Eric Coffin, long-time editor of the Hard Rock Analyst group of publications, has seen the all-time highs in the junior mining space, and the current three-year bear market has taught him to adjust his expectations. He says the companies that he follows that have performed recently all had a specific event—a bigger resource number, a new economic study or even a discovery—that prompted the market to rerate the stock. Coffin says that, as always, it is about solid management and good projects, but it’s no longer about who has the biggest copper or gold resource, it’s about which company has a resource that makes sense. In this interview with The Gold Report, he suggests some companies with resources that not only make sense but could make even more sense to larger companies.
The Gold Report: At the subscriber investment summit in Toronto in March 2015, you had a talk titled “Life in a Zero Yield World.” What is wrong with that world?
Eric Coffin: A zero yield world is the result of four or five years of central banks essentially buying the hell out of the bond market, which is what the European Central Bank (ECB) is doing right now. And buying those bonds, also known as quantitative easing (QE), drives down yields. QE has helped the U.S. and will probably help the European economies but it creates a lot of distortions. We tend to see a lot of money driven into high-risk areas, like heavily leveraged commodity and exchange-traded funds (ETF) bets and things like art and collectibles, because there are these large money pools that can raise capital at close to zero rates, and that tends to make people take greater risks. How that ends remains to be seen, but central bankers realize that they need to start weaning economies off of QE because when you generate that much risk capital and start creating that many distortions, it quite often doesn’t end well.
TGR: Can these economies successfully be weaned off QE?
EC: Maybe. On one side there is the “wealth effect,” which is the positive impact on the economy from people seeing their portfolios get larger. And that was always part of the plan. Most economists describe the wealth effect as a side effect of QE, but I don’t think policy makers at the U.S. Federal Reserve or the ECB think that way. The problem with the wealth effect is it mainly benefits—you guessed it—the already wealthy. I think that is why it hasn’t generated higher growth yet or higher inflation except in “one percenter playgrounds” like the fine art market. The U.S. economy is not doing that great overall and the ECB is trying to climb out of its fourth recession in the last five or six years. In both cases much of the money driving these economies is washing in and out of the equity markets and traders are focused on what central bankers are going to do.
In the last few months we have seen huge market swings based on things said by either U.S. Federal Reserve Chairman Janet Yellen or ECB President Mario Draghi. It’s not healthy. If we step back and take a 10,000-foot view of the markets, anybody with a finance background knows that an ECB rate cut or for that matter a Fed rate boost of 25 or 50 basis points is not going to make any difference in the real world. But with so much of the money chasing bureaucratic decisions, it is creating distortions and now the Fed has got to find a way to carefully ease out of QE. But if the Fed surprises the markets, the markets are going to get clobbered. It’s a tightrope walk for Yellen.
TGR: Throughout these last few years your job has been to clear up some of the market distortion for mining investors. What are some macro indicators that mining investors should follow and why?
EC: It’s a good idea to keep your eye on inflation indicators because metal prices are heavily influenced by inflation expectations. I follow the Treasury Inflation Protection Securities (TIPS). TIPS are basically inflation-indexed securities and there are ETFs for these that are heavily traded. These get bought as inflation protection; the way the price of those mutual funds and ETFs swings up and down gives us a read on traders’ inflation expectations. In the last few months, with collapsing oil prices, the bugaboo in the market has been deflation. But in the last little while we have seen a massive flow of funds into these inflation-protected mutual funds and ETFs. It’s a bit of a head scratcher because consumer price index numbers still look flat.
When it comes to the U.S., obviously everybody watches the jobs report. That has a big impact. One thing I’ve been watching closely is real wage gains. Even though the U.S. has seen its unemployment rate drop from about 12% to 5.5%, wage gains for average American workers—80% of the workforce—remain at around 2% before inflation, so after inflation it was next to nothing. People on Wall Street predict that the economy is going to accelerate by 3–5% but I don’t see how that happens unless we start seeing real wage gains because 70% of the U.S. economy is consumer spending. You have to pay people money before they can spend it.
I watch currencies, too, because part of the gold trade is currencies, and until recently, gold has followed the euro fairly closely.
TGR: Yellen recently said U.S. equity markets look “frothy” and recent U.S. dollar weakness seems to back that view. How do you expect gold to perform through the end of the year and perhaps beyond that?
