One "fact" that the average consumer and investor hears over and over again (from just about every economic and financial expert) is how doomed the US dollar is. The experts will point to how the US dollar is no longer tied to gold and is being printed to solve problems (which leads to inflation).
But one expert is running against the crowd, taking a strong position on his bullishness of the US dollar. Paul Van Eeden, who was once a stockbroker with Rick Rule's Global Resource Investments Ltd., and is now the president of the privately held Cranberry Capital, shared his opinion with audiences at the Hard Assets Investment Conference. We spoke to him the day before his speech to get a closer look at what his talk was about and why he is bullish on the US dollar.
He started by talking about the one 'currency' that everyone loves to talk about – gold. His position on gold, though, is contrarian: "Gold is coming off its high of around $1900/ounce," he said. "In my opinion there is a reasonable probability that the $1900/ounce could be an intermediate high for gold."
Instead of gold, Mr. Van Eeden is looking to the US dollar for opportunities: "I am becoming reasonably bullish on the US dollar versus other currencies. If the US dollar does rally and gets stronger then I think we could continue to see lower gold prices."
To back up his position, Mr. Van Eeden gave us three significant factors that he believes will influence the dollar. The first factor is interest rates: "In the United States, we have the highest bond prices in history, which also means that we have the lowest interest rates in history. Interest rates (from an economic sense) are the cost of money; the cost of borrowing. So what that means is: We have the lowest cost of borrowing money… perhaps in the last hundred years."
The second factor influencing his bullishness on the US dollar is employment rates: "In the US, we also have very high unemployment. We have somewhere between 13 million and 15 million people who are part of the workforce but who are unemployed. You never want to have high unemployment but it is a positive statement in that you have available a large supply of workers who are willing and able to work. And particularly because we are talking about the United States, we are talking about an educated and trainable workforce."
The third factor influencing his bullishness on the US dollar is the cost of electricity: "The success of horizontal drilling and fracking has lowered the cost of natural gas very, very dramatically and that has brought down wholesale electricity costs in the United States. The US has always been very competitive in the world in terms of wholesale costs but now with the lower natural gas price, and the decline we're seeing in wholesale electricity prices, the US is becoming extremely competitive."
Then he brought together all three of those factors to show why he is bullish on the US dollar: "We've got a historically low cost of borrowing money; we've got historically high unemployment (meaning availability of labor) and we've got declining wholesale electrical costs." That, he points out, creates the perfect condition for businesses to grow. "If I had to paint a rosy picture and a scenario that is right for growth; that is it!"
In addition to those US-based economic factors, Mr. Van Eeden also pointed out that the US is ahead of other countries who are still struggling financially. He said: "If you compare the US to [other parts of the world], the United States' problems are under better control than Europe. Europe is 1 to 2 years behind the United States in terms of getting a handle on its financial troubles. Asia's economic growth is slowing down as a result of the decline in economic activity in North American and Europe. On a relative basis, the United States is ripe for renewed economic growth. If that economic growth comes into being, then I think you will see a rally in the US dollar as a result of economic growth in the United States and you'll see a rally in the US dollar as a result of conditions being relatively worse in Asia and in Europe. That rally in the US dollar then is going to translate into lower gold prices," he concluded.
Next, we asked him what role the junior resource market would plan and whether there was a bubble in the junior resource market: "I think the bubble is already over," he told us. "I think the real bubble in the junior resource sector actually ended in late 2007. That's when the bubble burst."
Then Mr. Van Eeden explained why this was his position on junior resource stocks: "If you look at the Toronto Venture Exchange Index then you'll see that the index peaked around late 2007. And even though there was a strong rally in 2009/2010, the rally didn't come close to the peak of 2007 and the decline we've had in 2011 (which is continuing in 2012) has taken the index back down to the lows we saw around 2008. So to me it doesn't look like there was any real recovery after the peak in 2007." Then he pointed out that he believed we were at or near a market bottom: "I think there is a reasonable risk that this will be a prolonged bottom. So we may see a very difficult 2012 and 2013 for junior resource stocks."
Mr. Van Eeden explained. "If you look at the prices of lead, zinc, aluminum, and nickel, you'll see that those four base metal prices all peaked between 2006 and 2007 and their pattern looks exactly the same as the Toronto Venture Exchange Index, meaning that they peaked around 2007, they dropped in 2008, they rallied in 2010, and they've been declining ever since. The junior resource stocks have been reacting (at least for the past 4 to 5 years) similarly to the way base metal prices have been reacting for the last 4 to 5 years. The junior resource stocks have not been tracking the price of gold or copper. They have been tracking the price of the broader base metal complex."
Since the start of the financial crisis, investors have been scared off from the junior resource stocks. Mr. Van Eeden tells us why: "We've had an increase risk aversion and a decrease in risk appetite. The stocks we are looking at in the Hard Assets Conference are some of the riskiest investments you can imagine. It's very logical that as risk appetite decreased, alongside the deteriorating global economic conditions, that the appetite for junior resource stocks decreased as well. Hence, the decrease in prices and the strong correlation between junior resource stocks and the base metal prices."
Mr. Van Eeden sees opportunity in the US dollar, and presumably in the commercial and industrial sectors of the US economy, which would benefit from the low cost of borrowing, high availability of workers, and low cost of electricity. The news isn't immediately good for junior resource investors who are focused on the exploration side of the business but the news could be good for those investors who buy stocks of companies who more directly serve the growing commercial and industrial sectors.