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The outlook for gold and Gold Mining stocks as real interest rates stay below zero…

A PROFESSOR of economics for nearly two decades, John Doody became interested in gold through an innate distrust of politicians, says The Gold Report.

In order to serve those that elected them, politicians always try to get nine slices out of an eight slice pizza, debasing the currency via inflationary economic policies. Success with his method of finding undervalued Gold Mining stocks led John Doody to leave teaching and start the Gold Stock Analyst newsletter late in 1994. In the last decade, Doody has seen his top-listed equities skyrocket a combined 1000%, including an eye-popping 130% in 2009.

Subscribers pay a lot for his knowledge and expertise in the Gold Stock Analyst; but in this exclusive interview with The Gold Report, you get a few of his favorites Doody-free.

The Gold Report: We’re about 1.5 years into the Obama administration’s multi-trillion dollar bailouts and expansion of the Fed balance sheet to $2.3 trillion from about $800 billion. What are your thoughts on that?

John Doody: I think it’s a bailout that continues with $1 trillion-a-year deficits as far as the eye can see. There’s no end to it; unless we get some significant tax increases and/or spending cuts, there’s no hope to ever to pay down the debt. The best hope is to get the economy growing faster than the debt so that, as a percentage of GDP, the debt level shrinks.

TGR: Do you agree with the administration’s fiscal policies?

John Doody: Oh, yeah. I really don’t know where we’d be if we didn’t undertake all these remedies from the Treasury side on the deficit side, as well as the Federal Reserve side. The mess that this economy was in as a result of the Wall Street and housing collapse continues. You go by a strip mall here in South Florida with 10 stores, and at least one or two are empty. Almost 10% of workers are still without jobs. I was surprised to read that about 11% of all prime mortgages – these are the best mortgages – are either in foreclosure or delinquency. People are hurting.

TGR: How do you see all of this affecting the gold market?

John Doody: Everything that’s being done creates inflation. You don’t really care if somebody gives you a $1000 government bond as payment for a debt or $1000 cash. They’re equivalent. We’re creating a tremendous amount of money trying to get the pump primed to get the economy moving, but it’s obviously a very difficult task.

TGR: You mentioned inflation and, in your last interview with The Gold Report, you said: "Bernanke and the Fed are pursuing a loose monetary policy with a 0% interest rate. There’s actually no way we cannot end up in inflation." We’re starting to see signs of it now. How is gold going to act in an inflationary environment and, perhaps, even in a hyperinflationary environment?

John Doody: Gold’s going up now; it’s going to go up more. One of the uses of gold is to protect your purchasing power from inflation, and it’s done a damn good job! It always drives me crazy when these talking heads on TV talk about gold now vs. $850 in 1980. They say, "Oh, look where it’s gone!" It’s gone nowhere. That was a one-day high. The next day the Gold Price was $738. More important is to look at the Gold Price from when it was set free in 1968. It was fixed at $35 for over 30 years. If you just took that $35 from March ‘68, and I did in a recent issue of the Gold Stock Analyst, and adjusted it by the Consumer Price Index (CPI), gold would have grown from $35 to about $225. That’s your inflation protection; everything above $225 all the way up to the current price and the next $1000 – that’s all investment gains. From ‘68 to the present, gold had had an 8.6% compound annual growth rate that was 4.4% above the inflation rate for the period.

TGR: But you hold Gold Mining equities, and you don’t hold bullion. In the last market crash, everything crashed – even the gold equities.

John Doody: That’s true. The reason that I hold gold equities is because you get better leverage to the Gold Price. We always have to remember that while the stocks are derivatives of gold, they are stocks first. If the buyers disappear for stocks, they disappear for gold stocks too. But when they come back, they come back with a vengeance. In 2009, the Gold Price was up 28% and the XAU was up 37% but the Gold Stock Analyst’s Top 10 was up 130%. That’s the leverage you can get from owning the right stocks.

Investors in exploration stocks got killed in the 2008 crash. There were no fundamentals underneath those stocks. All the stocks I cover are producers or very near producers. We know there’s something there, so we’re not just arm waving over some drill results. That’s one of the things that makes Gold Stock Analyst unique: We don’t cover the exploration stocks, because I’m not a geologist. I can’t interpret drill results. I want data. I want data that you can analyze and that’s productions and reserves.

TGR: In a recent issue of Gold Stock Analyst you said: "As we’re in a bull market underpinned by negative real interest rates, loose monetary policies and exploding government deficits, it’s best to keep riding the bull and don’t let it throw you off." How high can the bull ride through the end of 2011?

John Doody: First we’ve got to understand what the real interest rate is. That’s the risk-free return on money, such as short-term US Treasuries. The US Treasury can’t default. They can always print more dollars and give them to you. I like to use 90-day T-bills. Or you can use savings-account rates, which are about 0.1%. It’s trivial. If you have in a savings account or in 90-day Treasuries and you start the year with $100, at the end of the year you’re going to end up with $100 plus 0.1% interest. But if inflation is 2%, the money is going to buy you only $98 worth of goods. When real interest rates are negative, and people can’t get positive return on their money by putting it in the bank or risk-free situation, they naturally flock more to gold to protect the purchasing power of their money. Gold has been a sanctuary in monetary crises and inflation for centuries. In the 2000s, Chairman Greenspan lowered the Fed Funds rate to 1% and the inflation rate has generally been higher. That’s why gold has done so well.

TGR: What Gold Price will we be looking at through the end of this year and 2011?

John Doody: Well, I’m not a guy who predicts the Gold Price because my philosophy is I can find value at any Gold Price. I’m just looking at the next $100 ahead. People who predict $1,500 or $2,000 or $5,000 are foolish because there’s no basis for that. I don’t doubt gold will get to those levels, but I have no idea when. I find undervalued stocks now and profit as Mr. Market discovers them. So, if gold does nothing, we can still profit. If gold goes up, then we’ve got two ways to profit.

TGR: Alright, how long do you think gold’s bull run will last?

John Doody: I think it’s got a lot longer to run because the negative real interest rate environment is going to run a lot longer. When’s the Fed going to raise interest rates significantly? They can’t raise them now. We’ve got almost 10% of the country unemployed and that much, again, underemployed. So, until the economy gets going, we’re not going to see any real change.

TGR: What about holding Gold Bullion vs. equities?

John Doody: The reason the stocks give you more leverage than Physical Gold is because all of the ounces are yet to be mined. Typically, a gold mine is going to have 10 times or more reserves in the ground than what they’re producing in the current year. If a company is producing one million ounces a year and the Gold Price goes up by $1, that dollar falls right to the bottom line. That’s $1 million more in profits. But because they’ve got 10 million ounces still in the ground, those ounces are now worth $10 million more than before.

That’s what gives you the leverage that owning bullion just doesn’t give you. If you own bullion and gold goes up $1, your coins are worth $1 more. No big deal.

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Source:Risk-Free Return vs. Gold

Gold’s price behavior during the global financial crisis marks it out from other commodities…

The DEBATE CONTINUES as to whether demand for commodities, and thus their price, will fall or not, writes Julian Phillips of the Gold Forecaster.

Reports say that the Chinese government will slow the Chinese economy down to the point where their hunger for resources will slow and commodity prices fall. If they do fall will the world’s appetite for gold fall to? And will the Gold Price fall?

This month has already seen China report a 48% rise in its exports for May. A 32% rise was expected, but this jump was a surprise. When analysts look at China they cannot help but relate the activities there, to the structures in the developed world. But China is completely different to the West.

In the first place the Chinese government has a tight control over the economy there and what it wants happens, quickly. In the second place this country has gained traction on a self-sufficient and growing economy, where massive infrastructural development that is larger than the world has seen since World War II.

China is developing basic infrastructure for 1.4 billion people, twice the population of the United States and Europe put together. The hunger for resources that this can produce far outweighs the impact of a gentle policy of restraint to calm growth from 11% to 8%. China is keenly aware that it will need resources for decades to come, and has a policy of buying foreign resource producing assets to feed that hunger for the long haul. So we would be surprised is the upward trend in commodities would be slackened by cooling economic policies.

What we have been seeing is a "street smart" China acting in markets to cool speculation and not allowing it to drive up prices they will have to pay. Instead, strategically standing back when prices roar and waiting for pullbacks and greater quantities being offered by sellers is paying dividends in the form of lowering the cost of commodities. This, we expect, will continue to be their policies regarding commodities now and going forward.

But is Gold a commodity? That is the real question in the context of today. By this we mean to ask whether gold is subject to the same type of consumption demand as a commodity? The answer is simply no! Gold’s price action over the last decade has little to do with jewelry or industrial demand or commemorative coin demand. Instead, since the turn of the century, investors and increasingly central banks have emphasized that it is considered by them an important reserve asset.

The major fund community will confirm now that it is a long-term investment that they will not use, but keep as a ‘counter’ to the potentially bad news expected from other markets. Indeed, these investors believe the Gold Price will rise as other markets fall.

In the Indian sub-continent, gold has been and will be considered as financial security for families. In China the same beliefs are held. In China, with limited investment options available and a relatively unsophisticated investment community (although a perspicacious one), gold appeals to this nation of savers and to the strong primal needs that accompany a people used to difficult times. So, no, gold is not a commodity, as such.

Will the Gold Price fall if the commodity trend turns down? We have no need of giving what might be considered an emotional, biased answer. We simply need to look back to when deflation really hit, as the credit crunch struck in mid-2007 to late 2008. At that time, there was an investor implosion as their wealth was decimated by falling asset values and markets. It was not the inherent value that their investments contained that failed, but their capacity to keep ownership of them that failed. One power plant owner borrowed against his part-ownership of his company, to buy a stake that gave him a big majority. Once the share price dropped below the value of his loan, he lost all his shareholding. In essence, that’s what hit most markets then.

And what happened to gold? Yes it did fall, at first, but not by that much (20%), because leveraged investors in Gold Futures were swiftly replaced by new investors Buying Physical Gold, driven there by fear and uncertainty from other markets.

The growth of the gold Exchange Traded Funds (Gold ETFs) during those days is a testament to the metal’s ability to hold or rise in deflation and collapsing markets. The Gold Price held its value then, before it started to break upwards amidst a new wave of instability. In reality, gold survived the worst and was seen (and is seen) as a safe-haven for wealth.

It is fear of uncertainty and instabilities in global financial markets that is driving the Gold Price up today. For those who keep insisting that gold rises in inflation, we say this is a myopic view ignoring today’s Gold Price, which has a nearly zero inflation factor in it. It’s fear in Europe, expecting a potential Euro collapse and a need for more financial security in the East of the globe that’s lifting the Gold Price upward.

So no, we do not believe that the Gold Price will fall even if commodity prices fall. In fact the question is far too simple a question to give credit to what will happen to gold. Investors in gold should research far more deeply than at present, to see what has driven the world’s desire for gold in the past. You can be sure that they were not barbarians. Today the same factors that made gold so attractive in past eras is doing so now. We expand on this in future issues of the Gold Forecaster – Global Watch.

Looking to Buy Physical Gold today…?

Source:Gold – Not a Commodity