Editor's note: This interview originally ran on June 26, 2012.
Read Part I of the interview, “Gold’s Volatility Signals Big Move Ahead; Tuesday Best Day To Buy Gold & Silver.”
Jeff Clark, senior precious metals analyst at Casey Research, is hardly new to the world of gold. As the son of an award-winning gold panner, Clark also works his family’s placer claims in California, Nevada and Arizona. When not looking for the yellow metal, he can be found researching mining companies, analyzing big trends in metals and looking for safe and profitable ways to capitalize on the gold and silver market for subscribers to Casey Research’s BIG GOLD newsletter. In this second part of a two-part interview with HAI Managing Editor Drew Voros, Clark discusses the mining industry, what effect gold ETFs have had on mining stocks, and even reveals one of several gold mining stocks he bought for his mother.
HAI: In terms of future supply, where do you see the breakeven point for gold miners? I’ve had various people tell me it’s around $1,000 an ounce, maybe a little higher, especially for the South African companies.
Clark: There’s definitely inflation in the industry. Energy prices have been coming down for the past month or two, but they’re still high. There’s also inflation with wages and in other materials. So it isn’t just energy. And inflation is going higher regardless of what the government tells us the CPI might be. This is another reason that might force the gold price higher, as the cost to extract gold is going higher.
South Africa miners are digging a lot deeper now, so their costs are especially going high. I definitely wouldn’t buy a South African producer at this point. Inflation is just one of many problems they have.
The $1,000/oz. figure you referred to is the “all in” cost. The operational cost of any given mine is usually lower, like $550/oz. But I do think regardless of which price we talk about, costs will go higher, especially if you believe we’re going to get inflation. That seems almost inevitable at some point. Even if we get a deflationary episode, the government is not going to sit idly by. They’re going to print like crazy and that’s going to bring inflation back at some point.
HAI: What impact do gold ETFs have in terms of the correlation between metals and miners? Have gold ETFs drawn capital away from the miners?
Clark: It’s interesting because there are some investors in the industry who believe that ETFs changed the dynamics in the industry and that the motivation to buy the stocks has dissipated. I disagree with that. It’s clear that the ETFs have taken some of the demand away from the miners because they’re easy to buy, especially for a large institutional investor. You could just buy the ETF to get exposure to gold. This is significant because in the early 1970s, there were no ETFs. It was hard to get their hands on that much bullion, so they had to buy the stocks.
However, when you buy a gold-backed ETF, you’re buying gold, and that has nothing to do with the gold equities. When investors want leverage to the gold price, they will move into the stocks. This is the natural evolution in our industry, as it has done numerous times before. At some point, institutional investors and the mainstream will move into the stock because they want more leverage.