Expect Gold And Silver Prices To Retain Their Gains In Q3

This article is based on an interview with Chris Thompson of Raymond James, courtesy of The Gold Report. Thompson’s main argument is that the relative stability now characterizing the market permits investors to make informed decisions about which companies can build value and demonstrate cash flows at today’s prices.

Will we see higher or lower gold and silver prices this year?

Today, our prediction for the high side in 2014 is $1,350/oz for gold and $22/oz for silver. In other words, we see silver potentially trading up to $22/oz this year but do not imply in any way that we expect silver to average $22/oz this year.

How comes the deteriorating geopolitical situation combined with weak U.S. economic performance has not pushed precious metals prices higher?

Gold and silver have performed relatively well this year and showed strength toward the end of the second quarter. My feeling is that stronger gold and silver prices that we have seen earlier than anticipated this year is a reflection of global political tensions and maybe just a reminder that we are not out of the woods as far as U.S. economic performance is concerned. We look for gold and silver prices to retain most of their gains in the third quarter.

After gold fell significantly under $1,200/oz, some argued that gold had been overvalued and overbought for a long time. Has this negative atmosphere been dissipated?

It was not just gold bullion that was hurt by this negative atmosphere. It was the gold-mining companies—in fact, the entire gold industry and its participants.

What we’re seeing at the moment is a restoration of market credibility, especially from the mining company side of things. The mining industry enjoyed for a long time a never-ending climate of strengthening metal prices; that was reversed last year. As a result, companies have had to deal with this reverse by slashing costs, revising their operating plans and, frankly, delivering what investors have always wanted from them: real growth and the generation of real cash flows at current metal prices, not growth at any cost.

What to think of the fact that precious metals equities have done poorly in the last three years compared to the broader indices?

Because of their dependence on ever-higher metals prices, the investment appetite for precious metals equities has been muted. Investors and institutional clients have in fact made money bynot investing in precious metals. As you suggest, however, our view is that perhaps clients should start looking for quality, precious metal-focused stories that are arguably undervalued today. Indications are that clients have been giving the precious metals sector a second look.

Are the broader indices are in bubble territory?

My view is that it’s all about real return. It doesn’t matter what the commodity is or what the company is. So long as companies can offer real returns from doing what they do, and there’s a value opportunity in what they can deliver. Companies aren’t overvalued, regardless of sector, if they deliver real returns. Also, investors have to be realistic about what returns to be satisfied with.

Can mining companies make money at $1,300/oz gold and $20/oz silver?

There are companies that can make money at those prices and others that will struggle. It comes down to two criteria. The first is a management team that can demonstrate the ability to reduce costs and keep them low. The second is deposits that make sense in today’s metal price environment: good grades that come without significant technical challenges.

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