Sizing Up the Metals Outlook with John Kaiser

The tremendous rise in precious metals prices in recent years reflects a world of increased uncertainty, just as it did in 1980 when gold last spiked. But whereas prices quickly fell again three decades ago, that has not been the case this time, according to mining analyst John Kaiser.

Whether this trend continues depends on a number of factors, among which expectations and perceptions are key, Kaiser told the Hard Assets Investment Conference in San Francisco this week. Kaiser is head of Kaiser Research Online, a San Francisco-based information portal for resource companies that tracks sector trends and evaluates companies.

Gold has seen a real price gain of 64% adjusted for (US CPI) inflation since 1980, using a spot price of $1,689/oz. If this increase had not occurred, Kaiser said, the 1980 average gold price adjusted for inflation would yield a price today of only $1,032/oz.

The price move has been so monumental this time that it had the effect of bringing 25 years of new mine supply on stream.

"The conventional view is to look at precious metals as inversely proportional to the global economy, to everything going right, to base metals and other raw materials going strong," Kaiser said. But he offered a different view: that prices for metals, including copper - which in recent years often has led gold in terms of percentage increase - is all about China. It's also about global perceptions around the idea of continued growth, he indicated.

"Demand for gold and silver is now twinned with this idea that the global economy is going to grow and the assumption that China is not going to implode. ... It's very key that these emerging markets do not ... collapse," Kaiser said.

He went on to present several scenarios for precious metals. His most pessimistic scenario assumes a $2/lb copper price.

"And I think that if we end up with a $2-copper world, we probably end up with lower gold," Kaiser said.

Kaiser went on to examine the idea that the value of existing gold supplies is a function of global GDP, stating: "We are still definitely in the realm of having gold spike to the range of $2,000-2,500 - even without some hyperinflation engine driving it."

He added: "There is such a negative bias about the future that it is almost contrarian now to bet on a strong growing economy. ... I don't think that we've seen the peak of the exponential rise in gold and silver, but I think the levels that we're at now are probably sustainable. ... You could see this (current situation) carrying on for another five years assuming a growing global economy."

Regarding silver, Kaiser suggested that the most bullish scenarios suggest a price of $40-60/oz. But this will depend on investment demand. At current prices, much of the silver that's fabricated into industrial applications is going to come back out as scrap, according to Kaiser.

Given the rapid rise in precious metals prices, it's fair to ask why gold and silver equities are lagging the market.

"The disconnect is due to the pessimism that the entire industry tends to exude about where the world is going. And people ... know that if a recession or a depression is coming, all commodity prices - precious and base - are heading lower. So the equities are actually anticipating all these prices coming back down," Kaiser continued.

Other reasons investors may be wary of mining stocks right now include a changing picture for mining margins.

"The cost structure has risen. The low-hanging fruit has been harvested, and we are now entering an era when there's a whole new range of deposits that can be mined. Yet producers are trending down, ounces in the ground are trending down, and base metals are all trending down," Kaiser said.

Further, while gold will rise further if the value of the dollar continues to decline, the cost structure for gold and silver miners will also continue to increase.

But Kaiser held out hope for a reassessment of precious metals equities. Assuming existing silver prices but with the simple addition of rising expectations versus the current bearish sentiment, share prices may begin to reverse, he indicated.

"So simply an inflection - an expectation that current gold and silver prices are here to stay, without monstrously rising inflation - is going to result in an upwards re-pricing of gold and silver equities," Kaiser said, adding that $8 trillion is sitting on the sidelines waiting for a reason to buy equities.

Chris Munford researches and writes about commodities, with an emphasis on metals, energy, and steel raw materials. He is based in the New York area.