Downgrades for U.S. debt, austerity programs across Europe and political uncertainty all point to a continued uptrend in gold prices according to Brien Lundin, publisher and editor of Gold Newsletter. For long-term investors, Brien Lundin says in this exclusive interview with The Gold Report, small-cap, precious metals equities are one place to take advantage of the coming upward gold price trend.
The Gold Report: Brien, cited the escalating European and U.S. debt crises as triggers for the August 22 spike in gold prices, when it briefly eclipsed the $1,900/ounce (oz.) mark. Since then, the French bank Société Générale has been downgraded and austerity measures are forcing the Greek economy further into recession. Despite these significant catalysts, the gold price remains range-bound between $1,750 and $1,850/oz. Why isn’t gold reacting?
Brien Lundin: If the European debt crisis and the S&P downgrade of U.S. sovereign debt had happened separately, say a couple of months apart, I think gold would have risen just as far, but the rise wouldn’t have been as steep and the market wouldn’t have overheated. But they happened to occur right on top of each other, so the market got ahead of itself and went nearly parabolic. Speculators who were merely trend-following traders came into gold, but the end of the rally sent them all packing at once. That dealt a sharp psychological and emotional blow to the market that we are still recovering from. Since then, we have seen a lot of very fluid, hot money coming in and out of the market.
More recent news from Europe hasn’t had quite the same effect. We have seen some itchier trigger fingers, people playing the news of the day and getting right back out. We have also seen physical gold buyers from Asia come in on the price dips.
The result has been rallies tempered on the upside by the speculators abandoning trades more quickly. We have also seen drops tempered by bargain-hunting, physical gold buyers coming in on the downside. In short, gold is in a consolidation phase, awaiting the next trend, which I think will continue to be headed upward.
TGR: You mentioned Asian physical buying. Recent rumors suggested China could be buying Italian debt to help Italy out of its problems. Is that bolstering the euro and keeping investors out of gold?
BL: I think that China helping out Italy hurts the gold price in an indirect way. It’s a sign of China knowing which side its bread is buttered on and knowing that it needs a stable Europe to support its economy.
We saw that need for stability when the European Central Bank and other central banks announced a coordinated U.S. dollar liquidity program and Germany and France said that Greece would definitely stay in the euro. All of this is part and parcel of trying to calm the markets down in the interim and to show that the gold price is essentially capped or that the rise is being dampened by official intervention.
TGR: Are you implying that the euro is doomed?
BL: I believe the euro is doomed as it currently exists. I think there is very little chance Greece will remain in the European Monetary Union. The rest of the PIIGS (Portugal, Ireland, Italy, Spain) remain to be seen. After all, what’s the use of a club if you can’t kick anyone out?
Obviously, the risks here are the implications of such an event, the dominos that would fall in the European banking system. The fact that Germany and France are so reluctant to kick Greece out of the euro zone shows that the problems could be very deep and widespread. I think they are just prolonging the situation. Ultimately, the euro of the future will not be the euro we see today.
TGR: What effect has the news out of Europe had on the gold price?
BL: There may have been some official manipulation in the gold price recently to bolster the idea that things are calming down. When the Swiss announced its cap on the franc, the news was incredibly bullish for gold; gold in effect became the last safe-haven investment standing. But shortly after that news broke, the metal sold off about $50/oz. overseas in just a few seconds. Investors wondered who could have known that news was coming, who could have reacted that quickly and sold so dramatically. The evidence points toward official management of the gold price.
TGR: In the September issue of Gold Newsletter you wrote that “long-term factors still favor a continued uptrend” in the gold price. Can you give us more detail?
BL: When we look at the S&P downgrade of U.S. sovereign debt, the problems in Greece and the potentially cascading effects across the banking system in Europe, what we see is the result of far too much debt being created on both the governmental and private level. Too much money has already been created and will have to be created in the future to inflate away all that debt. It is mathematically and politically impossible for austerity programs to be severe enough to overcome these debt loads. There is no way, especially under the weight of those austerity programs, that growth can be robust enough to overcome these debt burdens. At some point and to some degree, inflation will have to depreciate those debts away. That is the very reason why investors with a long-term view are buying gold. They aren’t concerned about gold having come so far over the past 10 years. They are looking down the road and seeing the amount of currency that will have to be created to get out of our tremendous fiscal problems.
TGR: With the aid of Ron Greiss, at thechartstore.com, you note that gold prices should continue to move higher at least until the 2012 election in the United States. Why?
BL: I don’t see any chance of fundamental fiscal reform in the U.S. to address the debt problems before the 2012 elections. No one is going to move off center and no one is going to take the political heat to make the dramatic reforms necessary to get the U.S. back on its feet.
We have about 14 more months, at least, in this bull market. If you look at the long-term trading channel for gold going back to the beginning of this bull market in 2000, you see that that channel, while fairly broad, has not really been violated, except by the 2008 credit crisis. If you extend that trading channel, it brings gold up to a price range of around $2,100 to $2,500/oz. by the 2012 elections. That would be a very nice gain from current levels.
After 2012, gold’s future depends on the results of those elections. If it is status quo politically, I think all bets are off on the gold price. I wouldn’t even hazard to guess what the ultimate upside could be.
TGR: And who knows where the euro will be by then.
BL: Right. We are on the brink of a massive inflationary reaction to the debt loads around the world. A number of people are afraid of a deflationary collapse, but I learned long ago that central bankers will never let that happen. Their primal instinct is to inflate in a situation like that and that’s exactly what they’ll do. They will take the lesser of two evils.
TGR: Nonetheless, most precious metal stock prices are falling, especially among the juniors. It’s increasingly difficult to convince people that small-cap, precious metals equities remain the place to be. You recently heartened Gold Newsletter readers by reminding them that you recommended Millrock Resources Inc. (MRO:TSX.V) “at $0.06 a share in November 2008 and it subsequently traded well over a dollar a share. I expect similar profits to be created in the months ahead.” Which profit makers are you high on now?
BL: Back then, I recommended Millrock because of the company’s extraordinary attributes and an overriding belief that, at some point, the sun does come out. I still like Millrock. They will have a lot of news out in the weeks ahead.
Looking at the Yukon, I like Wolverine Minerals Corp. (WLV:TSX.V). I have owned that stock for some time and recommend it because the company has a truly exceptional property portfolio, one that gives them a lot of kicks at the can in the Yukon.
TGR: Brent Cook called Wolverine a high-risk exposure to the Yukon when it was trading at $0.63. He called that a good entry point. Now it is trading at around $0.38; I guess that would make a very good entry point. Do you agree with Cook that it is high-risk exposure to the Yukon?
BL: Brent is a very conservative speculator, if you can imagine such a thing. When he recommends something, he must really, really like it. He is such an astute geologist and has seen so much in his career that he picks holes in just about anything.
I think what he liked about Wolverine, much to my consternation because he beat me to the punch, was the property portfolio, the people behind it and the management team. I think folks from Strategic Metals Ltd. (SMD:TSX.V) put the property portfolio together and are acting as operators in the exploration program.
Good management, good expertise in the ground, an outstanding property portfolio and a varied property portfolio gives you a number of tickets in the lottery.
As far as being high risk, these are all high-risk plays. You need to have companies with a number of properties and a number of these companies in any kind of a serious portfolio to spread the risk around. You also need to get out when you make some profits or take some money off the table along the way.
TGR: Any other names?
BL: Another one that I own and recommend is Golden Predator Corp. (GPD:TSX). This company also has an extensive property portfolio and a very astute management team. It has already made a couple of very exciting discoveries.
TGR: That includes impressive drill results on the Sleeman zone, which is part of the Brewery Creek project. What can you tell us about those results?
BL: Today’s exploration market is not so much in a phase of discovery, but of rediscovery right now. Companies are going back and reworking projects that were economic failures at much lower gold prices. Resources in the ground that weren’t economic with gold prices of $400/oz. are wildly economic and profitable at today’s prices.
That’s precisely what Golden Predator is doing with Brewery Creek. The company is not only expanding on the resources that were left there, it is making some really dramatic discoveries of new zones, like Sleeman, that previous operators overlooked. It is benefiting from the power of current prices and applying some really innovative new geological thinking to these projects.
TGR: Golden Predator has been rewarded with some good gold-silver intercepts so far. It also helps to have Mike Burke, who used to head up the Yukon Geological Survey, working for you.
BL: Yes, and Bill Sheriff, Golden Predator’s president, has done it before as well.
TGR: In February, you told our readers about Revolution Resources Corp.’s (RV:TSX; RVRCF:OTCQX) efforts to find gold in the Carolinas. Recently, Revolution acquired the rights to Lake Shore Gold Corp.’s (LSG:TSX) New Mexican property portfolio. Is this just a matter of diversifying or are things not going well in the Carolinas?
BL: I think everything in the Carolinas is going according to plan. I think the key to the Carolinas is that the region represents an emerging gold play. What Revolution is doing is twofold. First, the company is building value in the property it has. Second, it is expanding its property position to make it a must-have company or must-have land position for a big company wishing to get into that play.
The New Mexico acquisition wasn’t a matter of diversifying Revolution’s geographical position; it was just too good of an opportunity to pass up. The portfolio of properties Revolution acquired includes some outstanding prospects. If there aren’t proven resources, there are identified high-grade intercepts that scream to be followed up on.
TGR: What are other companies that you are following or that you think offer value in this economic climate?
BL: One company we have followed for some time is Rye Patch Gold Corp. (RPM:TSX.V; RPMGF:OTCQX). This company is making progress and has a great business plan in this high gold price market. It is building up a multi-million-ounce inventory of lower grade resources in Nevada using a number of deposits around existing central milling and processing operations to which ore can be trucked in. It is trying to consolidate a number of different resources, perhaps any single one of which would not be sufficient to support a standalone operation, but together represent a sizeable resource. It is also packaging that for eventual sale to a major and it has been getting good results as well.
TGR: Isn’t Rye Patch drilling the Garden Gate Pass property, not far from Barrick Gold Corp.’s (ABX:TSX; ABX:NYSE) Cortez Hill Gold Mine? Barrick has also discovered what it is calling the Red Hill and Goldrush deposits. Rye Patch believes it owns property that also encompasses the gold structure that hosts Barrick’s newly found deposits. That has to be good news.
BL: We have seen a nice uptick in Rye Patch’s share price as a result. The project lies along the strike of the Barrick discoveries, around 3 kilometers away. The structure looks good. Coincidentally, a drilling program was already in progress and we are eagerly awaiting results on that.
TGR: Are we six months or so away from a resource?
BL: I think longer than that. The program is only 5,000 meters. We hope to get a sniff of the kind of results that you look for in Nevada that are indicative of a much larger deposit.
TGR: Any other companies that you would like to talk about?
BL: Rare earth plays have come back a bit and represent great long-term opportunities regardless of what happens with gold. They are longer-term plays on the growth of technology. We were the first to recommend Rare Element Resources Ltd. (RES:TSX; REE:NYSE.A) and we still like it at current levels. We like Quest Rare Minerals Ltd. (QRM:TSX.V; QRM:NYSE.A) and were also among the first to recommend that. Tasman Metals Ltd. (TSM:TSX.V; TASXF:OTCPK; T61:Fkft) is also very attractive right now.
We just started recommending Elissa Resources Ltd. (ELI:TSX.V; E30:Fkft). It is a very early stage REE play. Its Thor Project in Nevada is only about 16 miles away from Molycorp Minerals’ (MCP:NYSE) Mountain Pass project. The idea is that if Elissa proves up or gets any solid indications of a REE close to Molycorp’s project, the share price will fly. It’s really an exploration play—high risk, but very high potential reward.
I also like Hathor Exploration Ltd. (HAT:TSX.V). It is the subject of a takeover bid from Cameco Corp. (CCO:TSX; CCJ:NYSE) that dramatically undervalues the company’s real value. That is a uranium play. It is a very high grade, probably the third-highest grade uranium deposit in the world.
I like a lot of plays in West Africa, for example, Keegan Resources Inc. (KGN:TSX; KGN:NYSE.A). I also like the Yukon. We recommend an array of companies in that area. It’s just a matter of buying on the dips and having the 12–18 month timeframe to see any real results.
TGR: Is that the advice you would give to a novice investor right now, to invest long term?
BL: Yes. You have to think down the road a bit, especially with strategic investments in plays like the Yukon, where news shuts down in the winter and you can pick up bargains at that time. It typically takes at least two exploration seasons for companies in the Yukon to get indicative results. A number of the companies that were hotly recommended last year aren’t going to make any real news until next fall. You can pick up bargains now; you just need the patience to wait 12–24 months rather than expecting drill results within a few weeks.
TGR: Brien, as always, thank you for your time and insights.
With a career spanning three decades in the investment markets, Brien Lundin serves as president and CEO of Jefferson Financial, a highly regarded publisher of market analyses and producer of investment-oriented events. Under the Jefferson Financial umbrella, Brien publishes and edits Gold Newsletter, a cornerstone of precious metals advisories since 1971; he digs into not only small caps of every type but also macroeconomics and geopolitical issues that ultimately affect every resource investor. Brien also hosts the New Orleans Investment Conference, the oldest and most respected investment event of its kind that, each year, gathers together the giants of investing, economics and geopolitics. Touted as “the world’s greatest investment show” by Money Magazine, the New Orleans Conference stands today as one of the few investment events that maintains a focus on value for the attendee, presenting independent, objective views from top experts, and charging attendees for the value they receive.