Mines and Money caught up with Michael Belkin, Author of The Belkin Report, ahead of his keynote presentation at Mines and Money London, to find out why as of July, his forecasts for gold, gold ETFs and gold mining stocks have been added to his outperform list.
Previous to July, Michael Belkin was no ‘gold bug’ but his data now shows signs that the significant bottom in gold has passed and by the end of the year, the previous highs could again be reached.
In Part 2 of our interview (read Part 1 here), we asked Michael if recent upward movements in the gold price will be sustained, how this might affect gold mining stocks and why we see more variation on the outlook for gold between various analysts, than with other commodities.
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M&M: I wanted to pick up on a quote from the most recent edition of The Belkin Report, dated August 19, which can also be downloaded from minesandmoney.com, which suggests the bottom for gold is over. Could you explain why you think this period of contraction is over for gold and why the right factors are in place to suggest that recent movements will in fact be a sustained move?
MB: Great question. So anybody that has been involved in the gold market or gold equity market is painfully aware that there has been a long bear market. So when did it start? It started on August 22nd, 2011 in the gold price. Like I said, it’s around the [USD]1900 level and the GDX gold mining ETF peaked a couple weeks after that (September 8, 2011). They declined, the bottom which I think is a sustainable bottom in gold, was June 27th of this year. So that was 22 months. It started from August, 2011 to June, 2013. Just two months shy of two years.
The gold price declined 37% over those 22 months and the GDX gold mining ETF declined, its peak was September 8, like I said, and its bottom was almost on the same day, a day earlier; June 26. So a 21-month decline in the gold mining ETF down 67%. So it went down almost twice what the fiscal gold price did.
Now, I am always looking, in my work my model is always looking, it’s old fashioned investing. Buy low and sell high. My model is always looking to locate into things that are depressed and to rotate into things that have had huge moves. So I’m not so much a momentum chaser, I’m trying to pick bottoms and pick highs. If you think of the financial markets, just disregarding gold for a second, there hasn’t really been anything else that has gone down. Over this whole period of QE, it’s a big risk-on environment and it hasn’t been an enormous rally but the SAP was up 20 percent or about 20 percent peak scale, five percent from there for the year. So, the question is, if you were a portfolio manager and you’re a global portfolio manager, what do you do?
You’ve been squeezed by QE and ZERP into an overweight position in equities probably. Meanwhile the bond price went down enormously. Thirty year bond, which I was short until about two or three weeks ago. The US 30 year bond went from about 150, over 150 to 130 basically. So down 20 points which I think was extraordinary. This is while the Fed is doing this bond buy program and the bond prices are going down.
So, the conclusion here is that gold and gold equities and ironically enough bonds are the only thing out there if you’re a global asset allocator that offered opportunity to buy something that’s down. The question is, buying things that are down doesn’t always work, so you need some kind of catalyst for things to turn around and my model says I’ve covered my short bond position a while back, a few weeks ago, and I added this week a long bond short SAP spread and I’ll probably be adding a long bond US bond position next week or in the next few weeks. It’s approaching the forecast.
So, what that tells me based on the model operator here as well as the model developer is that we are going into a risk-off environment in global financial markets. It’s certainly obvious already in emerging markets. They are collapsing. We’re having a historic crisis basically. If you look at the collapse in the Indonesia rupiah over the last few weeks, it’s just enormous. And the Indian rupee. These emerging markets are suffering big collapses, capital outflows. It’s on a 2008 kind of a level if you look what’s happening in our currency markets and in our equities.
So I think there is going to be this big rotation out of risk-on assets into safety and I think that gold, after its two year bear market, is kind of just sitting there waiting for people to discover it. It’s up a little, up off of its lows but not massively, particularly in gold stocks.
Now let me talk about gold stocks for a second. So we have my top seven names at the moment. I do individual gold stocks. Some of the largest gold portfolio managers are my clients. I know what stocks are in the portfolios and then I run the model forecast on them.
Let me just run a few of these names down:
- El Dorado Gold (TSX: ELD and NYSE: EGO) is down from 23 to 5 and has bounced back some, but these declines have just been enormous. If you look at the charts, these things are just demolished.
- IAMGOLD (TSX: IMG and NYSE: IAG) is down from 24 to 5
- Silver Wheaton (TSX:SLW and NYSE:SLW) is down from 50 to 12
- Royal Gold (NASDAQ: RGLD and TSX: RGL), fell from 110 to 30
- Detour Gold (TSX: DGC) fell from 40 to 8
- Osisko (TSX:OSK) fell from 17 to 3
- Samafo (TSX:SMF) fell from 15 to 1
Again, portfolio managers, anybody that’s been in the gold space, is painfully aware of the decline and they’ve been suffering for several years now. But I think that these are really representing extraordinary opportunities.
The best investors that I’ve seen over time are value investors, people that buy things when nobody else wants to touch them. They are just absolutely demolished. I think these gold stocks that are down from 15 to 1 qualify for that in that sense.
And, the percentage advances off of these, when something has gone down 80% or something, you can have doubles, and triples, and quadruples and it’s only a little blip on the chart. So some of these are up already a bit off their lows. This is not the lows anymore. We’re lucky. A month ago when I first became bullish on this, changed to bullish on the sector, but I think the people will wake up to the fact that you can have enormous percentage gains in these very, very depressed gold stocks.
I think that will be a catalyst for value investors. People thinking to get out of assets that have been inflated by QE as the global bubble begins to deflate, lead by emerging markets.
M&M: I was wondering if you could define why you think we do see often a fairly significant range in the forecast for the gold price between different analysts? When generally speaking there is greater consensus on other commodities.
MB: Good question. Again, I’m not necessarily the right person to have an educated answer for that. To tell you the truth, I pay very little attention to what most analysts are saying because having been at a major, a top three US investment bank, and been in the morning meetings, I honestly have very little respect for what the analyst are saying because some of them are, if you’re on the sales side, you have all these pressures to conform. You don’t want to shake the boat. You can’t really speak the truth even if you know the truth about, if you have some kind of opinion that deviates from the mainstream extraordinarily, then you’ll tend to get squelched and you want to be more conservative.
I think that is a good reason to look for independent analysts that are not tied to investment houses. I’m one. Certainly there are other ones out there. Although the gold price is pretty depressed right now and in terms of independent analysts, it has probably been a rough row to hoe for a while. So, I don’t think, I have not seen anyone with a bullish call such as I have on gold at the moment except for die hard permanent bulls on gold. So I’ve changed. I was not bullish this whole time during the bear market. So this was a big, big change for me.
I don’t know this for sure because I’m not, again I said I don’t follow the analysts that closely but for me, calling for a 30 percent something rally in gold, just for a base case, I would probably, I’ve got to be one of the most bullish people out there at the moment. Especially because it’s a fresh forecast. It’s not something that I’ve been saying incessantly. I learn humility on a daily basis. I’m forecasting many different markets and I certainly wouldn’t take 100% certainty in that forecast but I’m willing to stick my neck out and say gold is going up.
Download: Mines and Money London Brochure
Hear updated forecasting reports on global markets from Michael Belkin at Mines and Money London 2013. Joining Michael Belkin in the programme will be Rick Rule from Sprott Global, John Hathaway from Toqueville Investment Management, Randy Smallwood from Silver Wheaton, Frank Holmes from US Global Investors and Jim Rickards, investment banker, risk expert and bestselling author of “Currency Wars”.
As well as hearing advice and insight from a global investment heavyweights, attending investors will have the opportunity to scrutinise 250 mining companies and assess their investment potential by speaking directly to their senior management teams.
Download the programme here to see a list of exhibiting mining companies, confirmed investors and details about the full 3-day conference agenda, including discussion topics and new interactive formats designed to boost delegates’ networking experience.
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