Mike Niehuser's Gold Investing Lessons from Banking School

Source: Special to The Gold Report   (9/7/12)

http://www.theaureport.com/pub/na/14291

Mike Niehuser, founder of Beacon Rock Research, incorporates his banking school background into his mining industry analysis. In this exclusive interview with The Gold Report, he assesses the macroeconomic situation from a banker's perspective, explains why he is convinced gold is ready to take off and shares the names of companies poised to profit from mining in the northwestern United States.

The Gold Report: You were at the Pacific Coast Banking School last Friday when gold prices dipped and then surged on Federal Reserve Chairman Ben Bernanke's comments. Why are you attending banking school?

Mike Niehuser: In a former life I was a real estate construction lender; I attended a mid-career banking school and found out there that I am not a banker. I also learned how to analyze banks and in 2000 transitioned to become a bank analyst. In 2004, I found NovaGold Resources Inc. (NG:TSX; NG:NYSE.A) and fell in love with the mining industry. I never forgot the school and was awarded faculty status eight years ago for providing lecture capture for long-distance learning. Staying active in the school has allowed me to see outside the bubble and this I hope has made me a better mining analyst. The skills as a banker-assessing project, credit and market risk-have helped me to compete as an analyst.

TGR: Regarding Bernanke's comments, how does this impact your forecast on gold prices?

MN: I think Bernanke's comments, as unclear as they were, demonstrate how polarized the world is in its thinking. The markets are looking for leadership and direction, something investors can trust to plan their investments. This became clear to me at banking school. One direction is to stable money, the other indecisive course will reap the whirlwind. I'm still holding to my original forecast for 2012 of gold ranging from $1,400 to $1,700/ounce (oz) with the potential for some catalyst to push the upside to reach $1,800 to $1,900/oz. While it may appear lame to reiterate what has already occurred, I am quite confident we could see a move to stabilize near the upside of the forecast toward the end of 2012. Due to the election, we may expect significant volatility through the end of the year. It should come as no surprise if silver traces a similar pattern.

TGR: In light of your involvement with the banking industry, how do you think bankers feel about the possibility of more quantitative easing and its impact on interest rates and inflation?

MN: There are individuals who feel strongly one way or another, but strangely indifferent overall. There are hints that all is not well. I am not talking about concerns we might have for deficits, increasing national debt and inflation, but concerns about the public perception of bankers as a class and on their careers with the impact of legislation like the Dodd-Frank Act that has not even been written. Bankers appear to be coming out of a state of denial on Dodd-Frank, but I believe they understand that it will lead to a declining return on equity and being required to hold more capital, receiving lower returns on investment and falling stock prices.

There is also a split between large banks and community banks. This should lead to consolidation and the unforeseen consequence of even larger banks that are "Too Big to Fail," which, in my opinion, creates even more systematic risk.

Interestingly, some bankers see low interest rates as a new normal that present selling opportunities to their customers. There are people on both sides. On the whole, bankers would rather have the Fed on their side openly, if they want to have access to funds and support for their banks. I fear with Dodd-Frank the banking industry is becoming more of an arm of the government than an investible class of investments. As long as politicians and their regulators, in the name of risk reduction, continue to pick winners and losers, there will be unintended consequences. On the whole, they appear to be in a bubble and to have convinced themselves that they have the ability to shed inflation or interest rate risk on their balance sheets.

TGR: Do most of the bankers you know feel that the general economy is in recovery mode?

MN: Yes, it would seem so. Most of the loans going bad today are small compared with just a few years ago. Not a lot of new loans are being created. It was said by one instructor that, "You have got to be terminally stupid to have a new loan go bad in the first year." As things are less negative or at least stabilized, bankers' careers are in less danger and this is how they view the world. This is interesting for a number of reasons. From a microeconomic perspective of demand and supply, artificially low interest rates would actually create a shortage of credit, just as price controls create shortages. Once again, just thinking of additional requirements brought on by Dodd-Frank, the over-regulation will likely lead to unforeseen consequences, distorting markets and misallocating credit. Imagine being a lender with stiff penalties to be assessed by the unaccountable Consumer Financial Protection Bureau or having lawyers regularly sitting in with regulators on bank audits. The culture of banking is to reduce risk, and Dodd-Frank is a healthy dose of reputation, regulatory and political risk. In any event, this will suppress lending and economic growth in the economy, which will lead eventually to more imports or higher prices.

TGR: What is the general sentiment among bankers regarding investing in gold? Does the banking community regard the possibility of making gold a Tier 1 asset a real possibility?

MN: This was strange; in past years some students mentioned gold, but I didn't hear anyone talk about gold over the session except the economics professor. This was particularly odd because the school was held during the Republican National Convention, with its proposal to complete a study on the gold standard. One would think it would come up in conversation as this would impact the definition of the very lifeblood of the banking industry, money and leverage. I suppose this stems from a misunderstanding or lack of thought on their part of the definition of money. It was interesting that the recent partnership of PayPal and Discover came up. This advancement into mobile payments that skirt the banking system has the attention of both Warren Buffet and banks as technology innovates ahead and outside the banking system, challenging our understanding of money. It was also interesting that gold as a Tier 1 asset never came up. When I prodded some of the knowledgeable instructors on the subject, they said simply that this idea had been around but it never really went anywhere, except maybe in Europe.

TGR: How do you account for the indifference of a group of financial professionals toward gold, considering the higher prices over the last decade?

MN: I think the greatest pearl of wisdom I took away from being a student at the school in the 1990s was that people are different. They may look alike but they are different, not just because of their education or background, but how they process information and make decisions. People are individuals and they can be counted on to act one way or another in their own self-interest, and particularly in how they see the world. This is what makes markets so difficult to predict and makes it impossible to craft policies that micromanage business, investment decisions or personal behavior. On the other hand, groups of people bind themselves into special interests that in a silo or bubble become increasingly unstable over time. This is more than armchair philosophy. Demographics and an expanding culture of entitlement have hurt Europe beyond repair and are driving politics and economic trends in the U.S., perverting the role of money in an efficient economy, which is clearly the best case for higher gold prices in the near to long term.

TGR: Why does this make you so sure that this will lead to higher gold prices?

MN: It's just my opinion, but the world appears to be polarizing. I am in the minority where I come from, sort of a combination of a Classic Liberal, Austrian School, Friedmanite, Supply-Sider. I think, like Frédéric Bastiat, that the Law is to protect the individual's life, liberty and property. This requires free will, choice and belief in the virtues of mutually agreed upon free exchange, an economy regulated to eliminate deception and reinforce trust. Stable money is essential here and gold is the very essence of trust that all people desire. The other side is driving the boat in Europe and the United States. They work their own book and believe that they are smarter and can organize society. They believe demonizing the 1% and co-opting the bottom 50%, thereby destroying capitalism-moral capitalism-is actually going to benefit them. After they get done taxing the rich and destroying the economy, the only option left is to enforce redistribution of wealth through inflating the currency. It may be too late to turn back. I think this is why the U.S. Presidential election is so important and historic for the global and national economies.