Gold is in the midst of a 20-year upward climb, according to The Great Super Cycle Author David Skarica. In this exclusive interview with The Gold Report, he points out the emerging market small caps that could profit from global economic swings.
Companies Mentioned: Aberdeen International Inc. Ishares MSCI All Peru Capped Index Fund Pebble Creek Mining Ltd. The India Fund Tinka Resources Ltd.
The Gold Report: In a February interview with The Gold Report, you said, We're in the midst of a 15- to 20-year mega-supercycle for gold and gold equities. You predicted $1,500/oz. gold prices and that gold would move higher through 2015 or 2020. Do you still believe that to be the case?
David Skarica: $1,500 was hit. Yes, nothing has changed my long-term view. These cycles usually move in 15- to 20-year periods. If you look at gold bottoming in 2001 or 1998, depending on your view, you can see we at the very least will move higher in 2013 and more probably into 2015 to 2020. The fundamentals back it up as the problems with unfunded liabilities and the U.S. deficit will continue to put long-term pressure on the dollar and upward pressure on gold.
TGR: In that interview and your book, The Great Super Cycle: Profit from the Coming Inflation Tidal Wave and Dollar Devaluation, you predicted out-of-control inflation due to pressure from overseas bond vigilantes. Do you see signs that that has begun and what does that mean for gold prices?
DS: We are seeing inflation. However, we have yet to see big spikes in interest rates. On the inflation front, the U.S. government is probably the biggest group of liars in the world when it comes to reporting inflation. If you look inside the metrics, the calculations they use are all designed to keep inflation as low as possible. Housing also has not been adjusted for the recent bust and is very over weighted in the Index. It is about the only thing not going up at the moment. In addition, the U.S. is about the only country in the world that just uses core prices. I find it interesting at the moment that everywhere in the world from China to India to the U.K. to the Eurozone is reporting higher inflation, but the U.S. has no inflation worries! Gap recently had terrible earnings due to increases in costs from commodities and costs that the Chinese had to pass on.
However, the problem on the rate front is that the Federal Reserve is manipulating the market through their QE program. They are the majority of the long-term bond market and a bit of the short-term bond market. Even when QE2 ends, they will just rotate the $1.2 trillion of securities they put into the market the past two years back into the bond market. I call it QE infinity. That money is never coming out. Now, at some point rates will spike as debt approaches near-Greece levels. However, because they have bought so many of their own bonds, it looks like reality will take longer than I initially thought to hit, but it will have an impact eventually.
TGR: What impact will economic instability in Europe, the Arab Spring and the specter of a new IMF chair have on gold prices?
DS: Firstly, let me get something out of the way. The United States is a bigger economic basket case than Europe. The entire European debt crisis is way overblown. Places like Portugal, Ireland and Greece are tiny. They would be the equivalent of Rhode Island and Alabama going under; that wouldn't exactly take down the U.S. economy. In addition, Europe has such a bloated social welfare system that it can easily cut these expenditures. Also, Europeans, unlike Americans, are willing to pay taxes for government services. However, Europe's policy of printing money to take care of some of these problems is another positive factor for gold.
Conflict in the Middle East is positive because gold is a flight to safety during times of turmoil. Also, problems in the Middle East cause oil to go out, which is inflationary and positive for gold.
The new IMF chair is irrelevant; one empty suit replaces another.
TGR: In recent trading, gold and the dollar both trended higher, how does that fit with your model that gold gains when the dollar tanks?
DS: Gold can trade up with the dollar. It did in 2005. The problem we have at the moment is no paper currencies are very solid. The dollar's recent gains have more to do with Euro weakness. When people overblow the Euro debt crisis, the result is a rush to gold. The same dynamic can cause the dollar to rally up against the Euro. In the long term, the big trend for the gold cycle is the U.S. debt crisis and the printing of money to inflate its way out. Even if the dollar doesn't eventually drop against the Euro, it will devalue against real assets such as gold, oil and other commodities.
TGR: In your blog, www.addictedtoprofits.net, you talk about the cycles that impact gold prices. Where are we in the current cycle and what can we expect next?
DS: The next part of the cycle is going to be very interesting, in my opinion. Because of the 2008 market and gold price crash the fact that everything rebounded together from 2009 to 2011, people think that gold moves with the market. However, I really think the next bear market in U.S. stocks will be caused by the weakening of the dollar and inflationary pressures. Therefore, I expect a situation where bonds go down in price, stocks overall go down in price and gold and gold stocks go up. In addition, I think that once people see that precious metals are the only game in town, this will allow the sector to attract more money.
TGR: In that February interview, you were bullish on small caps in general. What companies are you watching now in that space?
DS: I really like Tinka Resources Ltd. (TSX.V:TK; Fkft:TLD; Pksheets:TKRFF), a small exploration company in Peru that is in the midst of drilling. I was in Peru last August and met with the head geologist-a real old-school Peruvian who spent the 1980s risking his life by prospecting in the middle of a brutal revolution. Today, the stock trades around $0.50.
I also like Pebble Creek Mining Ltd. (TSX.V:PEB). They are developing their Indian copper project in the Himalayas. Things have gone slowly and they have had some management problems. However, the stock trades at $0.10 and there is virtually no downside, especially in a company that is expecting to go into production in the coming years.
TGR: You talked about Aberdeen International Inc.'s (TSX:AAB) role as a merchant bank that allows investors to have exposure to a number of gold and resource companies. Is their stock price representing their value yet?
DS: The blunt answer is no. Aberdeen continues to trade at a huge discount to their net asset value (NAV). The stock is trading at $0.80 as I write and the last report had their NAV at $1.37. So, you are getting the stock at around 60% of what it is actually worth. In addition, they recently announced a biannual dividend of $0.01 a share. That may not sound like a big deal. However at $0.80, that is a yield of 2.5%. So, you can buy a great company at a 60% discount to its NAV, which has huge upside potential and get more than what you get on 10-year U.S. Treasury bond in terms of yield.
TGR: Any other tips on companies to look at that might take advantage of the macroeconomic cycles pressuring stock prices?
DS: I would really look at Peruvian or Indian stocks here. Both have been whacked for different reasons. India gets hit because of worries over inflation and rising rates. Peru is neglected because of worries over the recent election where the socialist candidate was leading. However, it looks like Fujimori, the right-of-center, more business-friendly candidate, is now neck and neck in the runoff polls. If she wins, Peruvian stocks will probably rise quickly from their current levels.
I think one thing you have to understand is these emerging markets are growing fast and are leveraging, not deleveraging, like western economies. I was in Peru last summer and the growth there was amazing. I plan on visiting India in 2012. The India Fund (NYSE:IFN) and Ishares MSCI All Peru Capped Index Fund (MXPECAPD:EPU) are simple ways to play these economies.
At the tender age of 18, David Skarica became the youngest person on record to pass the Canadian Securities Course. Skarica, a Canadian and British citizen, is the author of Stock Market Panic! How to Prosper in the Coming Bear Market (1998), which provided thought-provoking arguments on why a great bull market would end in the most vicious bear market of all history. He is also the author of The Contrarian Who Saved the World, which explains how markets work. His new book, The Great Super Cycle: Profit from the Coming Inflation Tidal Wave and Dollar Devaluation, was published by John Wiley & Sons in November 2010.
In 1998, Skarica started Addicted to Profits, a newsletter focused on technical analysis and psychology of markets. From 2001 to 2003, Stockfocus.com ranked Addicted to Profits third out of over 300 newsletters in terms of performance. He is also the editor of Gold Stock Adviser and The International Contrarian services, which focus on gold and global investing. Dave has also been a contributing editor to Canadian MoneySaver and Investor's Digest of Canada.
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1) JT Long of The Gold Report conducted this interview. She personally and/or her family own shares of the following companies mentioned in this interview: None.
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