Rob McEwen, chairman and chief owner of McEwen Mining (TSX: MUX; NYSE: MUX), looks back on the year that was, and ahead to what 2017 may hold in store for gold.
The Northern Miner: It’s been one of the toughest years on record for commodities, and we thought we’d ask you to reflect on the past year and offer your views on what the mining industry might expect in 2017.
Rob McEwen: The year 2016 was a surprise in many ways — pleasant in the beginning and perplexing as we approach the year-end. Right now the election of Donald J. Trump and Republican control of the Senate and Congress has introduced a brand-new variable that most investors never contemplated. I’ve been really impressed by how president-elect Trump plans to change the U.S. economy to make it stronger by simplifying regulations, lowering taxes, speeding up the pace of approval of capital investments, incentives for repatriating the offshore profits of U.S. multinationals and putting in a seasoned group of executives into his cabinet. It shows real serious intent and talent to kick-start the economy. Given this scenario, it is easy to understand why there is a rush of money into the U.S. dollar and particularly into its equity markets. With large planned expenses on defence, on infrastructure and a made-in-the-USA procurement policy, I expect their labour market will tighten, prices of goods and services will increase, and cost-push inflation will appear later in the year.
Since the election, the dollar has climbed in value against many of the currencies of its trading partners, interest rates are trending higher and money is moving out of the bond markets, and into U.S. equity markets. These abrupt changes in asset values could be a problem for the derivative market and borrowers of U.S. denominated debt. Furthermore, I expect the damage caused by these big swings is going to surface [in 2017] and reinforce the reasons for investors to have a gold investment.
TNM: So where do we go from here?
RM: Clearly gold was going up with the prospect of a win by the Democrats, but now with the Republican’s absolute victory, the gold price is having trouble holding its gains made during the year. Its price movement has been very curious. While it has been in a downtrend since the election, lately the price has traded in a fairly narrow band. Most days the price is closing up in Asia and Europe, then getting squashed in America. It appears that American investors believe a big, positive change is coming, and they don’t need exposure to gold, while investors in Asia and Europe feel their economic outlook is less certain and that they need the risk insurance afforded by gold.
Clearly, investors in America like president-elect Trump’s Cabinet appointments and his plans for accelerating the economy. And there are very good reasons to believe these plans will start quickly, because Capital Hill will be able to get bills passed. The legislative logjams that characterized the Obama years are over, and that’s a huge positive. As an aside, I have to wonder what Canada’s response is going to be to this massive competitive shift in tax rates, simplification of regulations and trade policy. Ottawa is going to have to work overtime devising and executing a response to keep industry, top talent and markets.
TNM: Is the recent sell off in gold overdone?
RM: It has been a quick drop. Is it overdone? I don’t know. I suspect the first 100 days of president-elect Trump’s term will set the tone for the strength of the dollar and the price of gold in U.S. dollars. However in the interim, I expect the price of gold quoted in other currencies to climb.
TNM: The Fed recently raised its interest rate by 25 basis points and signalled that it plans to raise rates as many as three times in 2017. How will that play into the gold sector?
RM: Short-term negative, intermediate-term little impact. Economic activity will likely accelerate with the large capital investment planned by the Trump government. In the late 1970s, inflation was running fast, interest rates were in the teens, and gold was reaching new highs. In March 1980, the Federal Reserve chairman pushed the Fed funds interest rate to 20%. And only then did the price of gold and inflation fall. Today, the Fed fund rate is 0.75%. This is just an illustration to show that gold and interest rates can go higher, much higher together, before depressing the investment demand for gold.
TNM: What is your prediction for the average gold price in 2017?
RM: My 2016 prediction was doing well up until this summer and then crashed after the election. Based on my belief that government debt levels are going to continue to grow dramatically, rising interest rates will make it more expensive to service, the massive, opaque derivatives market is vulnerable to the large relative moves by currencies and declining bond prices all conspire to make gold an attractive alternative investment today. So, my gold price outlook is US$1,800 by year-end 2017.
TNM: What are some of your favourite companies in the junior gold space and which ones have you invested in?
RM: Golden Predator Mining (TSXV: GPY) has an interesting property in the Yukon. They’re getting splashy gold grades. Nighthawk Gold (TSXV: NHK) is exploring on a property that’s been around for a long time, and they too are pulling good grades and intercepts. There’s Pure Gold Mining (TSXV: PGM) in the Red Lake camp. Their geos believe that they are looking at another structure — a folded structure — that might be a repeat of what was mined in the past. G4G Capital (TSXV: GGC), which is going to be renamed White Gold, has a most innovative and successful CEO, Shawn Ryan. The company has a large land package in the Yukon with promising exploration results, and its treasury has enough money for three years of aggressive exploration without having to go back to the capital markets. Agnico Eagle has recently become a large shareholder. Abitibi Royalties (TSXV: RZZ) I like. Its CEO, Ian Ball, has been running it well. It has a tiny share float outstanding, no debt, a strong treasury and a growing royalty revenue stream. Another interesting gold explorer with production capacity is Quebec-based Monarques Gold (TSXV: MQR). Its management was acquiring when most people were hiding in the closet out of fear of everything going lower. They are building on a good resource base and have recently bought a nearby production facility. Also, I like Goldquest Mining (TSXV: GQC), which has a good-sized deposit in the Dominican Republic, and Integra Gold (TSXV: ICG; US-OTC: ICGQF), which has forward-looking management that has been using technology to unlock the potential of an old mine.
TNM: What about the impact of central banks on the gold price going forward?
RM: Recently, the Central Bank of India eliminated their 500 and 1,000 rupee notes in an effort to stop corruption and improve their tax collection efforts. An outcome of this action was a near collapse of their economy and a large jump in the premium over the market price of gold. Gold will remain an important monetary asset for enlightened central bankers. Perhaps the new government in Washington will recognize the inherent value of gold and take steps to once again link the dollar to gold at a much higher price than where it trades today.
TNM: What about China?
RM: Here is an example of an enlightened Central Bank. China and Russia have been buying gold. Why? I’ll suggest because they appreciate its value and that they want to back their currencies with gold to make their currencies more attractive than the other fiat currencies of the world.
TNM: And then there are digital currencies and platforms like Bitcoin.
RM: The prospect of widespread use of digital currencies is a worrisome development for anyone who has concerns about big government, cyber theft of one’s deposits and a power grid failure that could deny access to one’s savings. I like physical gold and view it as a better alternative. It can’t be hacked or stolen online.
TNM: You’re one of five judges on the Goldcorp/Integra DisruptMining competition next March, which will reward the most innovative ideas and technologies that can be applied to the mining sector.
RM: I was really delighted to be asked to be a judge. I’m a big believer that innovation will improve profit margins for miners. Integra and Goldcorp should be complimented on this initiative. It’s encouraging people to see and try out new technologies, and also to ask contestants from other industries to cross-fertilize ours. One day, hopefully soon, our politicians will understand that the mining industry is of vital importance to Canada’s future.