Jeff Clark of Casey Research: Bullish on Gold

Benzinga Radio had the opportunity to talk to Jeff Clark, Senior Precious Metals Analyst at Casey Research this week. Jeff's father was an award winning gold panner and his family has mining claims in California, Nevada, and Arizona, so he has been around the precious metals business for a long time. His research focuses on both gold and silver bullion along with the shares of producing miners. Jeff told Benzinga that he thinks there is a major opportunity setting up in gold mining stocks, which have severely lagged the performance of gold itself over the last several years. He said that no matter what metrics investors use, "gold stocks are really undervalued." In comparison to gold, the mining shares have not been this cheap since 2009, and on a forward P/E basis most of the major producers are cheaper than they were in 2008. Due to the price explosions in gold and silver, the miners are operating at record margins and making huge amounts of money. We were curious to get Jeff's opinion on why gold mining stocks have been underperforming the price of gold so dramatically in recent years. He pointed out that while it is true that they have been underperforming recently, the divergence is not nearly as dramatic when looking at longer time periods, and the equities have actually outperformed if you measure from the 2009 bottom in the stock market. In the recent past, however, Jeff attributes the outperformance of gold versus gold stocks to the high fear environment in financial markets. He noted that in such an environment investors are much more likely to want exposure to gold, while buying the miners would be an afterthought. He said that he believes eventually this dynamic will change, and when it does, the mining shares will begin to catch up with the massive move in the spot price of gold. Jeff also spoke about some of the catalysts that have been pressuring gold in the very near-term, with prices down around 15% since the August high of $1,923. He said that he believes institutional money managers are selling gold to raise liquidity in the current uncertain environment. Due to the big rise in price, many funds have large profits in gold and it is an easy place for them to raise cash in order to cover margin calls and bring down portfolio risk. Despite the fact that the price has fallen, Clark told Benzinga that the demand for bullion is "going crazy" right now. He added that the move to bullion is becoming more pronounced and that this is a bullish sign going forward. Much of the bullion demand is coming from China and India, and North America only accounts for around 8% of the physical demand in the gold market. Another interesting development that Jeff pointed out in the gold market is the fact that central banks have gone from being net sellers of gold for more than 20 years, to now being net buyers. This is a very large demand driver because central banks buy gold in massive quantities and are expected to continue to buy for the foreseeable future. Another bullish development in recent years is the fact that nearly every major gold miner has taken off their hedges, allowing them to be fully exposed to spot gold prices. This is a clear indication that the management teams at the large miners believe that gold is going to continue to move higher. Jeff told Benzinga that while he doesn't have specific price targets in mind, the peak gold price during the 1970s bull market was 24 times the low hit in 1970. In other words, the high that was hit in 1980 was 24 times the 1970 low. If the current gold bull market turns out to be similarly powerful, gold prices cold hit $6,000, which would be 24 times the low from 2001 when the bull run started. Jeff also believes silver could be headed substantially higher. He said that if silver were to rise by a similar percentage to what it did in the 1970s bull market, prices could hit $130 or go even higher.