By Simon Grey, on December 16th, 2011
Economists essentially have a sophisticated lack of understanding of economics, especially macroeconomics. I know it sounds ridiculous. But the reason why I tell people they should study economics is not so they’ll know something at the end—because I don’t think we know much—but because we’re good at thinking. Economics teaches you to think things through. What you see a lot of times in economics is disdain for other’s lack of thinking. You have to think about the ramifications of policies in the short run, the medium run, and the long run. Economists think they’re good at doing that, but they’re good at doing that in the sense that they can write down a model that will help them think about it—not in terms of empirically knowing what the answers are. And we have gotten so enamored of thinking things through that the fact that we don’t know anything needs to bother us more. So, yes, it’s true that the average guy on the street doesn’t understand economics, and it’s also true that we don’t understand economics. We just have a more sophisticated lack of understanding than the guy on the street.
The value of studying economics is this: While economics won’t necessarily help you make good decisions, it will help you avoid making certain bad ones. Stated more clearly, economics provides a foundation for analyzing choices.
In the first place, economics enables you to understand tradeoffs. Humans are clearly finite beings and the earth is a finite system. As such, humans can never have everything they want, nor can humans do everything they want. Recognizing that making tradeoffs is an inevitable component of decision-making is fundamental to economic analysis, and those who study economics are usually in a better position to understand the full implication of this.
In the second place, economics enables you to understand incentives, and the potential long-term consequences that arise therefrom. This is especially helpful when analyzing system constraints (particularly artificial constraints). Studying economics enables you to better recognize potential incentive system tweaks (think subsidies, regulation, tax credits, etc.) and plan accordingly. Once you recognize systemic distortions, you should then ask if these distortions are sustainable, and how you can profit from these distortions while minimizing risk.
Finally, economics enables you to think beyond basic analysis, and weigh policy accordingly. It is popular in some circles, for example, to say that poverty is caused by a lack of money, and can therefore be solved by throwing money at it. To shallow thinkers, this makes sense. But fifty-plus years of history has shown that tossing money at the poor doesn’t solve their problem, and also suggests that systemic poverty is not due to an absence of money but rather to other factors. Studying economics, then, enables you to see past this rudimentary form of analysis. In spite of the aforementioned benefits, economics is still incapable of answering all questions correctly. Some of this is due to the fact that value is subjective, and so all economic analysis can do is provide if-then scenarios. Some of this is due to the limits of human knowledge, meaning that economic analysis will simply be wrong due to a lack of error. And some of this is due to the fact that economics has a rather limited application. These shortcomings, though, don’t change the fact that economic analysis can help you think better and make better (or less short-sighted) decisions. It doesn’t have all the answers, but it can tell you that some answers are obviously wrong. And that’s its value.
By The Gold Report, on December 6th, 2011
 Investors focused on picking the next ailing economy have reinforced gold as the ultimate refuge if all the financial juggling fails. In this exclusive interview with The Gold Report, Chen Lin talks about the effects of risk aversion on the performance of gold stocks. While it has been a tough year for precious metals stocks, there are some very promising stories smart investors should be looking at as others decide to clean house for tax purposes.
The Gold Report: When you last spoke with The Gold Report in August, the gold:silver ratio was about 40:1. Today it’s about 53:1. In August, you were looking for a lower gold:silver ratio that you thought would probably be more reasonable under the circumstances. Yet it seems to have gone the other direction. What do you think has happened here? Was silver drastically overpriced or not able to keep up with the gold?
Chen Lin: In the last interview, I was pretty evenly bidding between gold and silver. I don’t have a particular preference. At that time, there were some major funds buying silver. Historically it has been lower—as low as 10:1 a very long time ago. But, right now, it’s in a reasonable range. So, I’m not saying that one is overvalued and the other is undervalued. Silver has some industrial components to it while gold is mainly monetary. I’m personally looking for the silver:gold ratio to go lower over the long run. Right now, the financial crisis has pushed central banks to actually start buying more gold in the past quarter. So, that’s probably keeping the gold price higher.
TGR: So, what you’re saying is the European debt crisis is the thing that’s really driving the gold price higher.
CL: Two or three of the central banks have put a historical amount of gold on their books, which tells you there’s more focus on gold because of the European crisis.
TGR: What do you think is going to happen with metals prices if this Eurozone situation deteriorates further?
CL: That’s a hard question. I think it’s in the hands of the policymakers. When Greece said we’re going to do the referendum and that Greece could be kicked out of the Eurozone, the Greek people were rushing to their banks to get the euro out. If the euro starts falling apart, I think gold could be one of the hard assets people in Europe will try to get their hands on. That could be very positive for gold. I can see Germany give in to the other euro countries and basically agree to use the European Central Bank to print money. That’s probably the most likely outcome. That would delay the crisis and investors would focus on other countries such as Japan and the United States. Then Europe may quiet down a little bit. But, that would be very positive to gold as well. Gold can potentially have a very explosive move on the announcement.
TGR: You’ve had pretty spectacular performance since you started your portfolio with about $5,000. In August, it was down about 10% for the year. What’s happened here in the last three or four months?
CL: It’s been down between 10% and 15% so far, it has been quite flat this year. Considering that I own a lot of junior stocks, those stocks can be very volatile.
TGR: It’s been a tough year for everybody and not easy to show any spectacular gains in 2011. How about some of the individual stocks in your portfolio; do you have some nice winners that you’d like to talk about?
CL: Prophecy Platinum Corp. (NKL:TSX.V; PNIKD:OTCPK; P94P:Fkft) was a spectacular winner. The rest have been holding on. However, I’m quite optimistic because some of the stocks have some major news coming in the next few months.
TGR: You mentioned platinum, which always used to trade at a pretty substantial premium to gold. It’s obviously a lot rarer than gold. Yet somehow, it’s faded into obscurity in the last few years. Do you have any opinions on why that might be the case?
CL: In fact, I was out telling everybody that I’m loading up on platinum. Platinum is less than 10% of the global production of gold. Some 75% of global production comes from South Africa, which is having problems with electricity, labor disputes and other issues. Right now platinum is trading at a discount to gold. It’s almost unheard of. It used to be platinum was twice as much as gold. There could be hedge funds that may be long platinum and short gold and are having some problems and may be unwinding some positions. Over the long run, I think platinum is probably a very good investment.
TGR: Tell us more about Prophecy Platinum.
CL: This stock has been a spectacular winner for me this year. It’s up from less than $1/share to over $6/share in quite a short time. Now it’s pulled back to about the $3/share range. Prophecy just completed a private placement, of which 25% was participation by the insiders. That’s very strong insider participation. The price right now is at around the private placement price. Prophecy has a huge platinum group metals (PGM) deposit in the Yukon. It’s 12 million ounces in the NI 43-101. Prophecy just had some very nice drill holes. When the next update comes out, it will probably have more PGM and the gold. So, that’s looking very good. It has a sister company called Prophecy Coal Corp. (PCY:TSX; PRPCF:OTCQX; 1P2:Fkft), which owns about 45% of Prophecy Platinum. If you deduct its cash and the value of its Prophecy Platinum holdings, you get the coalmine in Mongolia for free. Plus you have leverage to this platinum play.
TGR: The platinum price situation is just hard to believe—the way it has fallen back. Maybe it has something to do with less industrial demand.
CL: The industrial demand will slow down a little bit. But, it’s not this dramatic. I feel it’s like when silver dropped to $10/ounce in 2008. The price dropped so low that I think it’s an opportunity for investors to buy platinum and platinum stocks on the cheap.
Another platinum producer I like is Stillwater Mining Company (SWC:NYSE). That’s the largest platinum producer in North America.
TGR: Stillwater. That’s the only producer in the U.S. that I’m aware of.
CL: Right. It fell very hard recently and lost two-thirds of its market cap. It now has a little bit of a rebound. I bought it pretty close to the bottom and I’m still holding it.
TGR: You recently returned from a visit to Haiti where you went to take a look at the Majescor Resources Inc. (MJX:TSX.V) gold property. What kind of report do you have on that?
CL: Oh, I was very excited about that. The property has a huge potential and Newmont Mining Corp. (NEM:NYSE) is also in the area. Newmont has been very interested in Majescor’s drilling program and even invited Majescor’s company executives to its office when I was there. That tells you how much focus it has on this drilling program by Majescor. It will have drilling results coming out in December. First, it was targeting copper and copper-gold and then it will drill out the area with some very high gold intercepts. In a previous release, Majescor showed 10 meters of something like 70 grams per ton. It will drill that next year. Basically, it’s a gold and copper or copper and gold project, depending on where you focus on it.
TGR: So, we’re going to wait for results next month and see how that goes, correct?
CL: Exactly. Its market cap is only $15 million and it could have a world-class deposit. Plus all the majors are looking at the drilling results.
TGR: So there may be a good chance that it will get taken out pretty quickly if the stock doesn’t go crazy.
CL: Majescor has been working on this project for two or three years and finally the drilling starts. It’s a pretty exciting time for shareholders.
TGR: Back in August you were also pretty positive on Pretium Resources Inc. (PVG:TSX). The company has a couple of properties that look pretty interesting at Snowfield and Brucejack. What’s been going on with those properties since last August?
CL: I visited its property and it was very, very exciting. The high-grade gold intercept was fantastic. Right now, the market is in a holding mode and we haven’t seen much movement in the past few months. Once people see how good a deposit it is and recognize how undervalued it is, I think we should see some good upside movement on this stock.
TGR: You also visited the Romios Gold Resources Inc. (RG:TSX.V; RMIOF:NASDAQ; D4R:Fkft) and the NovaGold Resources Inc. (NG:TSX; NG:NYSE.A) properties up in Northwestern B.C. last summer. What’s going on there?
CL: Romios started releasing drilling results and you can see it has some pretty good intercepts. It is still looking for the sweet spot and will probably need to take more time to drill out this area to find the center of the deposit.
TGR: When do you expect some significant news?
CL: Depending on the next round of drilling results, it could mean Romios needs to come back next year to do more drilling. It already released a few rounds of results and I think it has maybe one or two rounds of results left.
TGR: Romios is near NovaGold. Do you think there’s some possibility that NovaGold may try to take a run at Romios?
CL: NovaGold has a new CEO and plans to sell this Galore Creek deposit. Last time I think I was hoping it would have fantastic drilling results and then we would have a takeover situation. But, now it looks like it has found a deposit and needs to drill more. So, you probably need a little bit more patience to see how it develops, probably into next year.
TGR: What about NovaCopper?
CL: NovaGold wants to spin copper projects off and potentially the name could be NovaCopper. We’ll have to see what kind of deal it has and what direction that property goes.
TGR: What about other companies in your portfolio? Any developments there that our readers should be aware of?
CL: I’m still holding a lot of OceanaGold Corp. (OGC:TSX; OGC:ASX). The company is a producer in New Zealand and is starting up its new gold mine in the Philippines. It’s probably one of the cheaper gold producers you can find. I also own Coeur d’Alene Mines Corp. (CDM:TSX; CDE:NYSE). That’s a big silver producer and just had a management change. The company has two new silver mines going and half a billion dollar cash flow each year. It’s building up a third mine, which is a gold mine, and a fourth mine, a silver mine. It doesn’t have much in capital requirements coming and I hope will end up paying a dividend. I’ve been holding the stock for a while and expect to keep holding it.
TGR: What are your expectations as far as market performance in the last weeks of the year? Then what happens next year with the precious metals and mining stocks?
CL: A lot depends on the European solution. I think the most likely result would be a massive money printing in the Eurozone. That would be very positive for gold. As far as gold mining, we have seen the general lack of capital in mining stocks. That’s why I try to stay with companies with a strong cash flow. Many exploration companies and emerging producers are trading at very low valuation. Still, the market doesn’t give them recognition. If we have any solutions in the Europe situation, these stocks can have a huge run.
TGR: Are there any other parting thoughts you might want to leave with our readers as far as how they should be playing this market?
CL: Gold stocks are extremely undervalued right now versus the gold price. I personally believe that gold will go much higher. How high will gold stocks go? I think this depends on market conditions. Gold stocks have two faces. One is related to gold. The other is related to the capital markets. Mining companies need to raise money to produce gold. It’s a very capital-intensive industry. So, if the capital market doesn’t improve, gold mining stocks may lag behind gold for some time. But, once we have some stabilization, I can see some extremely undervalued gold stocks out there. Another idea to think about is to try to follow what the majors like. A company like Majescor clearly has the interest from majors. Majors are flooded with cash and can afford to pay a reasonable market price for a property. So, I think it’s probably a good time to follow the trades of the majors.
TGR: You’ve given us some good information and food for thought. Thanks for joining us today.
CL: Thanks for having me.
Chen Lin writes the popular stock newsletter What Is Chen Buying? What Is Chen Selling?, published and distributed by Taylor Hard Money Advisors, Inc. While a doctoral candidate in aeronautical engineering at Princeton, Lin found his investment strategies were so profitable that he put his Ph.D. on the back burner. He employs a value-oriented approach and often demonstrates excellent market timing due to his exceptional technical analysis.
By The Gold Report, on November 17th, 2011
 In the high-risk junior resource sector, 95% of the companies investors might choose will fail to hit paydirt. For your best chance to pick winners from among the remaining 5%, Exploration Insights Editor Brent Cook has some advice—including ideas about where to find good advice. In this exclusive interview with The Gold Report, conducted during the 2011 New Orleans Investment Conference, Cook makes the case that selecting juniors whose properties are most likely to pass the drill test also gives investors an ideal, built-in exit strategy.
The Gold Report: Could you tell us the premise behind your statement at the New Orleans Investment Conference about why so many exploration and mining companies fail?
Brent Cook: Mining is a tough business—a very tough business. So many things can go wrong even if the company did everything right. On the exploration side, probably 95% of the junior companies whose share prices start moving up the discovery curve finish down at the bottom of that chart. Very few actually end up with something of any real economic significance.
The main reason is that exploration is a very inexact science. In geology and exploration, we deal with a limited amount of data at the earth’s surface and then use geologic models to try and understand what is happening at depth. So we are doing a lot of guessing and projecting based on a very limited data set. In fact, exploration geology is as much art as science because so much of what a geologist thinks is subjective and based on experience.
So, in the end, that fuzzy science is being applied to test some sort of geochemical or geophysical anomaly near the earth’s surface. It could be slightly elevated gold or arsenic in the soil or a magnetic body of rock at depth. You have to bear in mind that an anomaly is really little more than a difference in the background values of something like soil or rock or density or magnetism. Whatever it is, the world is full of anomalies and they are not all deposits. Nature has scattered billions of geochemical anomalies all around the world, so chasing anomalies is just the nature of the game; that’s what keeps us all employed in the exploration business. And failure has to be the overwhelming result when you are looking for that rare place in the earth that everything came together to form an economic deposit.
Still, all of that chasing has been very profitable to the Vancouver stock market scene; a lot of money is raised and made chasing anomalies.
TGR: So even for trained geologists like you, geology is an inexact science and you cannot know what you have until you start drilling.
BC: Basically, that’s right. Drilling is a scientific tool. That’s when you test your hypothesis. You hypothesize that a vein of gold, for instance, formed at 200 meters of depth under the right circumstances. More often than not, you test your thesis, get your data back, reassess the data and adjust your thesis to fit the data. That’s another reason it takes so long to actually make a discovery. Putting widely scattered pieces of data together takes time.
TGR: If 95% of what appear to be good geographic anomalies fail the drill test, why does so much money chase the junior mining sector?
BC: Because if you are successful, your stock goes from $0.25 to $2.50, $10, $20. And even without an economic discovery the rewards can be enormous if you know when to get out. As I say, a lot of these stocks start up that price-appreciation curve. At some point, an investor who is well-enough informed and understands the drill results can sell that stock at a profit before the rest of the world realizes that this is a bust. So a lot of money is made on that upcurve.
TGR: That sounds like making money based on hype and not on value.
BC: A lot of hype goes on in this sector for sure, which is facilitated by the inexact nature of the science, but savvy investors really base decisions on interpreting the results as they come in. When the data start indicating that the hypothesis was wrong, they probably decide it is time to start thinking about getting out. To make money, speculators just have to recognize it before the crowd does.
TGR: Few investors really know how to interpret the data and test the thesis, as you say. How can they realistically play in that junior mining game?
BC: My honest answer is to get good advice. Rick Rule, who emceed the mining panel at the conference, runs Global Resource Investments, a brokerage firm that actually employs geologists and mining engineers as brokers. That’s one good place to get advice. A good investment newsletter is another; I like mine.
Of course, a good adviser has to interpret the data correctly and say, “Look, the results from this drilling program from this project up in the Yukon aren’t looking so good right now. The results are telling me we have less chance of finding something, so it’s probably time to sell.” Or it could be the opposite: “This is really looking interesting. Let’s buy some more.”
TGR: In your New Orleans presentation, you advised junior exploration sector investors to know their exit strategy. Can you expand on that in light of what you’ve just explained?
BC: Always buy a junior with some idea of who will buy it from you and why. My exit strategy ultimately is to invest in juniors that find deposits good enough to interest the majors. In other words, my exit strategy is to sell to someone somewhat smarter than I am—a major that knows its stuff, does its due diligence and decides to buy one of these companies. I also like to get in early on a project with the idea that as the company derisks it with drilling, metallurgy or whatever, the project fits the profile of a fund manager or someone looking for less risk and more quantifiable upside. But I think the exit strategy for most people who get into this game is to sell to someone dumber than they are, hoping the fools come in and pay more for a stock than they did. That works in a raging bull market, but not in this market. In essence, with a sound exit strategy you know 1) what the deposit the company is looking for actually looks like, 2) what it is going to take in both money and exploration to realize the deposit goal and 3) what it might be worth if all goes well—and then sell when it gets to that point.
TGR: So 95% of the time you sell to someone not so smart, and 5% of the time you hit it and sell to someone smarter.
BC: Theoretically, yes, but that assumes you buy all the stocks that start up the discovery curve and that you are right and that there is an infinite supply of dopes. It’s such an inexact science, though, that even expert opinions differ. If you get five geologists in this room with me and we start talking about a property, you will hear six different opinions as to what’s going on down at depth or who makes the best beer. I’m certainly not right all the time—no one in this business can be. You have to go with your interpretation of the data at hand and stick with it.
TGR: And the 5% that prove out are fabulous. Does some knowledge base allow a geologist to winnow that 95% down so that geologists have a somewhat lower risk than non-geologists?
BC: I think so, although on the whole geologists are dreamers, so keep that in mind. You can, however, improve the odds quickly by not getting into projects that don’t really have a chance of significant success. I would say half the junior companies in this industry are chasing prospects that are not worth very much even if they’re successful.
TGR: You are also an investor. Do you prefer prospect generators because, in essence, they have multiple projects and thus spread the risk more than explorers? Or does your knowledge as a geologist enable you to pick and choose on a very educated, selective basis?
BC: I think it’s both. The prospect generator model is a very intelligent way to go about investing, and I certainly think that any investors in this sector should have at least some portion of their high-risk investment in some carefully selected prospect generators. With the companies I know that follow this model, the people running them recognize the low odds of success and incorporate that into their business approach. You want intelligent people running the company to begin with—as opposed to those who think they will drill a glory hole, hit it the first time, and strike it rich. That is not a realistic approach to the business.
TGR: What are some of the companies that excite you now in terms of geology and the potential for being in the 5%?
BC: A few prospect generators that I own and are worth others’ considering for their portfolios are Millrock Resources Inc. (MRO:TSX.V), Lara Exploration Ltd. (LRA:TSX.V), Riverside Resources Inc. (RRI:TSX), Eurasian Minerals Inc. (EMX:TSX.V) and Miranda Gold Corp. (MAD:TSX.V).
TGR: What makes these five stand out as prospect generators?
BC: It’s all about management. Management understands the business and they’ve been very successful in implementing a strategy whereby they generate the ideas and bring other people in at the high-cost point to spend the money. If they’re successful, that support carries them.
But again, we know the odds.
TGR: So the managers of these five companies are particularly skilled at finding the right projects with good geologic anomalies that have a higher chance of hitting? Or is it more a function of finding other people to finance the drilling?
BC: It’s both. A company with multiple properties can have one being run by Freeport-McMoRan Copper & Gold Inc. (FCX:NYSE), for instance, and then go out and find partners for the next one and the next one and the next one. It’s a business that’s really a game of odds. With 20 companies working on projects, a prospect generator’s odds of success are much higher than if it is drilling only one or two projects. Of course, if successful it ends up with only a percentage of the deposit rather than the whole thing.
TGR: Could a lay investor infer that a prospect generator’s project has a higher percentage of hitting if it is joint ventured with a major that knows this stuff and has probably done a fair amount of analysis?
BC: That’s a good point. It’s fantastic when a prospect generator is involved with a Freeport or BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK), Kennecott Utah Copper Corporation or whomever. Its in-house experts are doing the due diligence and selecting the properties the company thinks have a chance of making its hurdle and meeting its big company criteria. A prospect generator in those circumstances has access to the big company’s geophysical, geological and engineering experts. There is no way small companies can afford that depth of knowledge on their own.
TGR: Any other companies that you think are worthy of consideration at this time?
BC: Lydian International Ltd. (LYD:TSX) has a deposit on the order of 2.5 million ounces (Moz) that I visited in Armenia. It’s low grade, but it will be a very high-margin deposit because the metallurgy is simple, the mining is simple and it’s in a good region of the world. I like Lydian, and I think it will be a takeover target for a midsize gold producer.
Another one is Almaden Minerals Ltd. (AMM:TSX; AAU:NYSE), which has a discovery in Mexico that looks very, very prospective. As yet, I don’t see an economic resource, but the geologic system is large enough that it has the potential to do something meaningful.
TGR: Any others?
BC: Midas Gold Corp. (MAX:TSX) is a major company run by very, very competent people. It has a good-grade 5.6 Moz deposit in Idaho that is going to get much larger. It’s not going to be easy to permit, but nowhere in the world is anymore.
TGR: When Rick Rule asked about stealth plays, you said you particularly like western U.S. projects because you think that area will really come into its own.
BC: These aren’t really stealth plays, but I do think the western U.S. has a lot of potential left to cover—places such as Oregon, Idaho, Arizona, Utah, Wyoming and even parts of California. A lot of work is being done there, but because it has been neglected to some degree I think companies working there will turn up some new ideas, new targets, new discoveries.
For instance, Barrick Gold Corp. (ABX:TSX; ABX:NYSE) has just announced a major discovery in Nevada on the Cortez Trend. The Long Canyon discovered by Fronteer Gold Inc. (FRG:TSX; FRG:NYSE.A) and AuEx Ventures Inc. (XAU:TSX) was a great new discovery in eastern Nevada that Newmont Mining Corp. (NEM:NYSE) bought. So things are happening in the U.S. And porphyry coppers, too. People are re-looking at porphyry coppers, and I expect to see some success there.
TGR: Where do you think the next really big precious metals discovery will be?
BC: If I could go anywhere in the world regardless of politics, I’d be in Iran, second is probably Afghanistan. After that it’s a tough call.
TGR: Would you like to add anything else, Brent?
BC: I’d like people reading this to come to my website and click on the Discovery Process video link to a property tour I did in the Yukon; it’s also on youtube. I think it’s worth seeing the reality of a property visit and the sorts of things you can’t get reading a press release.
TGR: And you’re also doing a special workshop in that vein?
BC: I’ll be doing that in San Francisco, at the Hard Assets Investment Conference (November 27–28). We will talk with investors about understanding what a company is saying, or not saying, in a news release. We will investigate bogus and misleading statements. We also will look in detail at something we talked about today—how to interpret drill hole results—as well as sample methods and geologic models. And of course, we’ll field questions from workshop participants.
TGR: Thanks for fielding our questions today, Brent. And for the link. Another one our readers may want to check out is an article you wrote as an online preview of the upcoming conference.
Brent Cook brings more than 30 years of experience in more than 60 countries to bear on his reputation as a world-renowned exploration analyst, geologist, consultant and investment adviser. His knowledge spans all areas of the mining business, from the conceptual stage through detailed technical and financial modeling related to mine development and production. His credentials include service as principal mining and exploration analyst to Global Resource Investments, where he provided analysis to retail brokers and two in-house funds. His weekly Exploration Insights newsletter (www.explorationinsights.com) selectively covers junior mining and exploration investment opportunities.
By Bron Suchecki, on November 1st, 2011
Very good two page analysis of negative lease rates by Pollitt & Co’s John Paul Koning, including central bank activity in this market. Quote:
What sort of “non-banks” might be supplying leased gold to the market-making banks at these extremely negative rates? As we already pointed out, central banks seem willing to lend only at positive rates, which leaves only one other source: the investing public. …
The public effectively lends gold to banks when they deposit their physical gold in unallocated form at a bank. … The negative interest rate received by the borrowing bank is probably in the form of client fees or bid-ask spreads. …
By serving as the cheapest source of lent gold, the investing public has effectively priced central banks out of the gold lending market.
The Perth Mint does a bit of leasing and certainly no one is paying us to borrow metal. However, unallocated accounts at bullion banks do attract an account keeping fee, as Koning notes, and this is effectively paying the bank to use your metal.
Another factor as to why investors may be prepared to pay people to borrow their metal is that it can be cheaper than the costs of storing it (ie Allocated). I do also think the derived negative rates are a theoretical interbank no counterparty risk rate. Once you add in a premium for the counterparty risk the actual rate is positive.
Finally, there is a mathematical relationship/arbitrage between the futures markets and GOFO (and thus lease rates) and this could also have an impact (not something I’ve been following too closely). 
By The Gold Report, on October 11th, 2011
 After leaving the securities brokerage industry in 2009, Ian Gordon founded Longwave Analytics and Longwave Strategies to focus on protecting investors from what he believes is a global macroeconomic meltdown that is already underway. Gordon proposes that physical gold and certain gold stocks will be investors’ best hedge and overall solution to the worst financial crisis the world has seen. In this exclusive interview with The Gold Report, Gordon shares his thoughts on the current economic mess and how investors can take action now.
The Gold Report: You founded this firm based on your long wave theory that is based on the Kondratieff Cycle. How is this same or different from Kondratieff?
Ian Gordon: We have gone significantly beyond Kondratieff’s original thesis published in 1925. I am very proud that we have made the cycle far more encompassing than Kondratieff would have ever envisioned. For instance, one of the key things we have done is identify an investment cycle within the long cycle. This is an extremely valuable tool for investors, which allows them to make appropriate investment decisions in each quarter of the cycle.
TGR: Do you feel that you have legitimized the Kondratieff Cycle beyond theory and as a general principle?
IG: Well, I think we have. The proof is in the pudding. We have been able to recognize exactly where we are in the cycle and envision what the implications are likely to be. I think we have been able to pinpoint that with a great deal of accuracy the critical aspects of the cycle and how these relate to the economy and to investing.
TGR: You obviously can’t expect investors to wait through an 80-year super cycle. You’ve managed to isolate the bull and bear markets. Is that what you are saying?
IG: Yes, we have not only been able to isolate the bull and bear markets, but also we have been able to identify the best and most appropriate investments for each quarter of the cycle, and they generally work throughout that quarter. We have broken the cycle into the four seasons. We call it a lifetime cycle because it is 60–80 years, and each of its seasons is approximately 15–20 years, a quarter of the cycle. By the way, this is the fourth cycle, and it has always repeated pretty well the same in every cycle. Certainly essential investment decisions have been the same for each of the seasons in the cycle.
TGR: Take it from the beginning.
IG: Spring essentially renews economic growth. It is the rebirth of the economy following the winter of the cycle, which is the time when the economy dies and when debt is wrung out of the system. Because spring is the rebirth, stocks and real estate make appropriate investments and do very well for investors. We can show from our current cycle, which we maintain began in 1949, that the Dow Jones Industrial Average rises from 161 points at the beginning of spring and ends at 995 points at the end of spring. Of course, real estate also does exceptionally well during this period.
Then, following spring we move to the summer, which began in 1966 in our current cycle. We have always had inflation in summer because there has always been a war in this part of the cycle, and that war has always been financed through a huge expansion of the money supply. In the first cycle, it was the War of 1812. In the second cycle, it was the U.S. Civil War. In the third cycle, it was the First World War from 1914 to 1918. And, in the fourth cycle, it was the Vietnam War. With that inflation, stocks do not do that well and essentially make no gains. If anything, stocks end summer about 30% below the point from where they began. Conversely, gold performs exceptionally well, as do all commodities. Gold goes from $35/ounce (oz.) in 1966 to $850/oz. in 1980, and the Dow goes from 995 at the end of spring and ends the summer at 777 points. Real estate continues to do well in the summer of the cycle.
Four things always anticipate the onset of autumn in every cycle: These are the peak in interest rates; the peak in the consumer price index; the bear market in stocks such as the one that occurred between 1981 and 1982; and a recession. Now, autumn is always the point from which stocks, bonds and real estate perform the best in the cycle. It is the most speculative period in the cycle, and it is when debt really starts to build exponentially, and so gold performs very poorly in this portion of the cycle. In fact, gold prices go from that $850/oz. peak at the end of summer to $250/oz. at the end of autumn, and the Dow goes from 777 to 11,750 and real estate continues to perform very, very well. So, real estate has a three-season growth period and stocks have a two-season growth period, to the end of autumn, while gold has a one-season growth period.
The winter of the cycle, which we call the payback period, is when the economy dies. It goes into a deflationary depression overcome by the overwhelming debt in the system that has built-up principally through autumn. When we get into winter, we get very defensive and we move into gold, which performs exceptionally well, as do gold stocks. The general stock market performs abysmally. Between 1929 and 1932, the Dow lost 90% of its value. And, real estate also performs very, very poorly on account of the economic depression and the fact that homeowners have assumed huge mortgage debt to purchase their homes. During this time many people lose their homes because they are unable to make the mortgage payments. House prices decline to very low levels and in many cases mortgage debt is significantly higher than the value of the home.
TGR: Where are we in the cycle now?
IG: We are in the winter. The signal of the onset of winter was the peak in stock prices in January 2000 for the Dow and March 2000 for the NASDAQ. That was the end of autumn. And, yes, the Dow was higher than that in October 2007, but, again, that was really an abnormality created by paper money systems. The Federal Reserve was able to print copious amounts of money, pump it into the economy and revive the stock market after 2000 and into 2007. That money printing also contributed to the greatest real estate bubble in history and we know what the outcome of that bubble is.
TGR: I’m looking at your dire wintery target prediction that the Dow Jones Industrial Average will descend by more than 90% to 1,000 from current levels that are around 11,000. It sounds like a global economic meltdown of unseen proportions.
IG: Politicians are desperately trying to revive the economy by printing even more money. So, this bear market that started in 2000 continues in 2011. Normally bear markets last about one-third the time of the preceding bull market; obviously that has not been the case this time. So, we think when the end does come, it is going to be very traumatic. Eventually the Federal Reserve will lose control and will not be able to get the stock market reignited because it will reflect the reality in the economy. We think the Dow at 1,000 is probably a little optimistic. We think it could go below that to something like 500 if we were to emulate the 1929–1932 experience.
TGR: That translates into massive unemployment, does it not?
IG: It translates into an economy that’s basically a disaster: massive unemployment, huge bankruptcies, breadlines and a government that, in fact, can’t raise the cash to support the depression. Remember, going into the last depression the U.S. government was extremely wealthy, and America was the world’s largest creditor nation by a huge margin. The U.S. government debt had been paid down all the way through the 1920s, and it went into the last depression with government debt of only $16 billion. When the depression hit, the government had oodles of cash to throw at it to get the economy going. Yet it was never effectively able to do that. The Second World War brought us out of the depression.
TGR: Ian, I know you said gold will perform quite well in this kind of environment, and so I assume you believe there is much more upside yet for gold.
IG: Well, I do. One of the ways that we’ve always been able to measure where we think gold is going to go is simply using the Dow/Gold ratio, the value of the Dow Jones Industrial Average divided by the price for an ounce of gold. When this ratio reaches extreme highs, stocks have performed exceptionally well. So, we would anticipate that it would reach an extreme high at the end of spring of our current cycle, and so it did when it was about 28:1. In other words, it took 28 ounces of gold to buy the Dow Jones. And at the end of summer, gold performs well, and stocks don’t. It went down to a 1:1 relationship that was the lowest low, which we have seen twice. But, we are envisioning that we are going to go below 1:1 simply because we made an all time high at the end of autumn of 44:1. The decline must be in proportion to the advance. So, we think the decline is going to take us to something like a quarter to one (0.25:1), which is $4,000/oz. gold and a Dow of 1,000. We’re currently at about 6:1 on the ratio.
TGR: What about gold equities versus physical gold? Will gold equities climb this wall of fear into this winter cycle?
IG: Well, we know that between 1929 and 1936 gold equities performed exceptionally well. I think that the reason that they haven’t performed that well recently, particularly in the junior sector, is that [non-gold] stocks have generally performed pretty well aided and abetted by the Federal Reserve. If the bear market had followed its normal course, it should have ended in 2006, but it did not follow that normal course. So, once that bear market begins in earnest and once the Federal Reserve loses control of the stock market, we believe that the gold stocks will begin to mirror the actual price of gold, for which our forecast is $4,000/oz. And, that may be conservative because we believe that when the whole debt bubble continues to unravel that you won’t be able to obtain gold at any price. But at $4,000/oz., the gold stocks will perform exceptionally well.
TGR: This would be a dramatic divergence between gold equities and non-gold equities. What are your recommendations for investors?
IG: Well, we have always believed that you should definitely own the physical metal as well as the equities. And we have always had a big belief in the performance of the juniors because of the leverage that they provide to the price of gold.
TGR: Where do investors go? Which equities?
IG: Well, one that we like very, very much is Barkerville Gold Mines Ltd. (BGM:TSX.V). The reason we like the company is that it is in production. It’s producing 25 thousand ounces (Koz.)/year of gold from its QR deposit in central British Columbia, Once it receive its permits to mine the Bonanza Ledge deposit, and that should be very soon, production will increase to 50 Koz. per annum. This makes the company very positive on a cash-flow basis. Barkerville is also finding and adding quite dramatically to its ounces in the ground position. It is going to bring in a second mill, and once that is permitted, production will rise to about 150 Koz./year. It is targeting 2013 for the second mill to be up and running.
TGR: Over the past 12 weeks, Barkerville is down 30%, and yet it still has a market cap of $100 million. It looks like shares have sufficient liquidity.
IG: I own a lot of it; it could be 30% of my stock portfolio.
TGR: So Barkerville would be your favorite?
IG: It’s my favorite, but there are also others that I like an awful lot. I love PC Gold Inc. (PKL:TSX) which I own. The company is in Pickle Lake, Ontario. I sort of trust Canadian mining, not because I’m a Canadian, but just because I feel it has been our heritage for so long. The Canadian government is always going to be a party to it. PC Gold has a very, very rich underground mine at Pickle Lake, and it has outlined about 1.2 million ounces (Moz.). PC Gold has also discovered a surface zone. It’s going to be a lower grade, but this gold in the ground has got to be worth something.
PC Gold hit $1.80 in April 2010, and I think it’s trading at around $0.47 right now. The other thing about PC Gold is that it has about $7.5 million in cash in the bank. So, even if we are in a major credit crunch, and I suspect we are, PC Gold has money to outlive a credit crunch and then get back on track and eventually be able to put its mine back into production.
TGR: The $7.5 million on its balance sheet represents about a third of its market cap.
IG: Right. We’re very keen on it and we own a lot of shares, all of which I bought in the market. I’m very happy to own this company.
Another one that we think a lot of is Colibri Resource Corp. (CBI:TSX.V). All of the Colibri properties are in Sonora, Mexico. One of its properties is very near La Herradura, which is owned by Newmont Mining Corp. (NEM: NYSE) and Fresnillo PLC (FRES:LSE). It’s a 12 Moz. deposit that consistently seems to stay at 12 Moz. In other words, as fast as the joint-venture partners mine the deposit, they replace it with new found gold. The Colibri property is about 12 km. from La Herradura and it has almost the identical geology to La Herradura. Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) is doing a joint venture earn-in on that property. So, you’ve got a major producer earning into that property and, if successful as Newmont and Fresnillo have been at La Herradura, it will take Colibri into production and hopefully find the 12 Moz. plus that they’ve found at La Herradura. I think it is very, very cheap. Agnico owns just under 20% of the company and Sprott Asset Management owns just under 20% and my wife and I own just under 10%. So, effectively, that’s half of the company’s shares. Colibri has about $2 million cash, and it has an excellent board.
TGR: I’m looking at Colibri’s market cap of about $7.2 million. I’m thinking that would scare a lot of people off.
IG: Well, I’m not scared off because Agnico is not going to allow this company to flounder. I’m sure it’s going to support it. And I don’t think Sprott is going to allow this company to flounder given the fantastic assets that it has.
Another company that has just gone on our website is Terraco Gold Corp. (TEN:TSX.V). I own shares in the company and I really like Terraco. It owns 100% of a property in Idaho called the Almaden Project, which it bought from a company in financial distress. The property has just under 1 Moz. already defined in an NI 43-101. Again, this company has a very, very strong board. Terraco has another property in Nevada, the Moonlight Project, which adjoins the north side of Barrick Gold Corporation (ABX:TSX; ABX:NYSE) and Midway Gold Corp.’s (MDW:TSX.V; MDW:NYSE.A) Spring Valley Project. We think that this company will do exceptionally well for shareholders.
TGR: Was there one more you wanted to mention?
IG: Actually there are several other companies that I like, but let me mention a couple more and give you the names of some other companies that I own. I am particularly fond of Temex Resources Corp. (TME:TSX.V; TQ1:FSE), which has all its properties in Ontario. One of the properties has outlined an NI 43-101 resource of about 1.2 Moz. of gold. It is also now drilling and being very successful on a property that it has in the Timmins gold camp, of which it owns about 60%. Goldcorp Inc. (G:TSX; GG:NYSE) owns 40%. So, that particular mine was the richest mine in the Timmins camp. I own a lot of shares, and I have just purchased more shares in a private placement that the company is now doing.
Another company that I have long owned and think will ultimately perform very well for shareholders is Golden Goliath Resources Ltd. (GNG:TSX.V; GGTHF:OTCPK). The properties are all in Mexico and several have had significant past producing gold and silver mines on them. Agnico-Eagle owns about 8% of the company’s shares and Sprott Asset management owns a little less than 20%. The company is working toward a joint venture agreement with Agnico-Eagle on its Las Bolas property.
Other companies that I own and like are African Queen Mines (AQ:TSX.V), Fire River Gold Corp. (FAU:TSX.V; FVGCF:OTCQX), Freegold Ventures Limited (FVL:TSX), and Northern Freegold Resources (NFR:TSX.V). All these companies have significant gold in the ground assets. Fire River Gold is in production. I would encourage prospective investors to visit the companys’ websites and read through the corporate presentations and even to phone the presidents of companies before they make a decision to purchase shares.
TGR: My final question is, how long will winter last?
IG: It will last until the debt has been eradicated from the economies of the world. So, to give it a date is difficult. If the whole world monetary system collapses under the massive mountain of debt that has accumulated worldwide, then it will happen reasonably fast, and a new world monetary system will evolve. I think that new system will be based on gold.
TGR: Ian, this has been very valuable. Thank you.
IG: Thank you very much for having me.
A globally renowned economic forecaster, author and speaker, Ian Gordon is founder and chairman of the Longwave Group, comprising two companies—Longwave Analytics and Longwave Strategies. The former specializes in Ian’s ongoing study and analysis of the Longwave Principle originally expounded by Nikolai Kondratiev. With Longwave Strategies, Gordon assists select precious metal companies in financings. Educated in England, Gordon graduated from the Royal Military Academy, Sandhurst. After a few years serving as a platoon commander in a Scottish regiment, he moved to Canada in 1967 and entered the University of Manitoba’s History Department. Taking that step has had a profound impact because, during this period, he began to study the historical trends that ultimately provided the foundation for his Long Wave theory. Gordon has been publishing his Long Wave Analyst website since 1998. Eric Sprott, chairman, CEO and portfolio manager at Sprott Asset Management, describes Gordon as “a rare breed in the investment-advisor arena.” He notes that Gordon’s forecasts “have taken on a life force of their own and if you care to listen, Gordon will tell you how it will all end.”
By Ajay Shah, on October 4th, 2011
The task of financial regulation can be broken up into consumer protection (where we worry about small consumers being cheated by
financial firms), prudential regulation (where we worry about the possibility of bankruptcy of one financial firm) and systemic risk
regulation (where we worry about the procyclicality of financial regulation). Everything that we do in financial regulation must be
motivated by one of these three issues.
In the class of fund management mechanisms, there is one interesting special case: the `alternative investment management
mechanisms’ which include hedge funds, private equity funds, venture capital, etc. The defining feature of these is that each customer
places a large sum of money under the control of the fund manager. A typical value for the minimum ticket size is $1 million.
Once this is done, it is no longer possible to argue that the investor is a small consumer who might be cheated by the fund
manager. A person who places atleast $1 million with a fund manager has the capability and resources to protect his own interests. Hence, the mainstream strategy utilised all over the world has been to leave these fund managers completely unregulated.
Indeed, there has been a healthy competitive tension between these investment vehicles (which are unregulated) versus mutual funds (which are regulated). Large customers have the choice between going with mutual funds, where the cost of regulation is suffered, or going to an alternative investment mechanism where this cost is not suffered. If these customers feel the gains from regulation are not justified, they have the choice of walking away and not incurring the costs.
The world over, there are debates brewing about the need for hedge funds to begin disclosing regular information on performance,
positions and counterparties to regulatory authorities. For example, the SEC recently proposed a rule requiring U.S.-based hedge funds to report such information to a new financial stability panel established under the Dodd-Frank Act. Unsurprisingly, hedge funds argued against this proposal, citing concerns that the government regulator responsible for collecting the reports could not guarantee that their contents would not eventually be made public.
In a recent paper, my coauthors Andrew J. Patton and Michael Streatfield and I examine one element of the relationship between a
hedge fund and its customers: disclosure about returns. The paper is titled The reliability of voluntary disclosures: Evidence from hedge funds.
Hedge funds are notoriously protective of their proprietary trading models and positions, and generally disclose only limited information, even to their own investors. However they do voluntarily report their monthly returns and assets under management to a wider audience through one or more publicly available databases. These databases are widely used by researchers, current and prospective investors, and the media.
Our paper examines the reliability of these voluntary disclosures by hedge funds, by tracking snapshots of these hedge fund databases captured at different points in time between 2007 and 2011. In each vintage of these databases, hedge funds provide their entire historical records (rather than just the new performance information since the previous vintage). Using these data, we detect that older performance records of hedge funds are revised as a matter of course. Nearly 40% of the 18,000 or so hedge funds in our sample revise their previous returns at least once over the vintages that we consider.
We then categorize hedge funds in real-time into revising and non-revising funds, and find that on average revising funds significantly underperform non-revising funds, and have a higher risk of experiencing large negative returns. This suggests that mandatory, audited disclosures by hedge funds, such as those proposed by the SEC earlier this year, would be beneficial to investors and help to
prevent such negative outcomes.
SEBI has recently put out a request for comments on a proposed strategy for regulation and supervision of alternative investment vehicles. Our paper can help in thinking about the issues faced in this field on the consumer protection, and analysing the policy choices faced there. While there is much merit to the mainstream strategy of leaving this industry unregulated, our paper suggests that a small dose of supervision, focusing on basic hygiene and motivated by consumer protection, may help.
By The Gold Report, on August 24th, 2011
 Thomson Reuters’ Commodity and Energy Specialist Christopher Henwood believes bailouts of too-big-to-fail companies and countries addicted to entitlements have cast an ominous shadow over the global economy. Nevertheless, he finds room for optimism as global economic turmoil puts downward pressure on energy prices, which should give the economy some breathing room. In this exclusive interview with The Energy Report, Chris shares a bit of his market knowledge and economic philosophy.
The Energy Report: Chris, would you give me a brief roundup of what you perceive to be the issues surrounding the brutal market turmoil of the last week of July and into August?
Christopher Henwood: What we’re seeing is a cascading of events. If we go back even a little bit further into earlier July, it seemed like the market was at least temporarily hopeful during that time. But once it became clear that politics were going to trump and the economic well-being of the country was going to take a backseat, that really put the markets on their heels. We see the consequence of the debt ceiling debate and the lack of clear direction that came out of that. I’m a market-based guy, and I’ve lived my entire career in the markets. I think that there’s probably no better indicator of what the real result of any sort of policy or political wrangling is than how the markets interpret them. Now, they’re not always 100% right, but more often than not people who are very smart in general move their money accordingly. This is, I think, no exception to that.
TER: What about the S&P downgrade on August 5?
CH: The S&P downgrade is just the latest cascading element to this kind of waterfall of negative economic news we’re looking at. So, what we’re seeing is that the market is coming to the realization that the economic outlook here in the United States and globally is still pretty grim and that the oil markets in particular are taking a beating due, in large part, to their increased sensitivity to macroeconomic factors that are increasingly playing a dominant role in that marketplace.
Conversely, gold is an asset that’s soaring as traders and investors are flocking to what is a solid asset. I won’t say gold is a safe haven. I’ll say it’s a solid asset and one that is being looked to increasingly as a counterweight to economic risk. So, I think we’re seeing the markets play out the skepticism of what we have going on policy-wise and politically.
TER: We’ve seen Brent and West Texas Intermediate (WTI) crude prices weaken through this turmoil. I’m wondering if this disproves what some people have been saying that energy is something of a currency like gold has been.
CH: It is being treated by some as a currency. You have a lot more players outside of the pure oil industry who are influencing the price of oil and playing it as an economic barometer. I think that’s why you’re seeing oil taking such a beating. If that’s how you’re going to trade crude, whether it’s WTI or Brent, it really makes no difference, you’re taking a huge risk because crude is not a currency like gold. Crude is consumable. Does it have value? Yes. But, if you start to cross that line and move into currency-type status for WTI or Brent, I think you’re running huge risks and it’s entirely inappropriate.
TER: Do higher energy prices mean a stronger economy?
CH: I actually think it’s the converse. I think that the high energy prices we have seen have been largely event-driven moves. The Arab Spring has been a huge driver of increasing energy prices where the market had to price-in the uncertainty and the fear factor that the supply side of the equation was going to become disrupted over time, or even in the short-run. Now we’ve seen Libyan oil taken off the market, but we’ve also seen Saudi Arabia step in and fill that void to a large degree.
What I think has been driving oil prices to their current highs is on the supply-side of the equation. We saw this in the big run-up in 2007–2008. As a trader I fought that and went short crude on a number of occasions because I just didn’t see the justification from a fundamental perspective for the price of oil during that period. What was always being cited in the marketplace was this increased demand coming out of China and India that was going to drive crude oil prices over $200/barrel (bbl.) in the very near-term. Three months later we were trading down in the $30s. If the demand-side of the equation is driving that, how could that possibly change in just three months?
Steadily rising energy prices being reflected in increased demand in good economic times is a better characteristic of a healthy economy.
TER: What does this recent downturn mean to energy investors?
CH: Well, I think the term investor is broadly overused. I think it’s important to distinguish between the energy investor and the energy trader. I think they’re two distinct people. I never consider myself an investor. I always consider myself a trader. I think traders and investors operate under completely different risk parameters and completely different mindsets. So, toward your point for investors, I think obviously as price goes down, margins decrease and profits decrease for the energy companies. But as a trader, downside offers sometimes the greater opportunity because of that mindset to the successful bear trader in a falling market. So, I think the investor will probably take some lumps. But savvy traders will benefit as a result.
TER: As a trader you think in terms of over-bought and over-sold probably.
CH: Sometimes, yes.
TER: What about a term that traders probably don’t use, value. Do you see value in certain areas of the energies today?
CH: Sure. I was primarily a spread trader when I traded. So, you do see value. I’m not an equities specialist, and I don’t really follow energy equities as part of my role, but I actually did a show at the end of January on energy master limited partnerships (MLPs) for a lot of midstream assets. I think that sector probably has a lot of opportunity as infrastructure is continually and acceleratingly being built out because of the increased shale plays we’re seeing in various parts of the country such as the Marcellus, the Bakken in North Dakota, the Eagle Ford in Texas. All these new shale finds and these new increased natural gas finds are requiring increased infrastructure to deliver and to store it and to figure out how to best capture and transport all this new discovery. With that comes new infrastructure that needs to be built. So, the MLPs probably provide a nice value at this point and one that will continue to grow.
TER: What would a good trade be today in terms of shorter term and longer term?
CH: Shorter term, I think gasoline prices have found some support right here on this $2.77-$2.75/gallon level. A break below the 200-day moving average in gasoline would be a nice short-term play. Conversely, if it can struggle back above the $2.85 area, that would be a great short-term buy. So, in either direction there’s good opportunity. Looking at it economically, I’m more biased to the downside. I think gasoline prices will resist for a little bit longer but eventually they’ll fall under the weight of the underlying crude.
On a longer-term basis, I have to go back to what I’ve been talking for the past year and a half, gold. It’s something that, as I mentioned earlier, is being used as a counterweight to manage virtually any manner of financial risk right now in the marketplace, whether it be currency risk, inflation risk, deflation risk or sovereign debt risk. If I have risk exposure to grains in Russia, I’m going to buy gold against that currency risk and against everything else. Mexico has bought a ton of gold. South Korea and Thailand just added a significant amount of gold to their reserves as a hedge against what is perceived as global risk. I would wait until it dropped down to like the $1,650/ounce (oz.) area again. I think the next range you’re going to see in gold is $1,725–$1,800/oz. before it makes the next big move up. It’ll be driven by some sort of economic problem more likely coming out of the EU than anything else. We have Italy and Spain now moving to the fore because of their risk profiles and their being on the verge of bankruptcy, and that’s going to drive people to buy more gold to hedge against it.
So, longer term I think gold is where you have to go. Shorter term, as an energy play, I like gasoline on the short side.
TER: You’ve managed a natural gas floor-trading operation in the past. Are you bullish on gas?
CH: I managed an operation for Goldman Sachs up until 1998. In 1998, I opened my own operation and I traded for myself from 1998 until mid-2009. I was on the floor the day natural gas trading opened for the first time in 1991. It was a real watershed moment on the floor in the energy business and for natural gas.
Right now we’re seeing natural gas in a very stable supply environment. With the development and proliferation of shale gas, the natural gas supply curve has been redefined all the way out. And every time the market starts to rally, we’ve seen producers selling into that rally in order to hedge that production. I think they’re becoming a little bit aggressive in terms of hedging their production given the flat projections for natural gas prices. But one thing I’ve learned as a trader is that as soon as everyone thinks something’s going one way, you can almost invariably bet your bottom dollar that something’s going to crop up that’s going to change the equation and redefine how that market is viewed across the board. Conventional wisdom quickly becomes a trap in this environment. So, I think longer term there’s tremendous upside here. I think what we’re seeing here now with prices at sub-$4/thousand cubic feet (Mcf) is probably a very good opportunity for some upward movement. I could easily see natural gas prices in the next several months run back up to almost $4.50/Mcf, maybe even $4.60/Mcf.
TER: Natural gas is half as polluting and one-fourth the cost of gasoline. What would it take to bring natural gas online for vehicles?
CH: I would welcome it. I think the first step would need to be a demonstrable demand. I’m not a fan of governments decreeing and mandating virtually anything. So, private industry would need to determine that there’s a real market and a real hunger for natural gas for vehicles among the population. We’ve already seen a number of fleets convert, which is great, and it’s easy to do where you have a fleet that returns to a specific base or operates within a certain range. You can build the infrastructure to fuel those vehicles, and that’s been very successful. I think the air quality in some of the major cities has improved as a result of the aggressive adoption of natural gas. I think it would be a great boom for natural gas domestically. It would be another supply piece and a great environmental benefit.
TER: Where are you seeing innovations in the energy industries?
CH: The greatest area of innovation the last three years has been in the development and the ongoing evolution in fracking technology. It has made huge strides. There were original forecasts that fracking of shale would only be economical if we were looking at $6/Mcf natural gas, and before that it was $8–$10/Mcf. That number has now come down and it’s been demonstrated that at $4/Mcf natural gas these fracking operations can still make money. And we’re seeing it now being exported to other countries around the world. Poland, for example, has identified a huge amount of shale resources. It has actually brought over some major U.S. companies to help them retrieve it. As that technology is brought to new areas, adapted and developed, it’s going to evolve. It’s the same thing in South America, where a number of countries are developing these programs.
Now the next level of innovation is going to have to be in the safety aspect for these drillings. The last thing this industry needs is a BP plc (NYSE:BP)-like disaster in the space that will really have much farther reaching consequences than the immediate damage to whatever water source that they’ve unfortunately harmed. So, the safety aspect—the drillings, the casings, what is in the fluid—all these things are getting much greater scrutiny. You’re going to see a lot of that applied in crude because nobody wants to see another disaster in any waters anywhere in the world. I believe in private industry’s ability to develop, to innovate and to be creative, which is what has defined energy in our country. And I think that’s going to continue.
TER: Efficiencies in fracking and safety must certainly translate into a play on services.
CH: Absolutely. Services are definitely going to be key, and they’re probably going to play a more important role as we go on. A lot of people weren’t even aware of the service aspect until the BP disaster when a number of the companies were involved in the process. It became the focal point in the discussion. And, I think that the services are definitely going to play an increasingly important role.
TER: When we first began our conversation today you told me you were pessimistic—”grim” was the word. Where is your pessimism, and is there any room for optimism here?
CH: My pessimism is mostly policy driven right now. The policy coming out of the United States and the handling of the European debt crisis highlight how money is being put into losing propositions. Cost cutting seems to be almost toxic to some of these countries that have enjoyed large entitlement programs and have an entitlement culture. I think that’s what we’re getting to in this country. So, my pessimism is driven by the fact that it seems that there are very few people willing to make very hard decisions economically in this country and across the globe.
As a self-supporting trader for many years, if you make a bad trade, you feel the pain. You’ve lost money, and you learn accordingly. What we’re seeing is companies that are too big to fail and banks that have taken outsized risks that are not feeling the pain. When they get into trouble, they get bailed out. And when countries get in trouble, they get bailed out. They’re not expected to curtail their activities to any extent, but they get bailed out. That’s what’s fueling my pessimism on the global macroeconomic scale and where I see it hurting energy prices.
Now I think there’s always cause for optimism. There are always people fighting for and injecting common sense economics into policy and into politics. I’m always hopeful that things will turn around and change. I’m always hopeful that there can be a new viewpoint, but I’m skeptical. So, again, politics and policy have made me skeptical and pessimistic but private industry and innovation give me optimism.
TER: Do you believe markets will correct these global policy errors?
CH: I believe they should. Unfortunately, what I think sometimes happens is that government and government agencies try to rein in the markets to correct a situation of their own causing. I think that’s an inherently flawed approach.
TER: We’re seeing lower energy prices as a result of the selloff in July and August. Is this going to be good for the economy?
CH: In the short to medium term they’re definitely going to be good—a net positive for the economy. You don’t ever want to see any price get depressed and then stay depressed for a long period of time because that’s indicative of some major economic problems. But if oil prices can establish a range, such as between $75/bbl. and $80/bbl., I think you’ll see a significant amount of relief in gasoline and fertilizer prices and petrochemicals and a lot of the consumer products in the value chain, including grains, milk, meat, cheese and bread. That would be a welcome relief.
TER: Thank you, Chris. I’ve enjoyed this very much.
CH: Thank you.
After coming within 43 votes of winning the Republican nomination for his local township committee, Commodity and Energy Specialist Christopher Henwood is evaluating his campaign to discover what worked and what didn’t work in much the same way as he might assess a move in energy prices in his day job at Thomson Reuters. Each day Chris’ work pits him squarely against the nuance and volatility of markets as he evaluates energy markets from both a technical and fundamental perspective. Chris has a law degree from Rutgers University School of Law–Newark in 2010, and was admitted to the New York State Bar in January 2011. He earned his undergraduate degree at Dickinson College.
By The Gold Report, on July 18th, 2011
 Gold is once again hitting new highs, closing at $1,589/oz. on July 14. In this exclusive interview with The Gold Report, Dr. Michael Berry, principal of discoveryinvesting.com and editor of Morning Notes, predicts $1,700 gold by year-end and points to the juniors that could bask in the enhanced glow of all the metals, including copper and zinc.
The Gold Report: Dr. Berry, you are going to go before the Federal Reserve and meet with Congressional representatives on July 18. Could you give our readers a Coles Notes version of what you plan to say?
Michael Berry: I go before the Federal Reserve twice a year. In this presentation on Monday, I’ll talk about the geopolitics of growth in emerging countries and issues related to the dollar, gold, convergence of the rest of the world and the weak global recovery.
Monday afternoon, I’ll head over to the House and meet with the Chairman of the House Natural Resources Committee and Senator Lisa Murkowski’s (R-Alaska) natural resource staff to discuss extractive resource policy, natural resource exploration in the U.S., critical metals and what’s really happening in the rest of the world regarding resource nationalism.
I also believe I’ll be meeting with Senator Murkowski’s natural resource policy representative, McKie Campbell. I’m trying to educate the Congressmen and Senators and their staffs on how important natural resources are to the U.S. and what’s going on in the world with respect to critical metals, metals supply and demand and what policies we need to enact in this country.
TGR: Do you feel you’ve made progress toward legislation that’s a bit more pro-mineral development or metal development?
MB: Yes, I think we’ve made some progress. It’s a long education process and it’s difficult to do because you have to be consistently in front of them. Congress has three bills pending now—two in the House and one in the Senate—that relate to natural resource development in the U.S. for critical metals. Not just rare earth elements, but a number of others as well. They also relate to exploration and development policy. I think we’re making some inroads with Congress and others in Washington. It’s very important that we keep that pressure up.
TGR: On Thursday, the price of gold for delivery in August flirted with $1,600/oz., going as high as $1,594.90/oz. before closing at $1,589.30. What is causing this continued upward climb and what does it mean for juniors going forward?
MB: There is just a tremendous amount of uncertainty regarding the debt ceiling and the U.S. credit rating. That is pushing gold and silver prices higher, which is positive for gold miners and exploration stocks. Look for $1,700/oz. gold by the end of the year.
TGR: What happens if there is no third round of quantitative easing and our elected officials come to an agreement on the debt ceiling? Does the gold price climb lose its momentum?
MB: Nothing is standing in the way of gold and silver going higher. There will be some accommodation on the debt ceiling and something will be done to try to keep the economy moving just because no one wants to see higher interest rates. In the meantime, investors have come to the realization that precious metals play an important role in the portfolios of individuals, institutions and countries, which are now buying large quantities of gold. It will continue to hit new highs as the 250-day moving average is increasing beautifully.
TGR: In the second quarter, we witnessed a significant sell-off in speculative positions in both gold and silver. Do you believe a portion of that speculative money could find its way into copper?
MB: There’s tremendous pent-up demand for copper around the world because of emerging economies. It is also much more difficult to make world-class discoveries today. I think copper prices will be very strong. Metals like zinc are also really starting to look very attractive to the exploration industry. There’s a lot of potential for discovery investment flows into some of the base metals, including copper and zinc, and some of the special metals such as manganese, vanadium and graphite.
TGR: Any discussion about copper has to include China. Beijing recently raised interest rates to fight inflation, but the economic indicators in China continue to improve and that ultimately means greater demand for copper there. Will supply disruptions converging with greater demand push the copper price above $5/lb. this summer?
MB: That is certainly possible. I can remember when copper was $0.65/lb., so obviously there is real upward momentum. Copper is a “quality of life” metal. Infrastructure can’t be built-out without copper. I think that prices are going to be quite strong as we approach the fall season.
It is interesting to note that the Chinese started buying again as the price of copper fell in the last couple of months. Their demand is crucial. They are also bidding for copper companies around the world. I think we’re in the third inning of a very long commodity supercycle in the world. Copper rightly will take its place in that cycle. Copper miners in Indonesia and Chile are experiencing labor problems as well.
TGR: Recently, China’s Jinchuan Group trumped a $1B bid for the African-focused copper company Metorex Limited (JSE:MTX; LSE:MTX). Do you expect Chinese firms to take more runs at companies as a means to lower the cost of copper?
MB: I do, but I think the primary motivation of the Chinese is going to be infrastructure build out. It’s a huge country with a growing middle class. Somewhere around $4 copper is probably very cheap to the Chinese.
But it will be more than just the Chinese that come into this game. Companies like Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) are going to get involved because there just hasn’t been a lot of new high-grade discoveries that have been turned into reserves. It’s a very interesting game that’s being played. Africa is in play in terms of natural resources. No doubt.
TGR: Given the jurisdiction risk in Africa, could there be a bit of a premium on western copper plays?
MB: The Murkowski Bill, which passed in a unanimous, bi-partisan vote but hasn’t been signed by the president yet, should help ease exploration in U.S. Some of the discovery progress in Arizona and Nevada now is going to become increasingly sought after by companies like Freeport, Rio Tinto PLC (NYSE:RIO; Paris: RTZ.PA), even Barrick Gold Corp. (TSX:ABX; NYSE:ABX), and of course some of the smaller copper companies. I think there’s going to be a premium on what’s happening in the U.S., Canada and, to a lesser extent, Mexico.
TGR: Which companies do you think could benefit?
MB: One that I’ve followed for years and in which I own a big position is Quaterra Resources Inc. (TSX.V:QTA, NYSE.A:QMM). It just exercised its option to acquire the Yerington Mine, which was mined from about 1952 to 1978 by Anaconda. It’s the most significant land position in the Yerington District. Adjacent to it is Nevada Copper Corp. (TSX:NCU), which has a huge skarn find. Rio Tinto has a 13% position in Entree Gold Inc. (TSX:ETG), which acquired the Anne Mason Property in Nevada, also adjacent to the Yerington Mine.
Yerington is the newest and safest copper district in the U.S. It could realize 50 Blb. to 60 Blb. of copper. Anaconda mined 1.7 Blb. during its 25-year life. Quaterra went through the rigorous process of taking this mine and property out of bankruptcy. It now controls water rights and about 8 Blb. of copper. No one understands this story, so the QMM stock is very cheap. I estimate that Yerington, the Bear Deposit and its nearby open pit MacArthur mine are worth $3 to $4 per share of Quaterra.
Another company that I follow closely is Redhawk Resources (TSX.V:RDK; Fkft:QF7; OTCQX:RHWKF). Redhawk sits in the Copper Creek area of southern Arizona, actually Pinal County, where several big copper porphyries are located. It is drilling a huge defined copper and moly resource there. The stock is trading around $0.50, so companies like Freeport, BHP Billiton Ltd. (NYSE:BHP; OTCPK:BHPLF) and Asarco Grupo Mexico, whose Hayden smelter is just a few miles away by road, are likely to take a big interest in Redhawk.
TGR: That property has been thoroughly explored before. Is it getting a second look because of where copper prices are right now?
MB: There has been a lack of new high-grade discoveries lately, so companies are coming back and readdressing some of the properties where maybe $0.65/lb. copper didn’t work, but $4/lb. copper works beautifully. These are places that already have a lot of infrastructure and safety isn’t a risk as in Africa or Indonesia.
TGR: Redhawk said in its scoping study that it’s going to need about $400M to build the mine and mill there. Is it going to have to do a joint venture or an off-take agreement?
MB: I would imagine that Redhawk will not raise that kind of money, but it may not have to build one. Several mills operate in the area, including Asarco’s Hayden mill, which would be a natural fit. There’s good transportation infrastructure and Pinal County is all about mining culture. My guess is that the company will strike a deal to use someone’s existing facilities or perhaps be acquired.
TGR: Quaterra and Redhawk are fairly mature. Do you have any earlier-stage prospects?
MB: Southern Silver Exploration Corp. (TSX.V.SSV; Fkft:SEG), southeast of Tucson, Ariz., is in the early stages of exploring for copper porphyries, specifically a Resolution-type target, jointly with Freeport-McMoRan. I think it has a good chance for a discovery at this stage on its Dragoon project. Freeport thinks enough of it to be drilling it at this stage.
It’s trading at about $0.17 a share, so it’s certainly what some of us would call a “penny dreadful.” But I like the management and I like their properties and they have several in addition to the Arizona copper target.
TGR: You recently went to Guyana with a group of Chinese investors. Guyana is starting to see some major gold projects come into development, such as Guyana Goldfields Inc.’s (TSX:GUY) Aurora Project and Sandspring Resources Ltd.’s (TSX.V:SSP) Toroparu Project. However, I see a few challenges facing companies looking to develop mines in Guyana. One is a severe lack of infrastructure and a pristine rain forest environment. Another is a shared border with Venezuela where several gold projects have been nationalized by the Hugo Chavez regime. Also, the Guyanese government is relatively unfamiliar with mining.
MB: You’re probably right about some of those concerns. There is a lack of infrastructure. For example, when we flew into the jungle to see GMV Minerals Inc. (TSX.V:GMV), we helicoptered in for about 70 miles. GMV has a huge land position. I think it has perhaps one of the better chances to make a significant discovery. I like the management team under Ian Klassen very much. They just have a good idea of what’s going on down there.
I don’t believe that Venezuela is a factor at all. I don’t foresee any problem with the Venezuelan government interfering in the internal affairs of Guyana.
There are some health risks. Malaria and yellow fever are a problem there. But I still think the glass is half full for Guyana. Especially, if foreign companies—primarily Canadian companies—bring their expertise, talent and jobs for the locals.
TGR: Is the government mining-friendly?
MB: We met with the Prime Minister and it’s fair to say that in every developing country there are going to be nationalist undertones. But the government is welcoming in exploration and development. Some of the big companies, like Teck Resources Ltd. (NYSE:TCK; TSX:TCK.A, TCK.B) and Barrick, are now looking carefully at Guyana primarily because Venezuela is so inhospitable. The government seems to know what it’s doing with mining law. I don’t foresee that the taxes will be more significant there than anywhere else in the world.
TGR: One of GMV’s properties is right beside Guyana Goldfield’s Aurora Project. Is that property likely to become GMV’s flagship operation?
MB: GMV has done the geophysics and flown almost the entire country and analyzed the data carefully. No other company has this database. The company has a better idea of where the gold veins are located than anyone else there. The property it’s working on now has tremendous potential. We were there when it drilled its first hole. It’s going to be a while before we really know much about GMV, but I really like its potential because it has a lot of targets to drill. I believe the company will farm out some of the properties and drill the best ones.
TGR: Can you tell us about Ian Klassen, GMV’s head, and his team?
MB: He’s an experienced hand in Guyana. He’s really done a thorough job of working with prominent local mining families, soil sampling, ground geophysics and airborne geophysics. He’s kept costs to $50/m on the drilling, which are relatively cheap. He’s just announced a deal with Canamex Resources Corp. (TSX.V:CSQ; FSE:CX6) for several million shares, where Canamex will take a GMV property that is about 10% of its land position. He’s very good at monetizing some of the company’s holdings that couldn’t be utilized in the near term due to the large size of its land holdings. Ian’s had a lot of experience in Ottawa with the Canadian government and is moving forward with Grande Portage Resources, Ltd. (TSX.V:GPG) on the Herbert Glacier where they have reported visible gold intersections. He’s ready to create value for GMV shareholders.
TGR: You visited Sandspring’s Toroparu gold-copper deposit in Guyana on your previous trip. That junior recently released the results of its infill drill program. Did you see those results?
MB: I did. The company is getting one and two gram gold and has a copper credit. It just needs to step out and keep drilling and it will find a lot more gold. There’s a lot of opportunity for the companies already in Guyana with camps set up. Sandspring has about 10 Moz. in various resource classifications from measured and indicated to inferred. I expect that it will get higher grades as it keeps drilling. I’ve owned that stock for about two years.
TGR: Sandspring shares reached $3 late last year, but fell back below $2.50. What’s going to be the next catalyst to push Sandspring stock above $3?
MB: The next catalyst could be the discovery of a higher grade system. Most of the share prices of these gold juniors, even the ones with NI 43-101 resources, came off significantly in the past few months. It wouldn’t surprise me to see Sandspring go back above $3. If the company keeps drilling and keeps adding resources, it’s going to get a significant premium on a takeout from a major player at some point in time.
TGR: Are there any other Guyana-focused juniors that you’re following?
MB: Sacre Coeur Minerals (TSX.V:SCM) was part of a controversial takeout by OAO Severstal (LSE:SVST; RT:CHMF) that ultimately fell through. The stock is very cheap. Coming down from a high of $1.57, it was recently trading at around $0.40. The company’s property is very close to GMV and Sandspring’s properties in eastern Guyana.
TGR: Recently, the Peruvian government rescinded Bear Creek Mining Corp.’s (TSX.V:BCM) permit for the Santa Ana Silver Project in Peru. Since then, the company’s share price has plummeted to about one-third of its previous value. Did that move send some shockwaves through the mining investment community in South America?
MB: Peru and Guyana are on the same continent, but they’re almost totally different in every respect. The Peruvian decision has sent shockwaves through the mining community there. There’s a lot of gravitation to places like Colombia and Guyana and away from places like Venezuela and Peru. However, Peru, Ecuador and Chile have some of the great deposits and a lot of investors are willing to take that risk.
When something like this happens, there are shockwaves and shockwaves scare investors. The Peruvian government is smart enough to know that they need to attract money into the country. I’m sure that Bear Creek will handle it well and its stock price will come back over time.
TGR: Is there a risk of anything like that happening in Guyana?
MB: There is an election forthcoming in Guyana and things could change. I don’t think that they will change for the worse in Guyana. The country recognizes the need to have their country developed, to have capital coming in, to increase investment and infrastructure. I expect the election will be favorable for mining and offshore oil work.
TGR: Any parting thoughts for us, Dr. Berry?
MB: Canadian Nobel Prize winner Michael Spence has written a book on the coming convergence of the emerging world. I think we have between 20 and 30 years. He thinks we have 50 years of this convergence of emerging country quality of life. If that is true, we have the next three to five decades of converging lifestyles. That means that the commodity and natural resource sectors, in particular the mining sector, will be a wonderful place to be invested. And we’re going to be there with the discovery investing opportunity. We’re going to focus and push very hard toward that down the road.
TGR: Thanks, Dr. Berry.
Dr. Michael Berry has lived in the U.S. for 36 years, but was raised in Canada. A math major at the University of Waterloo in Ontario, he earned an MBA at the University of Connecticut and obtained a Ph.D. specializing in quantitative analysis and investment finance from Arizona State University. He has specialized in the study of behavioral strategies for investing and has been published in a number of academic and practitioner journals. His definitive work on earnings surprise, with David Dreman, was published in the Financial Analysts Journal. While he was a professor of investments at the Colgate Darden Graduate School of Business Administration at the University of Virginia, Michael spent considerable time with some world-renowned geologists on the Carlin Trend. While a professor, he published a case book, Managing Investments: A Case Approach.
Dr. Berry also held the Wheat First Endowed Chair at James Madison University in Virginia, and managed small- and mid-cap value portfolios for Milwaukee-based Heartland Advisors and Chicago-based Kemper Scudder. His Morning Notes publication, distributed worldwide, provides analyses of emerging geopolitical, technological and economic trends, as well as identifying opportunities for the Discovery Investing strategy he developed. Dr. Berry has presented testimony to a subcommittee of the Natural Resource Committee and U.S. House of Representatives.
By The Gold Report, on July 11th, 2011
Eric Hommelberg has called a few in his day. In 2009, he predicted gold would reach $1,300/oz. the following year. And it did. But $1,800/oz. gold by the end of the year? Gold has recently come off its high of $1,580/oz., but Hommelberg, a principal of ValcambiGold.com, isn’t discouraged. In this exclusive interview with The Gold Report, Hommelberg makes a few more predictions.
The Gold Report: Metals and commodities guru, Jim Sinclair, says that gold is acting as a barometer of economic anxiety at the moment. Do you agree with that assessment?
Eric Hommelberg: I am more apt to call gold a barometer of our financial system’s health. When things get out of control and people start losing confidence in what governments and central banks are doing, then gold will start to outperform all fiat currencies in the world. That’s the transition from gold as a commodity to gold as currency. Today, gold has already reasserted itself as currency of choice since gold has outperformed all world currencies already for quite some time now.
TGR: But gold has come off its high of $1,580/oz. to settle around $1,500/oz. If you were to put your finger on the pulse of the global economy, with 10 representing complete panic and one representing sedate, where would you say we are now on the anxiety scale?
EH: I would say seven at this point in time.
TGR: What is underpinning that anxiety?
EH: People are losing confidence in what governments are doing. Just look at what is happening in Europe, Greece and Spain. People are protesting against their own governments and that’s certainly underpinning the anxiety there.
TGR: As someone who lives in Europe, do you think there is more fear there than there is in North America?
EH: No, it’s terrible in both places and that’s why I believe gold will continue to perform well. It’s not a matter of dollar versus euro, or what currency is better. Both the dollar and euro are in terrible shape. There’s no real alternative for holders of global currency at the moment. That’s why gold will perform well in the coming years, because gold is the only alternative.
TGR: What are some tangible ways that gold is crawling back into the currency system?
EH: A lot has happened over the last couple of years. A few international leaders, including those in Russia and China, have called for a super-currency to replace the U.S. dollar as a reserve currency and they believe that gold should play a role in that. This was illustrated in 2009 during the G8 press conference, when Russian President Dmitry Medvedev held a single shiny gold coin that he said represented a symbol of unity and a possible future world currency.
The idea of gold playing an important role in a new monetary system is picking up steam quickly. Last year former Federal Reserve Chairman Alan Greenspan said that fiat money has nowhere to go but gold; World Bank President Robert Zoellick called for a return to a kind of gold standard; and last week Columbia University Professor Robert Mundell, the father of the euro and a 1999 Nobel Laureate, proposed gold convertibility for the euro and the dollar. Also the central banks are turning back to gold. In the euro zone last year, central banks became net gold buyers for the first time since the inception of the euro. That trend will continue.
TGR: What are some key reasons to own gold?
EH: The most important reason to own gold is the protection of wealth. Paper currencies always disappear over time, but gold will always retain its purchasing power as it has done for more than 6,000 years.
TGR: Our culture teaches that gold is a commodity and that it has no real use. Is this something that needs to be fundamentally changed?
EH: That will change by itself. The current monetary system is just an experiment that started in 1971 when President Nixon was forced to abandon the gold standard. It seems that the experiment is coming to an end these days as people are losing faith in paper currencies and fleeing into gold. Look at Greece today where citizens are buying gold because of fear of a sovereign default and run on the banks. The Greek people certainly don’t view gold as a commodity, but as a hedge against the government.
TGR: I agree with you to a point, but it’s largely impractical to use gold as a currency. Could we reach a point when there is “digital gold,” such as a bank account based on a deposit of gold?
EH: That’s already happening. Look at Gold Money, for example. More of these kinds of things are coming into the market. I am not sure that digital gold will be the standard in the future, but these kinds of things already exist. I am not sure what kind of monetary system there will be, but it’s almost certain that gold will play an important role in that system.
TGR: Are the reasons to own silver essentially the same as the reasons to own gold?
EH: Yes, silver has always played a similar role as gold; it has been used as a monetary metal for centuries, just like gold. It moves in the same direction as gold—although in a much more volatile way. On the upside, silver will outperform gold in a significant way, which makes it a very attractive alternative for people who cannot afford to buy gold. That’s why silver is often called the poor man’s gold.
TGR: You use the Dow:gold ratio chart as a tool to time the market to some extent. In an article entitled, “Gold: $200 or $10,000,” you wrote, “It’s simple: when the Dow:gold chart tops, you buy gold; when the Dow:gold chart bottoms, you buy equities.” What’s the chart saying now?
EH: The Dow:gold ratio chart is not a perfect tool to predict gold movements in the short term. But it’s a very useful tool to see whether or not you’re close to the beginning of a bull market or almost at the end. Right now, the Dow:gold ratio stands at eight. Historical patterns of the chart show that it tends to bottom out at one. If gold and the Dow should come to parity, or 1:1, that would imply the gold price is going up to $10,000/oz. or more. It could also mean the Dow is coming down to less than 2,000. I don’t see the latter happening because of the depreciation of the U.S. dollar. It’s not only the Dow:gold ratio chart pointing to gold prices exceeding $10,000/oz. When you measure gold as a function of public debt, gold should exceed $12,500/oz. in order to counterbalance the total U.S. public debt held in foreign hands. Also, when gold’s long-term chart is adjusted for inflation using John Williams’ Shadow Government Statistics inflation figures, gold should rise to about $9,000/oz. in order to challenge its 1980 high. So yes, the idea of gold rising to $10,000+/oz. before gold’s bull run has run its course is not something that can be easily rejected.
TGR: In a 2009 interview, you said juniors were poised for a bull run and 2010 proved you right—it was an exceptional year for junior equities. However, so far this year, junior silver and gold equities have largely underperformed gold. What are the key reasons that is happening?
EH: It’s a combination of things. In the dramatic decline of the juniors in 2008, they were really decimated and lost 80% to 90% of their value. The CDNX gold chart shows that some of the junior sector is still recovering from that severe decline. By the end of 2008, the junior sector was so dramatically oversold that it had to rebound. In 2009 and 2010, many juniors went up 500%-to-600% or more. By the end of 2010, from a technical point of view, they were due for a correction again and that’s what happened at the beginning of this year. However, this recent correction has been accelerated by fear in the financial markets.
TGR: What was interesting about 2008 was that after a remarkable 2007 there was a fall-off in junior equities in the second quarter. That ended up being a bellwether of what was going to happen in the fall of 2008. Do you think it’s likely that we’re going to see that sort of collapse again in the fall of 2011?
EH: That’s what people are afraid of. It all depends on what happens in the next couple months. It’s difficult to predict. The charts do indicate a severely oversold condition from a technical point of view. It is almost equal to what we had in 2008. But in order to have a collapse in mining equities like what occurred in 2008, the gold prices should be coming down hard as well, and I don’t see that happening.
TGR: What are some principles that investors should follow in this particular down swing?
EH: Even though junior shares are severely oversold, that doesn’t mean investors should start buying them hand over fist. Keep watching them and wait until the downtrend is breached to the upside. As long as an item stays in a downtrend, don’t touch it. Just stay on the sidelines. The charts do suggest a rebound, however, sometime soon.
TGR: When you talked with us in October 2009, you expected Endeavour Silver to perform well; it was trading around $2.50 at that time. During the following 18 months its share price appreciated almost 400%. Do you still like Endeavour at current price levels?
EH: Yes, absolutely, it’s simple, Endeavour Silver Corp. (NYSE:EXK; TSX:EDR) is providing everything that an investor could expect from management. It keeps increasing its resource base, trimming production costs, and increasing its production quarter after quarter. The company has reported record production quarter after quarter for seven years now. The company is growing on the back of rising silver prices.
TGR: Endeavour put out a release recently that said it hit some high-grade, silver-gold intercepts. The highlight of the program was 404 g/t silver, plus 6.5 g/t gold over about 7.3m at Guanajuato. Do results like these give you hope that Chief Executive Brad Cooke and his team will outline a significantly larger resource at Guanajuato?
EH: I have no doubt about it because of what they’ve been doing for the last seven years.
TGR: One of the knocks on Endeavour has been that it doesn’t have overly significant resources for production. The numbers keep going up and there is lots of cash flow, but could these intercepts be that massive resource expansion that proves to be a catalyst for the share price?
EH: The results are very hopeful indeed, but exploration is always a very tricky business. Just one single drill hole doesn’t guarantee anything, but it is very encouraging.
TGR: In addition to Guanajuato, Endeavour also produces from the Guanacevi silver mine in Mexico. With cash coming from both of those operations, do you think the company might take some of that cash and expand its footprint?
EH: That wouldn’t surprise me. I can’t look into the mind of Brad Cook, but that’s what the company has done in the past. It has a strategy of increasing its resources and reserves first by drilling and exploration and then by means of acquisition. It wouldn’t surprise me at all if the company went with that route.
TGR: The flip side to that equation is that if the company has success and boosts its production numbers, it could become a takeover target.
EH: That could be a possibility as well.
TGR: Are there any other companies that you’re interested in right now?
EH: Yes, I like Victoria Gold Corp. (TSX.V:VIT). It’s tremendously undervalued and is almost a screaming buy at this moment. The stock recently trading at around $0.60. Victoria increased its resource base significantly this year and is sitting on more than 7 million ounces (Moz.) of gold. But it is not reflected in the share price.
Victoria had a bit of bad luck last year when it had to report an error in the resource estimate of its Cove Project. The stock was punished unfairly. I think the stock is about sold out and we can look forward now to lots of drilling news coming out from the Dublin Gulch property in the Yukon.
TGR: Dublin Gulch has a prefeasibility study underway. Do you think that will act as a catalyst for the stock once it’s published?
EH: The prefeasibility study on the Eagle gold deposit has already been done. It’s a bankable feasibility study, which will be coming out in the fourth quarter this year. That could give the company another boost because the new feasibility study could demonstrate a significant increase in Victoria’s resource base at Eagle. Part of the 2011 Eagle exploration drilling results will be incorporated into a revised resource estimation.
More importantly, the proven reserves, which are standing at 1.7 Moz, will be increased in a significant way. That’s not just hope; it’s simple math since the 1.7 Moz. reserves estimate is based on a $900/oz. gold price. At $1,500/oz. gold, a big chunk of Eagle’s 4.8 Moz. of indicated resources could be upgraded to proven reserves. Fueled by rising gold prices and growing resources and reserves, the Net Asset Value of Eagle’s gold project could jump toward the $1B mark. Victoria’s current market cap is just about $170M, it’s really so tremendously undervalued.
TGR: The board at the company is good, too. I know Leendert Krol a little bit. He sold Brazauro Resources to Eldorado Gold Corp. (TSX:ELD; NYSE:EGO) a couple years ago. The board certainly has some significant experience. Where do you think the share price could go by the time Victoria puts out that new feasibility study?
EH: Several things are working in favor of Victoria toward year end. First of all, I see a sector bounce for the entire junior sector. Second, Victoria just needs a few weeks of rising share prices to generate a new buy signal from a technical perspective. Previous buy signals triggered Victoria’s stock to double within two months. Third, I expect higher gold prices by year end. But the most important thing is the bankable feasibility study, which could show a significant increase in resources and reserves.
While Victoria has all these things working in its favor, I think the share price is difficult to predict because we don’t know if they will do a financing that could impact its share price. But I expect it will be a multiple of its current value.
TGR: When is Dublin Gulch expected to go into production?
EH: It’s expected to go into production by 2014. That’s what is scaring off some shareholders. They fear dilution since it takes a huge amount of money to build a mine. But on the other hand, look at how producers are being valued versus explorers. Most junior producers are valued at an average of about $300/oz. in the ground versus explorers, many of which are valued at less than $50/oz. Victoria is going to be a producer, but investors have to be patient for another three years. At that point, Victoria could very well be a $1B–$2B company.
TGR: Rising gold prices are an important part of your thesis for Victoria Gold, but there’s gold in Endeavour’s mines as well. Where do you forecast the gold price to be by the end of 2011?
EH: It could be as high as $1,850/oz.
TGR: That’s a dramatic increase! That’s about 20% between now and the end of the year.
EH: Exactly. Once fear of sovereign defaults kicks in again, we could see a dramatic increase in the price of gold. The period toward the end of the year is usually a gold-friendly period.
TGR: Well, when you talked to us in October 2009, your predictions proved remarkably correct. At that time, you said gold would hit $1,300/oz. by the middle of 2010, and sure enough, that’s exactly what happened. So, I guess investors can look forward to some dramatic numbers.
Eric Hommelberg is co-founder and CEO of ValcambiGold Inc., a bullion store for Valcambi precious metals products. Since 2002, Hommelberg has written many extensive gold market commentaries with a strong focus on junior gold mining companies, which he used to publish through his GoldDrivers Report. In 2011, Hommelberg and Swiss gold refiner Valcambi sa teamed up and launched ValcambiGold.
By The Gold Report, on June 22nd, 2011
The yellow metal has maintained its relative price strength during the most recent financial market correction, and gold is now closer to its all-time high than most stock market indices. As an illustration of gold’s leadership, note the following chart. At no time in the last four years has the performance of the benchmark S&P 500 Index (SPX) outstripped that of gold. The following chart compares the relative percentage performance of the SPX versus the iShares Gold Trust (GLD), a popular and heavily traded gold ETF that tracks the gold price.
As you can see, gold has dramatically outstripped the stock market in terms of relative percentage gains over the last three years since the U.S. economy went into recession. Gold has been the major beneficiary of safe haven funds, as investors rushed to buy gold as a defensive investment. What many analysts are wondering, though, is how much of the gold bull market of recent years is due to safe haven-investment flows and how much is due to other factors, such as industrial and jewelry demand.
A Gold Demand Trends report released on May 19 by the World Gold Council (WGC) suggested that much of gold’s gains in the first quarter of 2011 were driven by growing demand from China and India. Analysts have pointed out that the increasing prosperity of those two countries has made it easier for its citizens to purchase gold bullion, in coin and other forms, but primarily as jewelry, which in India serves the dual role of decoration and personal investment.
The WGC report estimated that Indian households own more than 18,000 tons (18 Kt.) gold, making the country the world’s biggest holder of gold. By comparison, official gold reserves in the United States total about 8,100 tons. Commenting on these statistics, BusinessWeek magazine wrote: “Indian consumers aren’t done buying: In this year’s first quarter, they purchased an additional 206 tons of gold jewelry and 85 tons of gold bars and coins. And China’s appetite is growing rapidly and could soon overtake India’s.”
BusinessWeek found that if Chinese and Indian demand is stripped away, “the rest of the world’s hunger for gold isn’t nearly so vibrant. Some new buyers have shown up; some prior speculators are cashing out. But a global flight to gold as a hedge against Armageddon doesn’t appear to be taking shape.”
There is reason to believe, however, that this conclusion is mistaken. To begin with, jewelry demand doesn’t account for the bulk of the tremendous run-up in gold’s price over the last few years. Gold’s strong performance can be linked primarily to the following four classes of buyers:
- Individual investors
- Central banks
- Hedge funds
- ETF holdings
Individual investors in Western countries bought gold as a safe haven investment in the aftermath of the 2008 credit crisis, for obvious reasons. Fear was very high in 2009 and 2010, and demand for gold and silver bullion coins in many categories hit record levels. The extraordinary increase in gold’s cost-per-ounce may have pushed many marginal players out of the market in the last year or two, but that demand was easily supplanted by institutions and hedge funds. Indeed, the appetite for gold displayed by these big money investors has been an oft-overlooked factor in gold’s upside run since 2009, just as it was in the years preceding the 2008 financial collapse.
Gold Fields Mineral Services (GFMS) recently published the 44th edition of its annual survey of the world gold market, Gold Survey 2011. According to GFMS, gold investment demand last year continued to drive the gold price higher; it rose nearly 26% in 2010 on an annual-average basis. GFMS noted that global gold investment in 2010 was the second highest on record, while world gold investment set a new high last year, in value terms. ETF holdings, notably, experienced the second highest annual gain in 2010 according to GFMS.
In more recent times, added to the list of key drivers behind the metal is a fifth major player—academic institutions—which have been increasingly looked to the yellow metal as a long-term investment. It was reported in April that the University of Texas Investment Management Co., which also handles Texas A&M, had 5% of its $19.9-billion endowment in physical gold bullion. The endowment took delivery of 6,643 bars of gold (664,300 oz.) in what is widely regarded as an extremely unusual move for a typically conservative university endowment.
This may not be the “flight to gold as a hedge against Armageddon” that BusinesWeek talked about, but it makes you wonder what exactly the folks at Texas Investment Management Co. are so concerned about that they would take delivery of physical gold. Perhaps, they know something the rest of us don’t.
If not Armageddon, what reason(s) could there be for owning gold in the years ahead? When it comes to evaluating gold’s long-term prospects, two factors must be considered. Within the typical lifespan of an investor, there are two major periods to buy gold. The first is in the face of hyperinflation, due to its proven performance as the ultimate hedge against an erosion of purchasing power. For example, in the hyperinflation that began in the late 1960s and lasted until about 1980, gold went from $35/oz. to around $800/oz.—proving its utility as an inflation hedge.
The second time to buy gold for the long term is in the face of economic collapse or financial market volatility, as gold has a proven record as the ultimate storehouse of value. For instance, after peaking in 1980 when hyperinflation ended and disinflation began, gold bottomed in 1999 at about $250/oz. at the beginning of economic winter. It has been going up since then, notwithstanding temporary setbacks. If history repeats, gold should begin to accelerate when economic collapse comes to bear, as we approach the fateful year 2014, when the 60-year long-wave, or Kondratiev wave, cycle is scheduled to bottom.
As Cycle Analyst Samuel J. Kress has observed, any portion of the similar increase from 1966–1981 bodes for astronomic prices in gold from here. In recent decades, the buy-and-hold mentality for conventional equities worked until revolutionary changes at the turn of the century retired this strategy along with the buggy whip. “Consequently,” he said, “replacing that gold will be the contemporary equivalent [of equities] and investors should retain long-term positions in gold and add to positions on interim corrections.”
Regardless of whether the economic-Armageddon scenario comes to fruition, there are several reasons gold will maintain its long-term bull market, which began at the turn of this century. If you believe the government will continue debasing the U.S. dollar, the gold price will benefit from this debasement policy. If, on the other hand, you believe the economic, Kondratiev winter of the 60-year cycle will accelerate in the next few years, history has proven conclusively that gold should once again be the safe haven du jour for investors seeking asset protection. Armageddon or not, gold’s long-term prospects are still promising.
Clif Droke is the editor of Gold & Silver Stock Report, published each Tuesday and Thursday. He is also the author of numerous books, including most recently, Gold & Gold Stock Trading Simplified. For more information, visit www.clifdroke.com.
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