Supply/demand fundamentals favour gold, silver, oil, uranium and pgms
Ron Hera shares why he is bullish on gold, finds silver volatile but worth investment and encourages new investors to dig a little to find hidden possibilities. Gold Report interview.
Posted: Thursday , 07 Jun 2012
OLYMPIA, WA -
The Gold Report: What's the macroeconomic picture for gold and silver throughout the rest of this year?
Ron Hera: I view gold as a currency, and I don't think gold is going to lose value on a permanent basis, especially in light of the debt monetization that's taking place. Real interest rates are negative, and that's bullish for gold.
TGR: Silver's been beaten up pretty badly this year. It's right now around $28/ounce (oz). Where do you believe silver will end up at the end of 2012?
RH: It's hard to say exactly where it will end up because these are very volatile markets. But the supply-and-demand situation for silver is bullish. The silver investment thesis is an astonishingly simple one. Since the 1970s, there have been considerable aboveground stockpiles of silver, but those stockpiles have dissipated. Smart investors, like Eric Sprott, simply came into the market and bought the remaining silver so that when the supply-and-demand situation tightens, they'll be able to sell that silver at a profit.
TGR: You're calling 2012 "the end of cheap everything." One example is oil. You're predicting that the spot price for Brent crude will never again go below $100/barrel (bbl). Tell us about oil's fundamentals and how that's impacting the junior resource space.
RH: The demand for oil is rising. Year over year, fuel oil consumption in the United States is down, so it certainly isn't U.S. demand that can account for higher oil prices. It's demand from developing countries, namely China. That's why I don't think that oil prices will stay down. Also, the vast majority of the sweet, light, easy-to-access oil has been discovered and consumed, so we're looking at more expensive oil. I don't believe that the world is running out of oil. I just believe that the world is running out of cheap, easy oil. I call it the cheap oil theory, not the peak oil theory. At $200/bbl, we have lots of oil.
This impacts the junior oil companies in very interesting ways. It also means that rising production costs for mining companies are here to stay.
That is also why we are repositioning out of mining companies that have lower grades and therefore higher production costs. We are specifically targeting companies that have low production costs. That could be because of the actual basic cost of production or it could be because of byproduct credits, like copper credits.
TGR: In an April 25, 2012, report titled "Gold Stocks: Where Is the Bottom?" you wrote,
"With gold and silver prices at or above current levels, some gold and silver mining stocks are severely undervalued. Exploration companies without substantial defined resources and producers that have relatively high production costs or relatively low grade deposits are less likely to rebound when mining stocks begin to recover. Metals prices stuck in a trading range and higher oil prices, thus, higher energy costs, are crushing the prices of exploration stocks and impairing the share prices of producers with higher production costs or lower grade deposits."
RH: The situation could be particularly bleak for those companies that do not have economic resources-and that will be the majority of the exploration companies. We're positioning into companies that have higher-grade deposits and lower production costs.
TGR: You talk about how cash flows are going to decide who's going to make it and who's not. In terms of cash flow, what do you like to see?
RH: That really depends on each company's situation. But we've systematically repositioned capital into companies that we believe will rebound most vigorously, and there is a general guide for that. Number one, those companies have strong balance sheets already. Number two, they have positive significant cash flow already. Number three, most important, they have what I call not just a growth story but a monster growth story, meaning that the resources, production and cash flow are going to increase by an absolute minimum of 40-50% in the next year.
TGR: What are the total cash costs that you're looking at?
RH: We're looking for gold producers that are producing for less than $500/oz.
TGR: You developed the Hera Research Model Portfolio. Regarding that, you wrote, "If a company is selected for inclusion in the Hera Research Model Portfolio, Hera Research believes that its share price could increase by 100% or more in 18-to-24-months based primarily on tangible value creation or other recognition of value." How have the last 12 months-when drill results aren't tangibly moving share prices and equities continue to significantly lag the performance of the underlying commodity-made assessment more difficult?
RH: I would say that it's always been difficult and that it isn't materially more difficult now, although it is true that the share prices in the market are more volatile at this time. As I mentioned earlier, I view gold as a currency. So, when we're talking about gold shares and the global commodity prices, the dollar is an enormous factor. That's one of the first macro considerations that I'm constantly looking at: What's going on with the dollar and other global currencies relative to gold in particular but then also to global commodity prices?
TGR: Are there other criteria that have become more important over the last year?
RH: I'm always looking at supply-and-demand fundamentals. The first thing that I try to do is identify natural resources that will rise in value because of supply and demand. Currently, that leads to crude oil, gold, silver, uranium and platinum group metals. Supply-and-demand fundamentals have little to do with inflation. They're a consideration independent from what's going on with global currencies.
In addition, sovereign debt and other economic factors have the potential to cause some of these commodities to rise much more then the supply-and-demand fundamentals would suggest, and that will be a function of inflation. There potentially is an inflation booster behind some of the natural resource stocks. Then I look at those specific companies within what I consider safe jurisdictions. So, my analysis starts with macroeconomics and monetary economics in particular and then moves into the supply-and-demand fundamentals for the commodities and then ultimately moves to the individual companies.
TGR: Thanks for your insights.
Ron Hera, founder of Hera Research LLC, and the principal author of the Hera Research Monthly newsletter, holds a master's degree from Stanford University. A native Californian, Hera is a self-described "escapee" from Silicon Valley. Originally a serial entrepreneur and private investor in communications software and mobile technology, Hera turned his attention to investing in hard assets after the dot-com bubble and stock market crash of 2000. When he is not consulting for investors and resource companies, Hera writes articles and focuses on special research projects. Hera's articles have appeared on GoldSeek.com, 321gold.com, King World News, Seeking Alpha, the Ludwig von Mises Institute and in other professional economics and investment publication venues.
Article published courtesy of The Gold Report - www.theaureport.com