PRINCETON, New Jersey -- Having doubled the value of RBC's Royal Gold & Precious Metals Fund in the past year, manager John Embry believes the best is yet to come. Interviewed live on Miningweb's sister syndicated radio show, Classic Business, Embry's four decades of experience in the business shone through. Asked if the current run in the gold price is familiar, Embry replied: "It reminds me a lot of what started to unfold in the early 70s, and I attribute that primarily to what I see going on in the United States… This was exactly what fuelled things in the early 70s;and got it going from $35."
Gold rocketed in the 1970s after a long period of official "price management" during which the dollar's gold backing was severely tested. When the gold window was finally closed in August 1971, the world suffered an inflationary pandemic which helped produce the Oil Crises and contributed to the 1973 decision to switch to floating exchange rates, all of which stoked severe global instability.
Embry was hesitant to say that gold might retest the record $850 an ounce it achieved in 1980. That year capped a sustained period of humiliation for the US which had conceded ground in every sphere of influence as the primary democratic superpower; perhaps best exemplified by President Carter's inept handling of the invasion of Afghanistan and Iranian hostage crisis.
The gold price subsequently waned under the tough monetary and fiscal regime run by President Reagan and Fed chairman Paul Volcker. It threatened to fall into the abyss before the Mexican Peso Crisis, which was solved through the monetisation of a vast sum of peso debt, lifted the price back to $400 an ounce.
North America's best gold fund manager is working within a dual time-frame when he considers the gold price: " I'm very comfortable - over the next six months - with the notion of $350, but if you stretch it out, say 18 to 24 months, I would not be shocked if it reached $500."
Bullion faces a critical test in 2004 when the Washington Agreement comes up for renewal. The Agreement governs the amount of gold central banks may sell. Most banks have sold their quotas – at the bottom of the cycle – and are now compelled to wait two years before they can resume sales.
Expert gold forecaster Dr Martin Murenbeeld believes the Agreement will most likely just be renewed, but a New York based mining executive warns that Central Banks will itch to sell at prices around $350. The gold industry ran a tough campaign to limit official metal sales and the executive believes higher gold prices will see the central bankers demanding the right to resume sales outside the scope of the Washington Agreement.
Mitigating against that is the fall in the dollar which makes up a huge proportion of official reserves. The Banks have argued that gold sales are essential to "rebalance" portfolios, but should feel daunted if a key asset class is derated as appears to be happening now with the dollar. It would be highly imprudent for Bankers to exchange gold for dollars in this environment, but they may well be satisfied to raise their euro and pound holdings.
Valuations and picks
Contradicting many analysts warning of overheated gold shares, Embry said: "If you go back and look at the valuations on gold shares at the beginning of the 70s, they looked pretty extreme too. I think the gold share market, in its wisdom, realises that the gold price is considerably undervalued and is probably on the threshold of a significant move. That's why the stock prices are trading up. There're a lot of people trying to get into the space."
Surprisingly, Embry has taken a liking to AngloGold [AU]. He is a staunch hedging antagonist, so AngloGold's rise to favour is especially noteworthy. He's not letting hedgers off the hook though and warned: "If the gold price were to do what I think it can do, then some of the hedgers will find themselves in serious financial difficulty."
"I've been really gratified recently by AngloGold's comments that they would significantly reduce their hedge book, and Bobby Godsell's comments that he thinks the gold price could move materially higher. I think these guys are plugged-in people and that gives me a lot of confidence. I've actually been moving into Anglo because I think it's cheaper than Gold Fields [GFI] today," Embry said.
Which by no means leaves the recently listed New York stock, Embry's single biggest holding, out of favour: "I went to South Africa a year ago and toured all their facilities. I was impressed by three things: the quality of the assets; excellent management – I thought Ian Cockerill was unquestionably one of the finest mining executives I'd ever met anywhere – ; and I thought the stock was incredibly inexpensive. And so far things are working out reasonably well."
That is quite an understatement. In the year since Embry took a fancy to Gold Fields, the price has rocketed from jus over $5 to today's $15.44, a gain of more than 200 per cent.
He acknowledges South Africa's perceived "risk", primarily in terms of its militant labour unions, but believes the threat is being addressed and doesn't present a problem in the short to medium-term. The National Union of Mineworkers signed a two-year wage agreement last year, but is attempting a break out on certain items not covered in the centrally negotiated agreement.
When it comes to finding the next Gold Fields, Embry said he is simply "moving down the food chain" in search of value – exactly why AngloGold has come into focus. But there are risks which point to the lack of meaningful diversity in the sector.
"I'm moving into somewhat more 'gamey' material on the premise that the stocks are cheaper. A lot of the majors have been bid up to fairly significant premiums. I have recently moved into things like Kinross [KGC], and one of the ones in South Africa that I've had a really good experience with has been Durban Roodepoort [DROOY].
"And so my attitude is I'm looking for companies that offer greater leverage now because I think the gold price rise is imminent, Embry said."
He confirmed that massive sums are pouring into gold mutual funds as investors finally awaken to the sector's potential. Canadian markets were closed for Victoria Day.
