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Precious metals manager sees gold heading north

Precious metals fund manager Chris Beer doesn't get too fussed about predicting the future price of gold. A former geologist and mining analyst, he is more concerned about getting the direction right. And right now, he sees the yellow metal continuing to head north. Gold recently peaked near $1,260 (U.S.) per ounce although it has peeled back a bit. "Gold has been up every year since 2001 in 10 currencies," says Mr. Beer of RBC Asset Management Inc. He also tries to target companies that can also increase their bottom line independent of the gold price through higher production or lower costs. Since 2003, he has run the $988-million RBC Global Precious Metals Fund, which gained 41.2 per cent for the year ended May 31, and has an annualized 26 per cent over five years.

What is driving gold?

Recently, a lot of Europeans have been buying gold because they are not sure if the euro is going to survive, and it's the same globally. It could be people with U.S. dollars making the bet that they are next. With people worried about the euro, global deflation, global inflation, gold has typically been a safe haven. But more people are looking at gold as an investment asset class that is not anyone else's liability. You can't print it, and it is not a currency that people can abuse.

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Is gold in a bubble?

No. At the moment, gold is half of one per cent of global financial assets [including stocks and bonds] It has been as high as 5 per cent in the late sixties. Prior to 1971, when U.S. president Richard Nixon took the dollar off the gold standard, gold was convertible into the U.S. dollar. If gold were to go to 7 per cent of financial assets, or if people were lining up outside of Scotiabank to buy bullion like in the late seventies, that would be more of a bubble.

So what is your outlook for the gold price?

The inflation-adjusted price of gold suggests that from its $850-an-ounce high in 1980, it would be about $2,400 gold today. That is why people are coming out with that kind of target price of where gold should be. If gold breaks decisively through $1,260 an ounce towards $1,280, then we are probably in a period where gold can continue to trend higher. I can't see why we couldn't get to an inflation-adjusted price of $2,000 per ounce. The fundamental factors affecting gold seem to be in place.

What do you think of the prospects for gold? Are you betting hard on flight to safety? Or is it the next bubble -- fool's gold, as it were?

What are those factors?

Deficit spending is resulting in the massive printing of currencies globally. Mine production last year was up for the first time in 20 years. It might be up a bit this year, but generally you are not getting any new mine production in gold. If people are printing currencies, gold is going up against all currencies because you are producing less gold than dollars, yen or euros.

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So why has gold pulled back after hitting highs?

Near term, we are seeing a bit of a pullback in June and maybe July. Often seasonally, we do get a pullback. And there is profit taking. Gold has gone up too fast for people who say that it is going up only because the euro has been weak and people are rushing to safety. All I know is that from a medium to long-term perspective, there has been an up trend [from when gold bottomed just over $250 per ounce in 1999] and the factors impacting gold are still in place.

Is it better to buy bullion or stocks?

We don't hold bullion because we are positive on the gold price. If gold goes up 25 per cent, historically stocks will go up 75 per cent. That relationship over the last couple of years has contracted from three times the gold price to, at present, probably 1.5 times. It has contracted because, while the gold price has gone up, the profit margin per ounce hasn't really increased [as costs rose.]But it does look like we are going to see continued margin expansion. In that environment, gold stocks will outperform bullion.

What advice would you give investors considering gold?

Gold is one way of diversifying your portfolio. Even in the financial crisis, gold bullion did better than the average stock market. Gold stocks didn't do well initially, but in the latter part of 2008 and early 2009, they were one of the first ones to increase. Goldcorp and Barrick almost doubled. In Canada, gold is about 12 per cent of the TSX. If you buy a Canadian equity fund that is market-weight gold, you are getting pretty good exposure to gold. If you are buying a global index fund you are not getting that much exposure - if any - to gold.

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Chris Beer's Picks

Goldcorp Inc. : The low-cost gold producer, which has assets in "safe jurisdictions" such as Canada and Mexico, has a strong executive team, good balance sheet and robust growth profile, he says. "Goldcorp is growing from roughly 2.3 million ounces a year to more than 3.5 million over the next two years." The Mexican Penasquito mine will add to growth in 2010 and 2011, he said.

Randgold Resources Ltd. : The gold miner and explorer headed by chief executive officer Mark Bristow is "one of our favourite mid- to large-cap names," he said. "The company was one of the first to identify West Africa as a great place to explore and build gold mines." Randgold has two mines in Mali that generate free cash flow to fund two "outstanding projects in Senegal," he added.

Aura Minerals Inc. : The junior miner is run by Patrick Downey who headed Viceroy Exploration Ltd. before it was sold to Yamana Gold Inc. in 2006. Aura has "exciting exploration potential at its Aranzazu copper-gold project in Mexico," Mr. Beer said. Aura, which also bought Yamana's mines in Honduras and Brazil last year, trades attractively at less than five times cash flow, he said.

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