Martin Place Securities executive chairman Barry Dawes expects Australian gold companies will continue to generate strong investor returns in the coming years.
Mr Dawes, who wields two decades of experience at banks such as BT Australia, Macquarie and Deutsche within investment management and commodity and equity research and a further two decades with Martin Place Securities with research and capital raising, explained to Small Caps that gold and silver could deliver outstanding investor returns in the years to come, partly as a backlash to fiscal indiscipline and stagnant returns in other asset classes.
Gold prices have been climbing consistently so far this year, from around US$1,300 per ounce in January to almost US$1,550/oz today.
The last gold bull started when gold hit a low of US$250/oz and ran to a peak of US$1,923/oz in 2011.
Mr Dawes said the next bull run has now begun and he expects to see higher prices for gold and gold miners in the coming years.
“There will be a real revaluation of gold and silver. I expect to see US$3,000/oz in gold over the next 30 months [2-3 years]. Gold is in a very long-term bull market and is likely to keep on rising for the next 50 years,” he added.
According to Mr Dawes, one of the major reasons why gold could go as high as US$3,000/oz in the foreseeable future is a very tight market for physical gold because of all the gold sent from the West to China and India.
“There are only around 185,000 tonnes of gold that have ever been mined which includes gold bars, coins and jewellery.”
“Half of that total supply is in jewellery and half of that jewellery is in India. This means that as much as 90,000t is not going back into the market,” he said.
Mr Dawes also pointed out that around 40,000t is owned by central banks who are continuing to stockpile gold.
“There’s a significant amount of short covering the West, and in the West people buy as prices go up. In Asia, people buy the dips. These two factors create a fertile environment for a strong bull market.”
One key reason why gold could be seeing a surge is directly related to political machinations and the ineptitude of policymakers that have taken their eye off fiscal frugality.
Given that governments are running up huge budget deficits, this has reduced interest rates to a minimal level. In some countries, interest rates have become negative whereby people pay banks money to safeguard their capital.
“Negative interest rates are the scam of the century,” said Mr Dawes.
“Why would you lend money to a politician?” he asks, when offered a much better alternative: putting money to work in the stock market and making use of ample returns being provided by a variety of industries including technology and mining.
“Government bonds are generating around 1-2% interest, which is next to nothing, and in fact, becomes a loss-making exercise if factoring in inflation over time.”
“Western governments are generating large deficits in a bid to generate inflation and there’s a lot of cash waiting on the side-lines. A lot of people are standing back in the market with around A$1,580 billion available as cash deposits in Australia alone”.
Mr Dawes said he thinks that this capital will eventually move into property and equities with equity market earnings from the likes of BHP (ASX: BHP), Rio Tinto (ASX: RIO), Fortescue Metals (ASX: FMG), and other gold companies likely to be strong as a result.
“The bond market is a bubble and there are far better alternatives,” said Mr Dawes.
The case of silver
In addition to being bullish on gold, there is also the curious case of silver. In contrast to gold, silver could endure an even sharper appreciation compared to its yellow sibling.
“During Medici periods in Italy (13-16th centuries) silver was worth more than gold. No reason why silver can’t outperform gold for the next few years,” said Mr Dawes.
Silver is mined out of the ground at a 10:1 ratio compared to gold, yet it is priced at around 82:1 at present.
Also noted was that while gold is hoarded above ground, silver, in contrast, is consumed in electronics in such small quantities that it is uneconomical to recover once applied industrially.
In recent months silver has followed gold’s upward run, with the metal’s price picking up in June from less than US$15/oz (A$21/oz) and rocketing to current highs of US$18.46/oz (A$27.44/oz).
The current fluctuations in major global currencies is also an interesting point which underlines gold value.
“Gold is hitting all-time highs in many major currencies. Against the Euro, the Pound and even the Yen but not all just yet,” Mr Dawes noted.
He added that gold prices are now at all-time highs in 80 currencies.
Mr Dawes believes the Australian dollar has a strong correlation with the North American gold-stock index – stating that commodity currencies such as the Aussie dollar could well be a good investment in their own right.
Similar to other analysts and economists, Mr Dawes said a return to the gold standard could be a positive step given the financial exuberance of politicians and that digital fiat currencies shouldn’t be trusted because there is no tangible way of restricting supply and keeping the market transparent.
“Twenty or 30 years ago, there was this idea that fiscal discipline was a reflection of moral character, but now that with so many people not caring, moral character has degraded and so has fiscal discipline”.
Gold will help bring about renewed fiscal discipline and this could mean plenty of investment opportunities both in Australia and abroad, especially in countries with a history of gold production and export.
According to Mr Dawes, small cap stocks allow investors to experience a boom – whether it be minerals, petroleum or gold.
“I’ve had a $20 price target on Northern Star (ASX: NST) for the past two years. The company has excellent resources and recently bought Echo entirely with cash.”
“When gold companies are cash-rich, their pet projects can be completed – adding more supply and reducing costs.”
How can investors cash in?
“The stock market provides the opportunity of making exceptional returns, at certain stages. [In particular], the small cap mining sector provides opportunity for speculative investors to generate returns. Not all companies succeed, but some do.”
If gold prices do continue their bull run, this is could see gold miners receive a boost in their valuations.
Mr Dawes provided simple but effective tips on what to look for if investors are keen to find small caps stocks in the hope of joining a speculative boom.
“Pick companies started by people with a strong track record and look for companies with lots of cash or that have recently raised cash,” he said.
According to Mr Dawes, companies such as Newcrest Mining (ASX: NCM) and Evolution Mining (ASX: EVN) are also attractive and although there are claims these companies are overvalued, this is entirely linked to the gold price. If gold prices rise, their current valuations will seem rather small in comparison.
“Mining brings wealth. In Australia, it was gold that was responsible for our high standard of living and for some of the most recognisable cultural artefacts we have, including Collins Street in Melbourne.”