Even at $1,600, there is plenty of value in gold producers and the metal - Sprott's Grosskopf
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Peter Grosskopf, CEO of Sprott Inc
(Kitco News) - There is still plenty of long-term value in the gold market, with equities looking extremely attractive even as the precious metal trades below $1,700 an ounce, according to one fund manager.
Although mining equities have dropped sharply since the start of the year, they are currently trading at a level that offers "real" value for investors, especially compared to the overheated general equity market, Peter Grosskopf, CEO of Sprott Inc, said on the sidelines of the Prospectors & Developers Association of Canada (PDAC) 2021 virtual conference.
Grosskopf added that even with lower gold prices, mining companies are still expected to generate significant cash flow through 2021.
"The well-run producers are a buy right now," he said. "They represent good cash-flow-back equity investments against any other stocks."
Supporting his outlook for the mining sector, Grosskopf said sees the gold price driven by long-term fundamentals, even if short-term momentum is on the downside.
He added that with bond yields rising and the U.S. dollar on the move, he is not surprised that gold prices are struggling, falling below $1,700 an ounce. However, he also said that he sees the current price action as an oversold, healthy short-term correction.
His comments come as April gold futures trade around $1,677 an ounce, down more than 1% on the day.
Instead of focusing on the short-term volatility, Grosskopf said that investors should focus on long-term fundamentals. The conditions that drove gold prices to all-time highs above $2,000 an ounce haven't gone away. The threats of further future currency debasement and inflation have only risen as governments and central banks continue to pump liquidity into financial markets, he added.
Although market sentiment, momentum, and real interest rates have all moved against the gold market, Grosskopf said that the U.S.'s growing money supply continues to be significant support. The latest example of money printing came this past weekend. Grosskopf noted that on Saturday, the U.S. Senate passed a $1.9 trillion stimulus package.
"In the long run, monetary debasement is actually required to balance the system," he said. "Governments around the world come up with new excuses to print more money. At the end of the day, that is the most important variable that will carry gold holders for the next five to 10 years."
Although the Federal Reserve has downplayed inflation, Grosskopf said that the threat is real and only continues to grow. He added that the rally in commodities like copper, lumber, and oil would eventually lead to inflation, which the central bank wants because it is the only way to deal with the growing debt burden.
"If you look at what is going on in the global economy, how does anyone say inflation is only going to be 2%," he said.
With rising bond yields dominating the gold market, Grosskopf said investors are moving to other markets with better momentum in oil, real estate, and cryptocurrencies.
Because the Federal Reserve is mostly brushing aside the bond market selloff, Grosskopf said gold prices would continue to struggle. As to how high yields can go before the Federal Reserve steps in, Grosskopf said it is impossible to know.
"The Fed will be driven by what they think they can get away with," he said. "But once it does spiral out of control, the Fed will need to step in. But I don't know where that level is."