The Gold Report: What has surprised you most in the gold market in 2014?
Michael Curran: We're a little surprised that the gold price hasn't had at least short-term runs to higher levels. We've had continuing global financial challenges and we've had growing political risk in places like Ukraine. Historically, those things have sent the gold price higher.
TGR: What's gold's role in an improving global economy?
MC: We definitely believe that gold is a play against improving global economics. If we see strong moves toward improving global economics, then we expect gold's role to be diminished. We still view gold as a store of value. When interest rates are low there is a case to own bullion and/or equities because they tend to be negatively correlated with strong economies.
TGR: From where will the bid emerge?
MC: Possibly aftershocks to the system that would suggest that the global economy is deteriorating. That's when we tend to see the best performance in gold and gold equities.
TGR: Traditionally summer is soft for the gold market. How do you see gold prices unfolding this summer season?
MC: We definitely believe in the "summer doldrums" for gold, when the metal tends to lose some physical demand support. Jewelry manufacturers don't need to buy physical gold until the latter part of the summer for all those events around the end of the year, like Indian wedding season, Christmas and Chinese New Year. Unless there is some other market catalyst, we tend to see gold pretty flat over the summer months.
TGR: It's difficult for investors to watch their portfolios slide lower on seasonal weakness. How should they cope with market softness?
MC: Our general view is that gold equities should be traded. We've never really been proponents of long-term holds on gold stocks. Historically, equities haven't been great long-term holds because of the way gold vacillates between "in favor" and "out of favor." A lot of the larger producers have already given back 20–25% in the last couple of months so it hasn't been a case of "sell in May and go away"; it's been "sell in March and go away."
A lot of the producers are in the middle of their 52-week price ranges. I wouldn't sell those stocks now; you might as well hold them. Some of those stocks will be pretty attractive opportunities in the next couple of months if they give back another 10% or 15%.
TGR: Generally speaking, what is an ideal percentage of gold exposure in an investment portfolio?
MC: Most portfolios would benefit from some gold exposure, but we're not zealots insisting people need to have 50%, 75% or 100% of their portfolios in gold or gold equities. I think somewhere between 5% and 10% is a good place for most people. Investors at the upper end probably want a mix of equities and bullion. At the lower end investors can probably get by with just buying equities.
TGR: What is your current investment thesis for small-cap gold equities or are there multiple theses?
MC: We prefer the small caps to larger caps at this point and we are taking a three-pronged approach. Our primary focus is high-grade projects in low political-risk jurisdictions. On the low-grade side, we focus on potential heap-leach projects as those projects tend to have low capital expenses and low operating costs. And we still see some opportunities in the early-stage drill plays where there is a little more risk but probably good returns if these companies are successful in their drill programs. For the most part, we would focus on explorers seeking high-grade gold.
TGR: Do you believe gold will finish 2014 above $1,400/oz?
MC: I think we can finish the year somewhere in the $1,400–1,500/oz range. We're seeing a flat summer and then there will be some catalysts later in the year to push gold higher. Our current target would be $1,400/oz plus.
TGR: What would those catalysts be?
MC: They are going to be things related to either political risk or that economies aren't improving as much as people believed, or if there's a hiccup with quantitative easing in the U.S.
TGR: Michael, thank you for your time.
Michael Curran is a managing director and mining analyst with Beacon Securities in Toronto. He was previously a director and a mining research analyst with RBC Capital Markets. Curran received the #1 Ranking for Mining & Metals research coverage by The Wall Street Journal (Annual Best on the Street Survey) in May 2013.