they could be. Do you believe that some companies have better control of that than others?
BK: Yes. For example, a wonderfully run company in South Africa has had labor issues and strikes. It had to fire workers, just like a lot of other companies. However, its cost control is phenomenal.
Overall, mining is a tough, expensive environment. Energy costs are going up, in South Africa and everywhere else. Oil costs have gone up. Labor wants a larger slice of the pie. The cost for concrete, steel, machinery, equipment—you name it, everything is more expensive. Cost growth is a big problem.
TGR: Is there a solution?
BK: The solution is really good managers building really good relations with really good miners. At the operational level, you need to keep everybody productive and working as hard as they can. The externalities—oil, cement, steel—are things that companies can’t control and have to design, build or work around.
The bad news is that we live in an era of money creation and inflation. The good news is that the price of gold will still keep going up. The price of gold may, on occasion, be manipulated downward by the little gnomes of Zurich, to use an old expression from the 1960s, but long-term gold prices are destined to go up. That brings me back to that point I made earlier: Investors who do not own physical gold are truly shortchanging their own future.
TGR: Can you forecast a trading range for gold in 2013?
BK: Gold could hit $2,500/oz during 2013.
TGR: Wow, you’re a bull.
BK: I’m a bull. But I like to think I’m a realistic, informed bull. For example, have you seen reports on how Iran is trading oil with Turkey? Iran has to work around economic sanctions on its banking system. Iran can’t use SWIFT anymore—the Society for Worldwide Interbank Financial Telecommunication. So Iran is out of the system for currency trades. What can Iran do?
Well, there’s massive gold trade between Iran and Turkey for oil. It’s in the range of $15 billion/year. Just that little vignette illustrates the point that, whether the monetarists of the world like it or not, gold retains its usefulness as a means of lubricating transactions.
TGR: We’ve seen some friendly mergers and takeovers in the gold space recently. Is this a trend?
BK: After the year-long share-price meltdown in the Canadian junior space, a lot of companies have their backs against the wall. A good many gold miners, and other resource companies as well, face depleted cash resources. Plus, it’s virtually impossible to raise new money without massive dilution. So stronger companies can pick up great assets for a song.
TGR: In a lot of these cases, they were neighboring companies.
BK: Consolidating plays, consolidating ideas, regional trends or adjacent mineral claims is part of it. When adjacent companies come together, they can reduce their overhead.
TGR: Is that an investable theme in the gold space? Should investors look for companies that are operating in the vicinity of each other, one with significant cash on hand and access to capital and one that perhaps has a promising deposit but is a little low on cash?
BK: Yes. It goes back to the game of Monopoly, where you want to own all the same properties with the same colors so when somebody lands on it, they have to pay you even more rent for the house or the hotel that you built there.
TGR: What’s your advice to precious metals investors as we are heading into 2013?
BK: Investors need to own precious metals on several different levels. Physical metal is wealth protection and wealth preservation over time. Yes, metal prices go up, prices go down. Investors need to understand the concept that gold is money. Metal will hold on to its purchasing power and its value over time. There are historical reasons to own gold as a form of money stretching back over the last 5,000 years at least. Investors have to look at it at that level.
Gold is also part of prudent diversification. When you invest in most financial instruments, you’re investing in somebody else’s liabilities. If you put your cash in the bank, that’s not your cash anymore. It’s ones and zeros down at the bank. You won’t get the same $20 bill back that you put in. So even a bank deposit is a liability, so to speak.
Stocks and bonds are liabilities. Electronic and paper gold are liabilities. However, if you own physical gold, then you control that asset. Obviously, you have to protect the asset. You don’t want to just leave the stuff lying around. But it’s your asset, and it retains value over time.
Investors should look at gold on numerous different levels of personal wealth protection, growing wealth over time and diversifying a portfolio. In a sense, just simply the act of owning gold, improves your IQ as an investor because once you have gold in your hands, you will never touch paper money quite the same way. If you haven’t ever held a gold bar, or gold coins, in your hand? Well, maybe you don’t know what I mean. I suggest you do it. There’s no fever like gold fever.
TGR: Thanks for your insights.
Byron King writes for Agora Financial’s Daily Resource Hunter. He edits two newsletters: Energy & Scarcity Investor and Outstanding Investments. He studied geology and graduated with honors from Harvard University, and holds advanced degrees from the University of Pittsburgh School of Law and the U.S. Naval War College. He has advised the U.S. Department of Defense on national energy policy.
Interview with The Gold Report – www.theaureport.com