Alka Singh: Gold Equities’ Upside Greater than Gold
December 21, 2010 by Gold Editor
Alka Singh: Gold Equities' Upside Greater than Gold
Author: George Mack & Karen Roche (The Gold Report)
Posted: December 20, 2010
Frequently prospecting for new mining companies in natural resource-rich nations, Rodman & Renshaw Senior Analyst Alka Singh is just back from Argentina. The Gold Report caught up with her to sift through her thoughts on the precious metals industry. Her current objective is to seek out gold and silver producers with growth potential beyond the price appreciation of commodity metals.
The Gold Report: You follow both precious and base metals for Rodman & Renshaw. From the lay investor's perspective, what's the difference? What are the value drivers in precious versus base metals that investors should know?
Alka Singh: That's a great question because a lot of people think that precious metals (PMs), uranium and base metals are all metals and mining. What they don't understand is that there are different drivers for each sector. The supply and demand determine the price of gold, but the gold price also changes based on the fiat currencies. Gold, silver, platinum and palladium are viewed not only as commodities but also as a store of value. As the demand for precious metals (jewelry and ETFs) increases so does the price of these commodities. But as the precious metals are also a store of value, people consider these as good as cash and their prices increase as the U.S. dollar depreciates.
On the other hand, base metals are driven primarily by global economic activity and, particularly, by growth in the BRIC (Brazil, Russia, India and China) economies. Growth in these countries has a great impact on the base metals. To some degree, they are also driven by currency exchange rates. Because all these commodities are priced in U.S. dollars, they tend to appreciate as the dollar depreciates; however, you'll see precious metals appreciate more than base metals just because they are perceived as a store of value.
Investors realize the dollar is depreciating and wonder if they should just buy copper, nickel, zinc or lead. They're frustrated because the dollar keeps depreciating, and they see gold or silver appreciating while base metal prices remain the same. Part of that is because if the U.S. and other economies are not doing well—no buildings, bridges or hybrid cars being built; the demand for copper, nickel, zinc, lead—all of these base metals—actually goes down or stays flat. As governments keep printing more money, precious metals appreciate faster than the base metals when there is lack of economic growth. So, that's the key difference in the value drivers.
TGR: So, precious metals can be thought of as a currency, whereas base metals are simply raw materials.
AS: You got it, yes.
TGR: Alka, are we in an unusual situation where we see growth in the BRIC countries and pretty much worldwide devaluation of every nation's currencies? Have you seen this in the past where both base and precious metals can appreciate at a distinctive rate?
AS: I'm sure there have been situations like this in the past, but today it's more dramatic because every country is trying to out-print the other. China is keeping its currency low, while the U.S. is printing so much money in an effort to keep the dollar down. All I'm saying is the rate of change is different this time. More countries are depreciating their currencies due to slow economic development, which causes precious metals to go higher than base metals.
Back in 2008 during the financial crisis, when most of the world economies weren't doing well, we saw base metal prices going down every day. Gold prices also declined, but not as much and at a slower rate than the base metals.
TGR: What's your forecast for the PM sector in the coming year? Do you expect continued price appreciation in these commodities?
AS: For 2011, I see gold prices at $1,350 an ounce and silver at $28, which is close to where they're right now, but not a big increase. I'm not using higher-than-current prices because I believe, at some point, we'll see the U.S. economy starting to improve and all this quantitative easing (QE) will end. People have QE2 all priced in. While there is a good chance we'll see more QE, its impact shouldn’t be as great—or the quantitative easing wouldn't be as big—if we see the U.S. economy improving with more job creation. I'm keeping my fingers crossed, but I think gold, silver and other precious metals will stay where they are right now.