(Kitco News) - The gold market continues to consolidate above $2,500 an ounce. While it may seem a little top-heavy, one fund manager believes gold still has plenty of upside potential.
In a recent interview with Kitco News, Eric Strand, Founder of the boutique precious metals firm AuAg Funds, said that given the level of money printing and sovereign debt, he sees gold's fair value around $4,000 an ounce. |
|
"We may see some volatility in gold at the current price, but we think that anything below $4,000 is cheap," he said. "Long-term, the market is nowhere close to being overvalued."
Although the central bank's money supply has dropped sharply as the Federal Reserve has aggressively tightened its monetary policy, Strand noted that printing hasn't stopped as U.S. debt has ballooned to more than $35 trillion.
"The players may have changed, but the printing and the paper remain the same," he said.
Strand explained that the only time gold was slightly overvalued was in 2011. Although the Federal Reserve pushed interest rates to zero and introduced quantitative easing for the first time in history, government debt was still relatively under control at that time.
In 2011, the debt-to-GDP ratio was around 95.5%. Last year, debt represented 122.3% of GDP.
After hitting an all-time high of above $1,900 an ounce, gold struggled through a six-year bear market. However, looking ahead, Strand said he doesn't expect the gold market to experience a repeat of those years.
He pointed out that there is no political will to change government spending habits.
"Over the years, politicians have come to realize that if they want to be elected, they need happy voters. You don't get happy voters by saying you are going to raise taxes and cut spending. There is no political incentive to stop printing money."
Strand noted that although the Federal Reserve has aggressively raised rates to bring down inflation pressures, the global increase in deficit spending means consumer prices are unlikely to remain subdued for very long.
Strand said consumers need to protect their purchasing power and wealth as inflation continues to rise.
"I am a strong believer in a sound money system, but we know that is not going to happen," he said. "That's why I am a strong believer in gold and silver; they are the best protection against all the money printing."
Although gold's momentum is waning at current prices, Strand views this as a short-term consolidation period. He explained that with the Federal Reserve expected to cut interest rates next week, investors will begin to see the value in holding gold, even at these elevated prices.
"Western investors are just starting to buy, as we can see in gold-backed exchange-traded funds. So there is still plenty of room for them to diversify out of stocks and into gold," he said. "Gold is significantly under-owned compared to historical norms. The global allocation in gold is around 1%. If that normalizes to 5%, it would be transformative for the gold price."
While some investors may be hesitant to jump into gold, as prices have rallied 22% this year, Strand noted that there is still an opportunity to gain some exposure. As undervalued as gold is compared to Strand's long-term price forecast, he said the mining sector is even more underappreciated. Mining companies have significantly underperformed gold this year, even as cash flow and margins have increased. Strand said that as inflation pressures ease and wage pressures decrease, gold producers will continue to see their margins improve, adding more value to their balance sheets.
"The mining sector offers a second chance for investors if they missed the gold rally," he said. "I believe we will see solid value in the mining sector for years to come. Even if prices rise 100% from where they are now, they will still have a lot higher to go."
As for what will spark broader interest in the gold market and mining sector, Strand said it is only a matter of time. He explained that investors are already becoming more receptive to investing in the sector.
"There are expectations that the global economy can grow its way out of all this debt. I don't know how realistic that is, but it definitely won't happen without the mining sector. We are electrifying the world more and more, but electrification is all about metals. We cannot electrify the world if we don't mine."
