Gold Profits from World Turmoil: Carlos Andres

The Gold Report: In a recent edition of the Frontier Research Report, you wrote, "As perplexing and disconcerting as it may be, the performance of major global stock markets currently has a much stronger influence on share prices in the mining sector than the actual performance of the underlying commodity." How is that different from previous cyclical dips in the resource commodity space?

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Carlos Andres: It's not different at all. The commodity space tends to be viewed with a bit of fear and skepticism by most retail investors and analysts generally. By extension, mining companies are viewed skeptically also, especially those in emerging and frontier markets. As a result, resource companies in emerging and frontier markets tend to be the last to receive investment capital during a bull market in stocks and the first that investors exit when markets get rattled.

TGR: Do you see a time in the near future when mining equities are influenced more directly by commodity prices instead of overall market conditions?

CA: It happens in the mature phase of a commodity bull, but the dynamic just described isn't going to disappear. However, I wouldn't be in this space if I didn't expect there to be appreciation in the shares. Although rising commodity prices drive the process, investors and analysts cannot ignore rising profits at mining companies as commodity prices rise. Analysts begin to look foolish by ignoring sectors that are outperforming. Generally, these rising profits begin to attract the investment herd to the mining space. Some of this money will also find its way into the junior resource exploration companies we cover. Because this market is relatively small compared to the overall market, it doesn't take much investment capital to drive share prices significantly higher, often many multiples higher than where the share prices bottomed.

TGR: In your latest edition of the Frontier Research Report you wrote, "Gold outperformed all major stock markets (in 2011) with a gain of +10%, confirming its role as the ultimate safe haven." Yet many pundits believe gold plays second fiddle, if not third or fourth, to the U.S. dollar in terms of "safe haven" investments and that gold's fall in the latter half of 2011 severely tarnished gold's reputation as a safe haven. Whom should retail investors believe?

CA: Since January 2000, the dollar is down 22%. During that same period, gold is up 497%. During this same period we have had a tech bubble, 9-11, wars in Iraq and Afghanistan, a global financial crisis in 2008 and the global train wreck that characterized 2011. This is a hint at the answer to your question. In 2011, the dollar was flat, while gold was up 10%. You be the judge.

TGR: Last year marked the 11th straight year of gains for gold. It has only returned less than 10% in four different years: 2001, 2004, 2008 and 2011. That pattern suggests that gold slumps slightly every three years. It begs the question: What's the pattern in the years immediately after a slump?

CA: Gold has performed very well after the years with single digit gains. For example, gold returned 1% in 2001, but then returned 26% in 2002 and 20% in 2003. In 2004, gold had a 5% gain, but in the following years it was 17%, 23% and 32%. In 2005, it returned 5% again. However, in 2009, it reached 25%, and in 2010, it hit 30%.

Based on historical returns, gold could perform quite well in 2012. It could also break the pattern and underperform, and that wouldn't shock me or cause me to change my outlook on gold. If gold didn't perform well in 2012, I would still keep my eye on the supply and demand fundamentals, which are as positive, if not more so, than they were at the beginning of the gold bull more than a decade ago.

TGR: The gold price is already off to a good start for the year.