Interview with expert analyst Michael Belkin
Michael Belkin, renowned precious metals analysts, sat down with Mines and Money to discuss what the future holds for gold and other key investments.
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Mines and Money: What is your outlook for gold over the next 12 months?
MB: Gold hit a major cycle low of $1051 on December 17, 2015 after a -45% four-year bear market that started from a peak of $1897 on August 22, 2011. That four-year bear market was almost twice as extreme in gold stocks, the GDX gold stock etf dropped 81% from its September 8, 2011 peak to its January 19, 2016 low. At the 2015-2016 bottom everyone hated gold and gold stocks.
I started the Belkin Gold Stock Forecast in late 2015 because my work suggested the precious metals bear market was ending and it would be a major long-term bottom in precious metals. My work is based on a proprietary time series analysis forecast model developed during my studies at the UC Berkeley Haas Business School and the UC Berkeley statistics department. After working as a quantitative strategist in proprietary trading at Salomon Brothers, I’ve used that same proprietary model for 26 years in the Belkin Report, which is an asset allocation forecasting service for big institutional investors (hedge funds, family offices, sovereign wealth funds, pension funds, etc.). In 2016 I carved out the Belkin Gold Stock Forecast as an affordable service for individual investors who are primarily interested in precious metals markets and mining stocks.
To get back to the point of where is gold headed over the next 12 months, my forecast is the gold sell-off of the last few weeks is probably another major buying opportunity similar to what occurred in late 2015 or again in late 2016. Gold should bottom around these levels, last week’s August 16, 2018 low of $1174 may have been it. I forecast a 30% gold rally over the next 12 months, which would put gold at $1526 by the late summer of 2019. 30% is how much gold rallied from its Dec 17,
2015 low to its July 8, 2016 peak in the first move of this bull market, so another 30% rally would be normal in a long-term bull market.
Mines & Money: What does that imply for precious metals mining stocks?
MB: In the major rallies and declines since the 2011 gold top, the GDX gold stock etf has moved on average 2.6 times as much as the gold price. 2.6 times gold’s forecast 30% one-year rally is +78% for the GDX, which would put it at 32.3 in one year, from its recent low of 18.16.
Individual gold and silver mining stocks (G&S) can move much more than the GDX. They are highly leveraged to gold and silver prices. G&S stocks are an inefficient market, they are under-owned, under-followed and under-analyzed. Consequently there are greater opportunities with individual G&S stocks than with the GDX. What I’ve done with the Belkin Gold Stock Forecast is assemble an exhaustive database of all investable gold, silver and platinum mining stocks that trade in the US, Canada, Australia, London and South Africa. These are not ‘moose pasture’
exploration stocks, they are companies with proven reserves and production – stocks that are credible investments for portfolio managers and institutions. I run my model forecast on each stock in order to identify G&S stock candidates that can outperform the GDX and XAU gold stock index.
If the GDX goes up 2.6 times as much as gold, some G&S stocks could go up twice as much as the GDX. For instance from Jan-Aug 2016 in the first gold bull market rally, one major silver stock went up 2.4 times as much as the GDX.
I’m particularly enthusiastic about silver mining stocks. The universe of investable semi-pure-play silver mining stocks is extremely limited, less than 30 stocks amounting to a minuscule market capitalization of less than $50bn. Contrast that $50bn with the market cap of a few single leading tech stocks like Apple ($1tn) or Amazon ($928bn). What that means is when big money institutional investors wake up to the scarcity of pure-play silver mining stocks, they will be scrambling for the limited capitalization of available prospects. It also means mining industry heavyweights will be tempted to snap up the few silver miners with proven reserves and production (takeovers). Silver usually outperforms gold in precious metals bull markets and silver stocks should be poised to zoom.
Mines and Money: What precious metals stocks are you tipping for 2019?
MB: I’ll give you three picks, one gold miner, one silver miner and one platinum miner. The gold stock is Golden Star Resources, symbol GSS with a miniscule P/E ratio of 13, a too-cheap stock trading at a fraction of the P/E multiples of major gold miners. The silver stock is First Majestic Silver, symbol AG which is down -37% in the past two months on disappointing earnings. When silver rallies AG will be a leader and this is a good entry point after a big correction. The platinum stock is Ivanhoe Resources, symbol IVN.TO. Ivanhoe stock is down -61% in the past
16 months and the model forecast suggests it is now a buy. Ivanhoe has amazingly rich deposits in the Congo, if you can stomach political risk.
Mines and Money: What will trigger the next global recession and when will it happen?
MB: The current US economic expansion started in July 2009 and is now 111 months old. The average US expansion is 45 months long, 1902-now, so this one is 2.5 times as long as average. This expansion has been artificially prolonged, first by the Fed’s overly-accommodative zero interest rate and QE monetary policies from 2009-2016, then by Trump’s corporate tax cuts. But the global economic cycle is already weakening, assisted by Trump’s tariffs and trade war. Emerging equity and currency markets led by China have collapsed this year, the Chinese stock market is down -23% from its January peak.
My model is not positive on base metals, the Belkin Report has been short copper, nickel, etc. for months and base metals prices are down an average -17% since June. The decline in base metals prices indicates the global economy is already slumping.
But precious metals are forecast to outperform base metals, a major reversal of a trend that started two years ago. My precious metals index has underperformed the base metals index by -34% since July 2016. Now the model forecast suggests precious metals will turn around and outperform base metals for the next 18 months, a major turning point.
What fundamental reasons could cause that to happen? My theory is central banks are completely out of touch with the global business cycle. The Federal Reserve pushed its emergency crisis QE and zero interest rate policy for seven years (2009-2016) way past the time when it was justified. Since 2016 the Fed has raised the fed funds rate seven times in baby steps, but the fed funds rate is still only 2%, below the rate of inflation. The European Central Bank (ECB) and Bank of Japan
(BOJ) are even worse, still mired in negative interest rates nine years after the last crisis. Ideally central banks should have raised interest rates during the business cycle expansion so they have room to cut them when a recession inevitably arrives. But major central bank interest rates are still negative or ridiculously low even as symptoms of a global economic downturn mount (base metals, China and emerging market downturns). Central banks missed the boat.
So what happens when the emerging market crisis escalates, US consumer sentiment slumps and the US stock market bubble finally goes poof?
Central banks will dive right back into unconventional monetary policies (QE and negative interest rates), but this time starting from already too low interest rate levels. That is a scenario for a global monetary crisis and a recipe for a major sustained rally in gold.
Mines and Money: Any final thoughts?
MB: One last point to keep in mind: The XAU gold stock index came out in
1979 at the 100 level. The XAU index currently stands at the 65 level:
-35% below its inception level from 39 years ago. To put that in perspective, the Nasdaq Composite index is up 5072% over the same period. I’ve learned over the years from my Belkin report clients that the biggest percentage returns and best long term performance is from value investing, buying assets that are depressed and out of favor.
There are few if any assets that trade below their level of 39 years ago like the XAU gold stock index. The investment consensus is currently infatuated with Nasdaq FANG stocks and hates gold. Gold sentiment is similar to the bottom of the gold market in late 2015. US stocks are extremely elevated in a FANG bubble while the XAU gold stock index trades way below its level of 39 years ago. The intelligent contrarian position is to sell the Nasdaq and buy gold stocks.