GOLD HILL, Ore. (AP) After California shut down gold mining with suction dredges, Dave McCracken loaded his gear and drove over the Siskiyou Mountains to Southern Oregon, where he is building up his retirement fund with flecks of gold gleaned from the gravels of the Rogue River.
Source:Mini gold rush to Oregon after California restricts gold mining
Gold Mining and exploration stocks sit at the riskier end of the spectrum…
INTRIGUED by the Gold Price soaring even as inflation has stayed low, Beacon Rock Research founder Mike Niehuser won’t be surprised if it crosses the $1500 threshold in 2011, says The Gold Report.
Here Mike Niehuser explains why he thus sees further upside in Gold Mining producer stocks, and how Beacon Rock Research is advising clients to benefit…
The Gold Report: Considering the turns we’ve seen in the relationship between gold and the US dollar, what is your view on Gold Prices these days?
Mike Niehuser: We are really quite happy with where the prices are now. Our beginning of the year guess for gold in 2010 was a range of $900 to $1200 per ounce. We saw a greater potential for gold exceeding that range and going to $1500 than for retreating to below $800. While Gold Prices have been closer to the high end of our range, this has pretty much been the experience so far this year.
Over the last eight years, precious metal prices moved up beginning in the early fall through spring, due to increased seasonal demand in Asia, then flattened over the summer months. This pattern broke in 2009 as investor demand offset reduced demand by jewelry fabricators. For 2010, Gold Prices have remained surprisingly strong given the increasing perceptions of a double dip in the economy, low inflation and low interest rates.
It is fascinating to see gold at record highs during a period of record low inflation. It makes one think something else must be supporting current prices. In any event, with renewed seasonal demand coming in August and September and the potential for government monetizing debt or other stealth stimulus programs, $1500 Gold Prices at year-end are not out of the question.
TGR: Do higher Gold Prices translate into opportunities for gold stocks?
Mike Niehuser: Obviously, higher metal prices should bode well for gold stocks, but this is not necessarily so across the board. For a company’s stock to do well we would assume that there must be some combination of improving company-specific fundamentals or interest in the mining sector. On the continuum of investor tradeoff between risk aversion and return requirement, institutionalized concerns over a double dip in the economy has led fear to win out over greed.
Gold Mining and gold exploration stocks are considered to be on the riskier end of the spectrum for all equities. Over the last couple years, even companies with good projects and a track record for meeting guidance are not getting the respect they deserve. There are probably a number of concerns weighing on the minds of investors that will persist through the end of 2010.
TGR: Are you implying this is a good time to reduce mining and metals company holdings?
Mike Niehuser: Not at all. It is really more a factor of time horizon and expectations for return. We continue to believe that companies with improving fundamentals will outperform companies that do not create value. A lot of pessimism may be priced into the market now, which creates an opportunity for careful stock selection opportunities for investors looking for companies with the potential to increase fundamental value. We are living in historic times, and growing expectation of a double dip in the economy is all too reminiscent of the stagnation in the economy during the 1970s.
TGR: What parallels or factors do you see influencing the economy?
Mike Niehuser: It is starting to look a lot like the Nixon and Ford years. As if the ’60s were not unsettling enough, the Nixon administration brought forward new regulations including the EPA and OSHA, deep-sixed Bretton Woods for a floating exchange rate, enacted wage and price controls, and introduced the earned income tax credit, which was a redistributionist negative income tax.
The current administration has accelerated deficit spending and intervention into private markets. Clearly, deficits can either be reduced by increasing tax revenues or financed with more debt. Fortunately, we are in global markets and for the time being, the Chinese are maintaining an artificially low exchange rate while the US dollar has been strong against the euro. As the exchange rate moves into balance, interest rates in the US should increase and the government may be forced to monetize the debt.
This is why we like gold producers; while the government produces and monetizes debt, diluting intangible assets, gold miners are producing the ingredients of real currency. From a stock point of view, many companies with operating mines are still trading below levels seen just years ago before the mines were built or in operation. These appear to be among the best opportunities to preserve principal with some upside potential.
TGR: Given the uncertain outlook for the economy and investing, what do you look for in gold stocks?
Mike Niehuser: It would appear that the market may become less efficient, not more. Small investors have a bad taste in their mouth and computerized trading by institutions suggests stocks are being influenced by factors that aren’t company-specific. It is not clear what the market will identify in an individual company stock that will lead to a full valuation. If metal prices appreciate rapidly, the market may look for exploration upside. If metal prices are flat and investors more defensive in looking for value, they may want production and cash flow, or improving balance sheet fundamentals.
It makes sense to me that good Gold Mining stock selection would look for one or the other, and if possible both. This may include companies that have improving production profiles in the near term, project pipeline to expand production or reserves in the near term, and competitively promising exploration prospects on the horizon. As the market may not currently recognize more than one of these characteristics, when it does it would be logical that those stocks have a better-than-average opportunity for performance.
TGR: That’s a lot of good information. Thank you.
"Gold first, then stocks," advises US investment author, entrepreneur and money-manager Jim Cramer. Start here with a free gram of physical Gold Bullion by using world No.1 online provider BullionVault…
Sensible speculation, as practiced by Rick Rule, when Buying Gold…
RICK RULE, founder and CEO of Global Resource Investments, began his career in the securities business in 1974, and has been principally involved in natural resource security investments ever since.
A leading American retail broker specializing in Gold Mining, energy, water utilities, forest products and agriculture, Rick Rule has built a national reputation for Global Resource Investments‘ specialist expertise. Here, adapted by The Gold Report, is a synopsis of his latest Global Resource Investments webcast…
Critiquing the Greek drama that’s been playing out since early this year, Rick Rule finds it curious for the European community to make additional loans to Greece, thinking it helpful to push the Grecian debt from the 120% of GDP (which it couldn’t pay) up to 150%. In The Daily Reckoning, as Rick notes, Bill Bonner observed that Greece as a society made promises – to workers who were paid more than they produced, to pensioners and others in the entitlements class who were promised more than they could deliver, to savers who loaned Greece more money than it could pay back. Who should get stiffed? Bill’s answer was all of them.
Rick recites these facts because "we face the same conundrum in the United States" – and the same dismal prospects. "We have lived beyond our means for many, many years. People who don’t produce as much utility as they take out by way of wages and salaries need to adjust their living standards. We have made promises that we cannot keep with regard to Medicare, Medicaid and Social Security. It’s as simple as that. Those who loaned money to various entities, individuals, corporations, governments are going to be stiffed either via a default or by inflation."
US Balance Sheet Blues
Rick sees one bright spot when he scans the country’s balance sheet picture: "Corporations have taken advantage of the last two years to shore up their balance sheets greatly." In contrast to government balance sheets, which are in "horrible shape," he considers corporate balance sheets to be in "very good shape," by and large.
But the US federal balance sheet? "Bad shape." State balance sheets? "Bad shape, particularly in the People’s Republic of California." And municipal balance sheets, the "great unsung tragedy" are in "very, very bad shape." His list goes on. "Individual balance sheets, consumer balance sheets, worker balance sheets, voter balance sheets are in very bad condition."
According to Rick, extraordinary short-term liquidity, particularly on bank balance sheets, fools us into believing that the economy is in better shape than it is. "Extraordinary amounts of capital have been added to bank balance sheets." While the banks are extremely liquid, however, the underlying asset quality, "their so-called assets – loans to the zombie borrowers – remain problematic." And despite the liquidity, the banks aren’t lending. There isn’t much demand for credit in the still-weak economy, particularly among credit-worthy borrowers. "The banks learned a lesson three years ago, and now prefer to lend money to people who will pay it back. The deterioration of credit quality around the country constrains the banks’ ability to make real loans."
Wolves in Sheep’s Clothing
It’s not hard to see why people have been fooled. Some observers talk about shadow statistics. Rick cites bank earnings reports as one reason that the economic reality is so poorly understood. In the last quarter, he indicates, J.P.Morgan Chase showed earnings increased – but on what basis? Two things:
Its debt – bonds it’s issued – have fallen in price, so the company booked as earnings what it would cost to reduce the debt. In other words, the fact that people are cautious about JPMorgan Chase’s ability to pay its debt shows up in its earnings. "Truly bizarre," Rick observes.
The company drew into earnings some of the reserves made for loan losses on a historic basis. So it’s reporting increased earnings as a function of collapsing reserves and a deteriorating standing in credit markets. An earnings increase in the face of declining deposits, declining loans and declining profitability? "Truly strange…"
Bank of America exhibited similar performance. "So while the economy is allegedly improving as a consequence of the ’stimulus,’" Rick comments, "the best indicators of the private economy – the operating earnings of the banks – continue to deteriorate."
The Lesser Evil
When people ask Rick about the US Dollar relative to other currencies, he falls back on what he calls an old truism: "It’s probably the worst currency in the world with the exception of all the others." He sees the USD as a "deeply troubled but deeply liquid market" that "may fare less badly than the rest," with its purchasing power falling 5% or 6% per annum against deeper declines in other currencies. The bad news about that dwindling purchasing power, though, is that people will have to maintain high cash balances to survive ongoing "turbulence and incredible volatility in global debt and equity markets."
Cash on Hand
Rick figures that we can probably count on major equity markets to rise and/or fall by 25% in any given year going forward, "and the speculative markets will exaggerate those moves." With volatility a given, "you absolutely, positively have to use it."
Naturally, no one knows when these periods of volatility will occur, so we have to be prepared. Investors who are fortunate and are prudent enough to set aside significant cash savings in anticipation of volatility earn next to nothing on cash on deposit. Still, Rick recommends maintaining larger cash balances than you otherwise would despite the fact that your savings are losing purchasing power at the same time as they’re collecting scant interest. As he sees it, holding big wads of cash and exposing yourself to 5% declines in real purchasing power beats losing 20%, 30% or 40% in conventional debt and equity markets. "Painful but true," he quips.
"But when very aggressive down moves and market crashes take place, remember to step in and buy. It’s not because the cash is valuable relative to the equities in your portfolio," Rick says, "but because the cash will give you the opportunity to take advantage of periodic sales as they occur."
Capital & Courage
As a case in point, Rick looks back to what happened, particularly in small-cap equity markets, in late ‘07 and ‘08. He hunted for and found about 20 stocks selling at less than 50% of working capital, "where you got the management teams and the assets for free." With its Exploration Capital Partners 2008 portfolio, Global Resource Investments stepped into those stocks "very aggressively in a down market and profited mightily when the stocks responded upwards." Maybe there was more money to be made "had we been less cautious about the nature of stocks we chose," he adds, "but we speculated only in stocks selling at substantial discounts to free working capital." In any case, "having the courage to step into the markets and having the capital available to do so – when our competitors had neither courage nor capital – stood us in extremely good stead." So Rick’s core rule for individual investors, too, would be to have capacity available: capacity in capital and courage alike.
Sensible Speculations
And when you buy, what do you buy? Rick has a number of suggestions, which include:
But where to speculate?
Commodities in Context
Despite the condition of the broad economy, we are in an important secular bull market in resources. This bull market came at the heels of the secular bear market, as they always do. The 18-year bear market from 1982 through 2000 "took out all kinds of investor interest and all kinds of productive capacity," Rick explains, and the constricted investment in natural resources eroded the supply side of the equation.
As Rick points out, the large deposits that we as a society depend on – uranium, petroleum, copper and so on – were discovered and developed from the 1950s through the 1970s. But deposits are finite; every barrel you draw from an oil well or pound of ore you dig from a mine takes the resource closer to depletion. Because "you don’t stand at the top of a mine pouring in fertilizer and water and expect the mine to grow more copper," those old deposits have grown old and passed their prime.
Though the bull market has brought in new investment, from his vantage point we’ve not yet done a good enough job of replacing or replenishing the deposits that we’ve been busy exhausting.
Even as supply stagnated or even shrank, demand continued and continues to grow. Every year, more of us occupy the planet. In fits and starts over the last 20 years, populations in Communist countries, emerging markets and developing nations have begun enjoying measures of economic and political freedom that is expanding the middle class and elevating living standards. That phenomenon, in turn, fuels ever-increasing demand for commodities. Rick cites the BRIC countries – Brazil, Russia, India, China – are good, classic examples.
"At the bottom of the demographic and economic pyramid, as the poorest people get more money, they buy more stuff. Most of us here have too much stuff already. We may want more, but we tend to spend a lot on services. There isn’t much stuff in an iPod; the value-add is service. You pay $1 for songs for your iPod; none of those songs contains copper or oil.
"But if you’re on the bottom of the economic ladder in Nigeria or Sri Lanka or India or Indonesia and start making more money, instead of walking you might buy a motor scooter that’s made of stuff and consumes oil. You may build a cinder block home to replace your Visqueen and patch shanty. You may buy a refrigerator and an air conditioner. What adds utility to poor people as they get more money are things that are made of stuff. There is a boom in stuff in the emerging markets."
A decade into the new millennium, we find ourselves in a situation where constrained supply as a function of nearly 20 years of sparse investment meets unconstrained demand. "That means real raw material prices are going to go higher," Rick says. And again turning to historical experience…
"The past is prologue. In the last great market in commodities, the market of the 1970s, the Gold Price escalated from $35 per ounce – admittedly, a price-controlled level – to $850 an ounce. But it’s instructive to remember that in 1975, in the midst of that great secular bull market, there was a 50% cyclical decline."
When the Gold Price slid from $200-plus per ounce to just over $100, Rick recalls, "people who understood that the Gold Price would rise but were over-leveraged or psychologically unprepared for the decline still could go broke having made the right decision in the midst of a spectacular bull market." He raises that point because he thinks another decade remains in this secular bull market in resources.
"If you aren’t prepared for the volatility that you’re going to experience – financially in terms of your liquidity and psychologically in terms of your ability to deal with 30% or 40% price declines in your portfolio in one quarter – you’ll get shaken out of the best market you’ll ever experience."
From where he stands, Rick says there’s no doubt that "we will see some ugly cyclical declines." Nor is there any question that "absolutely incredible opportunities are ahead of us." He reiterates his guidance: "Use this situation to your benefit by having the courage and the capital available to take advantage of the situation when the people competing with you in the markets have neither."
Volatility ? Risk
"Understand that volatility is not the same as risk," Rick says. "It isn’t a catastrophe if a company with $100 million in market cap that’s in reality worth $150 million experiences a drop to $50 million in market cap. It’s an opportunity. Pay attention to the underlying value of the assets, and use that underlying value to put the price of the stock into context. It’s absolutely critical if you’re going to maintain yourself in these markets that you pay attention to that liquidity."
As he sees it, whether cyclical downturns affect investors unduly is not a function of the market but of the investor. "Cyclical downturns are periodic sales; that’s not a bad thing." If you understand the companies you’re investing in and confine yourself to viable companies, downturns will be opportunities. They will certainly test your character," he quips, "but you are going to experience them so get ready for them and in fact welcome them."
If you are the type of investor who considers volatility itself a risk, Rick has three words of advice: "Get out now." But if you appreciate sales, understand that you have to buy companies based on value, not on price. And he thinks this is a pretty good time to be able to find those $100 million market cap companies that should be worth $150 million. "As a consequence of the deterioration in markets that we’ve already seen, some values are starting to appear," he says.
"If you own one of these companies and expect its prospects to improve over time, don’t worry that the market marks it down in a period of volatility."
If you have the psychological fortitude and financial wherewithal to take advantage of it, and if you like the idea of periodic half-off sales in a secular bull market, the volatility on the horizon will bring "unparalleled opportunities." And, he says, "I think you’re going to see opportunities across the board in resources."
Liquidity, Liquidity, Liquidity
In real estate, they say it’s location, location, location. In resources, Rick also has three words of advice to remember: liquidity, liquidity and liquidity. "These are capital-intensive cyclical businesses. Without capital they have no businesses. The companies that you invest in relative to their needs have to have liquidity."
He reiterates his earlier point that investors themselves need ample liquidity, because "absolutely without a doubt you will experience volatility in your portfolios of up to 30% or 40% a year." Without liquidity, you won’t be able to take advantage of the "unforeseen black swans" that swoop in – "brutal cyclical declines in the context of that secular bull market (that) knock markets off precipices."
Ground-Floor Opportunities
Investors always want to know how to get in at the ground floor. Those who speculate in juniors need to pay particular attention to cash-rich shells, Rick advises. In these cases, the company’s market cap may be at a substantial discount to the free working capital and treasury. "These are ground-floor opportunities," he states.
"Cash at a discount always attracts management, always attracts assets. This is not to say that all of these situations work out, but the risk-reward parameter associated with this type of speculation is unparalleled in any other form of exploration."
It’s not as if the bargains are everywhere at the moment. For instance, Rick finds the micro-cap precious metals stocks overpriced at this time "because the market has driven up the bad ones with the good ones." However, the picture will start to change when one of those cyclical downturns hits. "It will flush down the good ones with the bad ones," Rick says. "Be ready to take advantage and you will be able to snap up spectacular bargains."
Cash Includes Bullion, ETFs
Rick will be the first to say that portfolio diversification for the average investor – if there is such a creature – is not exactly up his alley. "My whole portfolio is in my business and in things I understand," he says. Besides, he doesn’t believe in a one-size-fits-all approach to investing. But with the caveat that he claims no expertise in what you might call "traditional asset allocation," if pressed he’ll go out on a limb to say, "I would suspect that an intelligent passive investor at present needs to overweight cash – 35% or 40% in cash and as much as 25% of the cash part in either physical gold or silver bullion or ETFs." Beyond that, "I do suggest investors overweight the raw materials portion of their portfolios to the rest of the portfolio because I think we’re probably into a multi-year bull market in raw materials."
Stock Picking
If you think the Gold Price is going to go up, Rick says, Buy Gold. That’s "the best way to participate." As for equities, if you think a company has some competitive advantage, some facet that will cause the company to do well, buy stock in that company, irrespective of what it produces. Most of the time Global buys and recommends a stock, he says that the decision is based on organic growth or "some type of internal event, something that would make the share price respond even in a bad market." The decision is not based on "any sense of what the market may or may not do to that stock in the next 12 months."
Because most Gold Mining stocks are priced at substantial premiums to their net present value of their cash flow at today’s Gold Prices, Rick says that they’re inefficient stores of value in the context of rising Gold Prices. For those who want equities in their portfolios, though, he sees room for explorers as well as producers. In fact, he notes, because the explorers are only looking for gold, whether the price of gold goes up would probably have only a marginal impact on the company.
Resource Stocks vis-à-vis Stocks Overall
Rick says that he expects the resource stocks to correlate very well with the overall market in the very near term but will diverge in the longer term. He quotes Warren Buffett as "famously said that markets are ‘voting machines’ in the very short term and ‘weighing machines’ in the long term." In other words, emotions move the markets in the short term; in the long term, value becomes the driver.
When stocks fall, all stocks fall but recoveries are uneven. In Rick’s view, the recoveries inevitably occur where value is present; where value is absent, so is recovery. But in a dramatic selloff, he adds, the selling decision is not always the investor’s to make. "Margin clerks don’t care about an investor’s asset allocation style. When they are selling stocks to meet margin calls, they sell the things that have bids." He says that the same thing happens in opened-ended mutual funds, when fund managers with $1 billion in assets get calls for redemptions, they sell what they can, not necessarily what the client wants to sell.
In fact, "your best stuff, your more liquid stuff, has to be sold at the same time or even before the junk gets sold because there are bids." For these reasons, he expects resource stocks to correlate very well to the overall market in a cyclical decline. "I would also expect the better resource stocks to recover," he reiterates, adding, "That’s not something I can say for all stocks."
A Lesson on Steroids
Rick is quick to remind investors that in the vehicles his company really made a reputation with – such as the Exploration Capital Partners 2000 series – most of the big returns came from less than 10% of the positions. "The portfolio performance occurs in a fairly small number of names," he explains. It’s the "nature of speculation, sadly, that most positions make only a little bit of money or lose some."
Almost without fail, he recalls clearly, the Exploration Capital Partners portfolio stocks that made 20- or 30-fold gains had handed in 30% or 40% losses before they went higher. In an "extravagant example" to illustrate the point, he talks about a stock Global bought in intervals at $0.10, $0.12 and then $0.015."An 85% decline before the stock ran up to $10," Rick says, "a really instructive lesson – a lesson on steroids." But, he adds, "It’s important that people understand that value is more important than price and that volatility is an opportunity rather than a risk."
Long or Short? A Matter of Math
As a rule, Rick doesn’t short stocks. His reasoning is a simple matter of math. "If I short a stock, the most I can make is 100% while my losses are theoretically incalculable," he says.
"In a long portfolio the odds are completely reversed. The most I can lose is 100% (which unfortunately I’ve done on a couple of occasions) but the amount of money I can make is almost unlimited (and mercifully I’ve enjoyed a couple of those too). I like the math on the long side way better than the math on the short side."
Rick also has a take on tax matters that investors might find helpful. The Bush administration’s tax cuts will be allowed to expire, he says, but he anticipates that the Obama administration will probably find other ways to "raise revenue." With that in mind, he says, "Investors who have very large embedded gains in some historic positions may want to take those gains this year. If you really like the company, you may want to sell and re-buy after 31 days – the opposite of taking tax losses."
In addition, as a consequence of less favorable capital gains legislation, Rick says, "Equities markets, at least in the US, will become somewhat less buoyant than they have been. I think these tax changes will have a profound effect on the venture capital industry and a lot of equity trading."
Furthermore, he sees the US tax structure becoming more "progressive" as time goes on. The "more productive" taxpayers – the rich, as Washington might call them – "will be increasingly victimized." Recalling Willie Sutton’s supposed reply when a reporter once asked him why he robbed banks – "because that’s where the money is" – Rick notes that already 5% of US taxpayers pay almost 70% of the income and capital gains taxes that the federal government collects. "That’s going to continue," he adds, "and that’s not the way you engender a recovery." Among the reasons his overall economic outlook is so "muted," he says, is that government’s share of GDP will continue to grow partially as a function of taxation.
And Will Gold Go Up or Down?
Year after year, at the beginning of the San Francisco Gold Show, Rick says, people ask him whether the Gold Price will go up or down. "I always say yes," he chuckles.
Generally speaking, he says, Gold Prices will rise in USD terms because gold is priced in USD and the currency will go inexorably lower. However, he points out that isn’t necessarily true in the short term. In a liquidity crisis, those same margin clerks he mentioned earlier "are the ones who set prices, hit bids." For that reason, he says he can well imagine that the Gold Price will lower before it goes higher. At the same time, he adds, "I also think that the Gold Price will rise at least in nominal terms, because the denominator (USD) will decline in value while gold holds its own. But it will certainly be a volatile ride."
"Listen," he goes on, "I’m in an odd position. Separate and apart from my portfolio, I own three businesses that are leveraged to the Gold Price. Despite that, I have a fair bit of physical gold or physical gold proxies as constituents of my net worth. To put it bluntly, I own a lot of gold and I can honestly tell you that I hope that the price goes down."
Did Rick Rule really say that? Yes, he did. But he explains why. "Gold has fulfilled a role for many centuries as catastrophe insurance and that’s the role it fills in my portfolio. I have no insurance policy at all that I’m dying to get paid off on. Think about it. Life insurance means somebody died. Home insurance means that your home burned down. Auto insurance means that you had a wreck. Gold is catastrophe insurance.
"I sleep better having catastrophe insurance, and I would be remiss if I didn’t tell you that I think that you should own some physical gold or physical gold proxies in your own portfolio for the same reasons that I have it in mine."
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Why current gold market volatility is not caused by deflation, but by seasonal factors…
A SPEAKER at major resource conferences, including the Cambridge House resource conference series, John Lee CFA has gained invaluable insights by living in three continents and making frequent globe-spanning visits to Gold Mining and other mineral sites.
Founded in 2004, John Lee’s Mau Capital Management hedge fund is based in Vancouver and invests mostly in junior mining companies. Here he speaks with The Gold Report, John Lee deflates the deflation argument, discusses why he favors near-term gold and silver producers over early stage explorers, and reveals some of his fund’s top holdings.
The Gold Report: Everyone is concerned with the volatility in the markets. What’s going on out there?
John Lee: Well, there’s the proverbial "sell in May and walk away" going on, even though commodity prices have stayed fairly buoyant. In the junior market, there’s a lot of paper that came out and began trading from the financings conducted in November and December. I think we’re experiencing a little bit of a weak season where equity markets are vulnerable.
TGR: I was reading some of your presentations and one thing that you talk about is paper currencies being at the mercy of government and you consider gold a hedge against paper. On July 1st, one of the more popular gold futures contracts lost $40, its biggest drop since February. Investors seem to be gravitating toward T-bills because they fear deflation. Should we fear gold’s prospects in a deflationary economic environment or should we expect Gold Prices ultimately to continue their record bull run?
John Lee: Well, you touched on a number of issues there. July 1 was Canada Day and Canadian markets were closed and you had the futures markets trading. There is actually some evidence to suggest that the markets, on a given Friday or the day before a holiday, will see a heavy correction—a one-day correction. However, Gold Prices are around $1,211 right now (July 2). It’s only $50 from its all-time high. And so, the market is really healthy.
In terms of the discussion of inflation and deflation, I am firmly in the inflationary camp. In the history of fiat currency, there has never been a scenario where deflation has occurred. You have to adhere to the real definition of deflation, which is a decrease in money supply. The money supply is, in the history of fiat currencies, always on the way up, not on the way down. There may be brief periods when the increase in money supply slows, but rest assured that the money supply is still increasing. With deflation we’re talking about an actual decrease in the money supply.
I think it’s almost nonsense to become concerned about deflation. Going back to the Great Depression of the 1930s, the reason we had a deflationary scare was because the Gold Price was tied to the Dollar. But this time it is not tied to the Dollar. So in a true deflationary scenario, gold’s purchasing power will go down because the paper currencies’ purchasing power is going up. But this is not what we have today.
TGR: Right, but people like T-Bills because if you buy a $100 T-bill and you cash it out a year later or even three months later, it is still going to be worth at least the original $100. They’re safe. Should people be buying T-bills, gold bullion or shares in gold companies as a hedge against what’s happening right now in financial markets?
John Lee: You should have bonds and equities and in cash. Then you can break it down further: the equities into international equities and domestic equities; the cash, into precious metals and currencies. Also, you should really allocate a basket of commodities, and get some real estate as well. Depending on your risk tolerance, you may structure your portfolio differently. There is a place obviously for T-bills in the cash category. I think in terms of Gold Bullion and precious metals, it’s money so it belongs to the same category as T-bills. And it’s not necessarily a good idea to put all your T-bills in US Dollars.
I think in a reasonable portfolio you should have about 30% cash, which is a prudent way to go. I would say 10% in foreign currencies, 10% in US Dollars, and 10% in precious metals. It depends on which country you live in, because I think a number of currencies trend together.
TGR: Is there anything that you put faith in when it comes to monitoring global economic conditions? Charts? LIBOR rates?
John Lee: Usually commodity prices are a good indicator or forecast of what is to come, and so are equity markets, particularly the emerging equity markets such as Brazil, Shanghai and Hong Kong. What they’re telling me is it’s a pretty mixed picture, but I would say growth in commodity prices such as copper and oil, and growth in emerging equity markets are good signs. You talked about the bond prices; usually, if bonds and equities both go down together, that is a signal of something severe that could be coming into place. But right now the bond markets are still staying fairly stable, even though the equity markets have corrected somewhat from earlier this year.
It looks to me now like there is some profit-taking, given that all the major indices, including the Canadian TSX and S&P and the Asian markets, have racked up over a 50% gain since their low in March 2009.
Another gauge is the Baltic Shipping Index. It tells you the global shipping activities from everywhere else are pretty much gravitating toward Asia and China. Since the financial crisis (in 2008) it has recouped a lot of its losses; however, it’s gone down the other way quite severely; 30%–40% in the last 30 days.
I think it’s a mixed picture. Nobody really knows what’s going on. Even within Asia there are mixed pictures between, say, Korea, Taiwan, Thailand and China. Only in China are things going on all cylinders.
TGR: Really? I think Hong Kong’s Hang Seng Index is down about 20% so far this year.
John Lee: Yes, and the Shanghai is down more than that.
TGR: So if China is going on all cylinders, shouldn’t those markets be performing better?
John Lee: In the short run, there is obviously a disconnect between the equity markets and the economy. Although a lot of times the equity markets are forecasting what’s going to happen, you can’t read so much into the markets as they go up 10% and down 10% on a monthly basis. Keep in mind, China is very centralized; it’s not a free economy. The government has $2.2–$2.5 trillion in their coffers so they can easily weather any sort of a storm and dictate the pace of progress. For example, they’re spending around $1 trillion building high-speed railways; in three years time they’re going to have more high-speed rails than the rest of the world combined. Any short-term corrections are not going to dissuade them from their plans. And they’re building buildings, a lot of them. Their low occupancy rate is not going to stop them from trying to deploy as much of their $2 trillion as they can before the Dollars go bad.
It’s the first time since the 1960s that the dividend yields are lower than the interest rates. So, basically you have this giant casino going on; you have money coming in, going out; and you have the Greek situation and the Spanish situation. Every time the US market rebounds, they’re crediting that to Chinese growth, and every time you have an equity correction it’s going back to China again. China has already surpassed the United States in both automobile purchases and auto production. Their rate of auto consumption is growing somewhere around 50% annually.
TGR: What did you think of today’s job numbers out of the US? 83,000 jobs added.
John Lee: Some people will tell you they’re suspicious of the numbers and the way the numbers are calculated. If you look at the foreclosure rate, it’s in the range of 15%–25%, depending on the region of the country. I think that’s probably a better indicator of the employment rate than the government’s stated numbers. Even though the official unemployment rate is 9.5%, the real numbers could be twice as much, depending on how you define that.
The US economy is no longer the world’s largest consumer of commodities; they’re no longer the world’s largest auto purchaser; they constitute 6% of the world’s population. At the same time, they’re not even the main influence on the US equity market, given that S&P 500 companies derive somewhere around 50% of their revenues and profits from outside the US
TGR: But you’re still a big believer in junior mining companies, correct?
John Lee: Yes, I am. That’s my specialty.
TGR: Can you talk about some of your favorite names among the junior miners?
John Lee: Yes, but first I would like to talk about the junior market scene. For example, on the TSX Venture Exchange, about 70%–80% of the companies listed are mining related in one way or another. It went from c$600–C$700 in 2001 to a high of C$3,300 in 2008, so that’s about a 500% increase. In December 2008, it was down to C$700, and now it’s back to about C$1,400. It’s still less than half of what the peak was, and I think there’s a lot of people who say, "You know what? If gold prices are $50 down from an all-time high, and copper is not that far from its all-time peak either—copper went from $0.70 in 2001 to $4 in early 2008, and now is trading around $2.80—then surely the juniors will have to follow, if not exceed its previous high of C$3,300." It would make sense because commodity prices have resumed their bull run.
TGR: What do you look for in a junior?
John Lee: I would not be so much focusing on value because a lot of management has lost a lot of their traditional means of financing. I mean it used to be that you could just walk down a Vancouver street and get broker financing at a 20% discount (to market price). It doesn’t work that way anymore; the model has broken down. So, you have a lot of companies that are sitting on very good assets, but the management doesn’t have the energy to go to unconventional financing sources such as the Chinese, the Middle East or the Europeans.
Therefore, I tend to focus on companies with a higher market cap and—I can’t believe what’s coming out of my mouth right now—the companies that are trading at a slight premium. Those companies are on the path of becoming a producer. What I am trying to say is that the gap between a producer and an explorer is widening, and I don’t see that trend changing anytime soon.
More than ever you’ve got to be really selective on the junior market. There is not a lot of stupid money around chasing promotional stories, and when there is, instead of driving it much higher, it’s barely a blip on the radar screen. I would say that with the junior market today you’ve got really to be cautious and look for stories that will be in production in the near term. Or gold exploration companies that have legitimate ounces in the ground.
I am not so much into drill plays because these near-term producers are still selling at extreme discounts. You don’t really have to go down that far in the food chain to gain leverage.
TGR: But what do you define as a good asset?
John Lee: A good asset is one that has a reasonable time line and road map into production. I would not be so much into a gold deposit way out there in, say Nunavut, that has tens of millions of ounces or tens of billions of pounds. I am more into where you have a modest size, say 1–2 million ounces, in a good jurisdiction, and also you have to look for management that has a history—proven history—of an ability to raise money. Ideally, the company is aligned with one of the big backers, whether it’s Lukas Lundin or Ross Beaty or Hunter Dickinson; you really have to identify a company with a good management group that can raise money. And with a deposit that doesn’t require billions of Dollars for infrastructure because, like I said, money is very hard to come by now.
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Source:Gold Volatility Coming from "Summer Lull, Not Deflation"
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World Cup prompts demand for Mandela gold coins
Creamer Media’s Mining Weekly Demby said that SAGCE had been a regular CHOC donor over the past couple of years, not only through donations of gold coins for auction but by donating a … |
Source:World Cup prompts demand for Mandela gold coins – Creamer Media's Mining Weekly