Gold & Precious Metals

The 88 Yr Old Legend (Bought Below $300) Gold will shoot up to unbelievable prices"

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Posted by Richard Russell - Dow Theory Letters

on Wednesday, 06 June 2012 00:00

"Gold -- I've been thinking more and more about the yellow metal. Price action -- Over the last month gold has had every opportunity to break down below 1500 and undergo a full correction. But it never happened. What the market doesn't do can be as important as what the market does do. Of course, the gold mining stocks underwent a full correction, and many gold "experts" warned that the metal would follow the gold mines down. It never happened, which I took as very bullish for bullion.

In this business, logic and reality usually win out, although sometimes it seems forever before this comes to pass. In the long history of paper fiat money, no fiat currency has ever lasted for long. And this is as it should be. It's illogical, immoral, and against reason that a group of men at a central bank should be able to print or publish wealth at will -- to create wealth out of thin air.

Thus, I am taking it for granted that history will repeat. In due time all of the current fiat money that is being ground out by the various central banks will be footnotes in monetary history. But this won't happen overnight. It may take many months or even years. But while it is happening, intelligent men and women will sense the trend. As the news of the slow death of fiat money becomes accepted, smart investors will be looking for tangible substitutes for the dollars and the euros and the reals that they hold. 

Already this is happening; we can see it in the astounding prices certain works of art are selling for. It's happening in many areas. Babe Ruth's 1934 uniform just sold for $400,000. Diamond prices are up 35% over the last few years. Classic cars are being auctioned off in the millions of fiat dollars. In dozens of areas, tangible items are being purchased at outrageous prices. Munch's pastel work, "The Scream," just sold at auction for $110 million dollars, a record.

I believe that gold is far behind the game. Gold has been recognized as a medium of purchasing power for five thousand years. Most of Asia understands gold, but decades of anti-gold propaganda has turned Americans against bullion. Proof -- try to pay for your next restaurant dinner with a one-ounce gold krugerrand.

This is starting to change. For ten years running, the price of gold has pushed higher. Even this remarkable record has not changed US sentiment towards gold. 

Gold is in a classic bull market. I think gold is in its second psychological phase.The second is the longest phase of a bull market. It's the phase where the public slowly becomes interested in an item.

I believe that the third sentiment phase for gold lies ahead. In the third phase the public finally turns bullish, then more bullish, and finally all-out insanely bullish.

What will be the signs of the third phase of the gold bull market? First, new inflation adjusted highs in the price of gold (gold above $6,200). Next, gold will be the focus of every conversation; it will become THE talk at parties and wherever people gather together. Next, gold coins and bars will disappear. The coin dealers will be out of gold and will start touting silver and platinum (the prices of which will be rocketing higher). Finally, the naysayers will start warning of a "gold bubble." But their warnings will be early. The price of gold will shoot up to unbelievable prices."


Russell began publishing Dow Theory Letters in 1958, and he has been writing the Letters ever since (never once having skipped a Letter). Dow Theory Letters is the oldest service continuously written by one person in the business.

Russell gained wide recognition via a series of over 30 Dow Theory and technical articles that he wrote for Barron's during the late-'50s through the '90s. Through Barron's and via word of mouth, he gained a wide following. Russell was the first (in 1960) to recommend gold stocks. He called the top of the 1949-'66 bull market. And almost to the day he called the bottom of the great 1972-'74 bear market, and the beginning of the great bull market which started in December 1974.

The Letters, published every three weeks, cover the US stock market, foreign markets, bonds, precious metals, commodities, economics --plus Russell's widely-followed comments and observations and stock market philosophy.

In 1989 Russell took over Julian Snyder's well-known advisory service, "International Moneyline", a service which Mr. Synder ran from Switzerland. Then, in 1998 Russell took over the Zweig Forecast from famed market analyst, Martin Zweig. Russell has written articles and been quoted in such publications as Bloomberg magazine, Barron's, Time, Newsweek, Money Magazine, the Wall Street Journal, the New York Times, Reuters, and others. Subscribers to Dow Theory Letters number over 12,000, hailing from all 50 states and dozens of overseas counties.

A native New Yorker (born in 1924) Russell has lived through depressions and booms, through good times and bad, through war and peace. He was educated at Rutgers and received his BA at NYU. Russell flew as a combat bombardier on B-25 Mitchell Bombers with the 12th Air Force during World War II.

One of the favorite features of the Letter is Russell's daily Primary Trend Index (PTI), which is a proprietary index which has been included in the Letters since 1971. The PTI has been an amazingly accurate and useful guide to the trend of the market, and it often actually differs with Russell's opinions. But Russell always defers to his PTI. Says Russell, "The PTI is a lot smarter than I am. It's a great ego-deflator, as far as I'm concerned, and I've learned never to fight it."

Letters are published and mailed every three weeks. We offer a TRIAL (two consecutive up-to-date issues) for $1.00 (same price that was originally charged in 1958). Trials, please one time only. Mail your $1.00 check to: Dow Theory Letters, PO Box 1759, La Jolla, CA 92038 (annual cost of a subscription is $300, tax deductible if ordered through your business).

IMPORTANT: As an added plus for subscribers, the latest Primary Trend Index (PTI) figure for the day will be posted on our web site -- posting will take place a few hours after the close of the market. Also included will be Russell's comments and observations on the day's action along with critical market data. Each subscriber will be issued a private user name and password for entrance to the members area of the website.

Investors Intelligence is the organization that monitors almost ALL market letters and then releases their widely-followed "percentage of bullish or bearish advisory services." This is what Investors Intelligence says about Richard Russell's Dow Theory Letters: "Richard Russell is by far the most interesting writer of all the services we get." Feb. 19, 1999.

Below are two of the most widely read articles published by Dow Theory Letters over the past 40 years. Request for these pieces have been received from dozens of organizations. Click on the titles to read the articles.

"Rich Man, Poor Man (The Power of Compounding)"

"The Perfect Business"


Gold & Precious Metals

Gold and Dow Flash the Same Warning Signal

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Posted by Greg Hunter: USA Watchdog

on Tuesday, 05 June 2012 07:13

On Friday, both gold and the Dow flashed the same warning signal—the economy is in deep trouble.  The Dow plunged nearly 275 points on the news of a weak jobs report, and gold rocketed higher by $66 on speculation global bankers are going to print money to resuscitate a dying financial system.  You do not get this kind of tandem move in opposite directions by coincident.  Last week, both the stock and gold markets appeared to stop pretending and acknowledged the vortex of debt and insolvency that could suck us all into a black hole.

Renowned gold expert Jim Sinclair of JSMineset.com said Friday, “Those popular gold writers calling for much lower gold prices are simply out of their mind and disconnected from reality.” 

....read more HERE

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Gold & Precious Metals

The Ultimate Gold Bull vs. The Muted Bear

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Posted by The Gold Report

on Monday, 04 June 2012 08:05

Is gold preparing for another shot up to $2,500/ounce heights or on the way down after being overbought? In this exclusive interview with The Gold Report, two respected names in the investing world share their arguments for what could happen in the coming years and how to profit from it. Financial Adviser Peter Grandich predicts a lot more upside while AlphaNorth Asset Management Chief Investment Officer Steve Palmer has a more cautious outlook on the shiny metal. Where are you putting your money?

The Mother of All Gold Bulls
The Gold ReportPeter, you have called this the mother of all gold bull markets and predicted $2,500/ounce (oz) gold prices. What is driving the price of gold? Is it China's growth? Is it a weak U.S. dollar? Is it global fears? Is it central bank currency printing? What's going on?

Peter Grandich: This mother of all gold bull markets was built on a foundation of dramatic changes in the gold market itself that began in earnest 10 years ago and propelled it up to where it is now. First, two significant negatives turned into positives. The gold market had basically capped due to constant central bank selling and producers being aggressive forward sellers of future gold production. However, starting with the Washington Accord in 1999, the central banks dramatically changed direction and agreed to limit gold sales. In fact, in the last two years the central banks have actually become net buyers. At the same time, gold producers have made hedging a thing of the past. Hedging has really become a four-letter word among investors.

TGR: What convinced companies to stop forward-selling their production?

PG: The gold market finally started to rise and people realized that companies that were hedging were making less money than companies that were not hedging. In the '80s and '90s, the old American Barrick was almost a commodities trading house rather than a gold producer because it used the hedging derivatives to make money. But the great mother bull market made that counterproductive and investors began to shy away from any company that pre-sold gold.

The other factor fueling the bull market for gold is the introduction of exchange traded funds (ETFs). They brought in an enormous amount of new gold buying. In the '80s and '90s, institutional investors found it cumbersome to take a large position in gold. Physical gold purchasing was not only expensive, it involved storage costs and carrying costs. People tried to use mining shares as a proxy until they realized that when the market went down, mining shares went down with it. ETFs allow people to have direct exposure to the gold price. ETFs also offer tremendous liquidity and the ability to sell at reduced costs intraday.

Central bank gold selling, lack of hedging and the creation of ETFs are the main reasons why the gold bull market has done what it has done. The gold permabears who have not recognized these changes have missed out.

TGR: Will those conditions continue?

PG: There is no sign of change. In fact, despite the permabears cries to the contrary, we saw in the first quarter that central banks continued to be net buyers. I suspect that when the second quarter is over, we will see that central banks stepped up again as buyers.

TGR: So, why are you predicting $2,500/oz? Why not $2,000/oz or $5,000/oz or $10,000/oz?

PG: I'm actually not a big fan of a target number. I'm more interested in the direction of the gold price. My feeling during this price rise has been that gold will eventually reach not only a nominal new high in price, but an inflation-adjusted, all-time high. Right now that is somewhere in the $2,300-2,500/oz area depending on what factor you use for an inflation rate. And, that's what I think is the minimum target that we can look for before this great bull market even comes close to an end.

TGR: How do you respond to people who say that gold doesn't really have any value, that it's not an industrial metal and its value is arbitrary?

PG: I give them a very simple answer. I have thousands of years of history on my side. Mankind, for whatever reason, over thousands of years has seen many paper currencies come and go. Regardless of the economic framework, gold was used to buy the things that were important while other means of value went by the wayside.

A hundred years ago an ounce of gold bought a good man's suit and it still does. There isn't really anything else I could point to, financial assets or oil, wheat or any other commodity that has managed to do that. So, I think it's absurd when people say gold doesn't have value.

TGR: What about the people who say it's in a bubble? How will you know when gold is overbought? What are some indicators that you watch?

PG: The definition of a bubble of any kind is when so many people have gotten so involved in something that it has been driven beyond any reasonable price. This gold market has surprised us in how high it has gotten with so few members of the general public and the professional community investing in it, particularly in North America. If this is a bubble, bring more on for me because there just aren't enough people participating in this. The only bubble I see is in the number of people predicting the end of the gold bull market. That is overloaded. Gold is not.

TGR: Well, it sounds like you are definitely bullish on the gold commodity price, but what about equities? Are equity valuations too low or too high based on where the gold price is now and where it could go?

PG: There has been a dramatic change on the equity side with some bearish developments. I'll go through them with you.

The first change as we discussed was the shift to ETFs for exposure to the gold price. The single biggest change, particularly in the junior resource sector, has been the adjustment in the financial industry from a commission-driven business to an asset-gathering business. A decade ago, thousands of so-called financial stockbrokers built their books of business on buying and selling individual stocks. Some of them specialized in mining shares. Each one would have 100 to 500 or 1,000 clients. That created a market for mining and exploration companies to get exposure to the end-user. That is all but gone now. Most people in the financial industry today are asset gatherers. They gather an asset, turn it over to a third party money manager and the individuals no longer buy or sell or recommend individual stocks. That has been the single biggest hit to our market.

The other thing that changed dramatically is the regulatory and compliance environment. In North America, the NI 43-101 rule required companies to follow specific reporting guidelines in order to classify exactly what kind of reserves or potential reserves they may have. Before that went into effect, companies could almost say anything, sizzle their story into looking like steak if you will. While it was a good change in many ways, it also removed all the sizzle. Companies are now very limited to how they can describe their resource, thus limiting some stock price growth.

The regulatory end changed as well. In the United States, it's almost impossible to find a brokerage firm that would allow solicited or even unsolicited orders on stocks that are not trading on the major markets, the New York Stock Exchange or the NASDAQ. Even though the Toronto Stock Exchange may be the fourth or fifth biggest exchange in the world, it's very difficult for U.S. investors and the investment community to buy and sell stocks that trade there because compliance departments don't allow it any more.

The holding time for private placement is something else that has changed. Private placements are the life blood to the junior resource market. It is where companies raise money to continue drilling and exploring. When I first entered the business, placements came with a two-year hold. Then it became a one-year hold and now it is only four months. A four-month hold brings more paper into the public trading market faster than most companies can demonstrate results. Therefore, it has become a depressant because that stock is getting ahead of company growth.

Add to the challenging equity picture the emergence of discount brokerages. Many individuals can literally trade for a penny or two share movement and make money. Before people had to have a 10% or 20% move in the stock before they would even consider taking profits. Now they think nothing of trading multiple times a day.

Throw in the political difficulties that mining companies have around the world, environmental and now even labor shortages, and you can see why there is a disconnect. Those are some of the reasons why even though we have had a three-, five- or even sometimes tenfold increase in underlying metal prices over the last couple of decades, but it is far more difficult now for the typical mining company to realize increased stock prices. It is far more difficult today for the typical mining exploration company than in any other time in the 30 years that I have been around them.

TGR: Do you see that changing? How will the demand for gold be fulfilled if it isn't profitable to pull it out of the ground?

PG: That is going to be a challenge. The bears have predicted that 80% of juniors are going to be wiped out because the gold price is going to go so low. That would mean 80% of the gold that might have been found will not be. That would actually improve the fundamentals for the gold price by decreasing supply.

What will happen is what happens in all cycles. Juniors don't really die. They become born again. They recapitalize. They change names. They may even change properties. But they never truly die.

The world is going to need new cars and electronics and that will require metal and energy and mining companies to find those materials. More than 80% of metals found in the world are found by small companies. If they are not around, who is going to discover the ore to build the world of tomorrow? That is why I still maintain a very bullish attitude toward commodities in general.

Add in the pressure for a store of value safe from increasing world debt and political turmoil and you have a strong argument for gold. So, it's not because I wear a tinfoil hat or sell log cabins or dry food that I'm bullish on gold. I'm bullish on gold because all the fundamentals point toward it still going dramatically higher.

TGR: If the juniors are having trouble finding love in the stock market during these record-high gold commodity prices, what about the producers? Are they reaping the benefits of a higher gold price?

PG: Not to the extent that they should be in the short term, but I know it will be all right long term. My bellwether is Barrick Gold Corp. (ABX:TSX; ABX:NYSE). It has gotten to a single digit price-to-earnings ratio. This was unimaginable when I first entered the business because mining shares traded anywhere from 30 to 50 multiples. When a major producer is below a general market multiple, but continues to do well on the corporate side, that is where the undervalue is in the general market. So, I think we're pretty well done in this corrective/bear market phase for mining shares. People have priced companies to a level where gold might have been 10 or 15 years ago. So, either the gold price has to come way down to match that or these things have been way overdone on the downside. I'm in the latter camp.

TGR: Do you have a bellwether for the juniors if Barrick is your bellwether for the producers?

PG: It is a much more difficult environment for the mining and exploration business than it was 20 years ago, even though the metals themselves have gone up a lot. Throw in all the political risk and the environmental, social, economic and financial challenges and I would have to say, "If I had a child I wouldn't want it to be a junior resource company because it has so many things going against it." So many good juniors like Sunridge Gold Corp. (SGC:TSX.V) have net asset values at multiples of their market cap. But those things happen at the bottoms of markets, not the top. The first focus of the market when it rebounds is on the companies that got way overdone. There will suddenly be a recognition that not only will they survive, but they will prosper because there will be less overall competition.

Sunridge is a classic case. It has positive news with new studies, a feasibility study and lots of new value created. There are lots of Sunridges out there. That is why I believe anyone who thinks there is a lot more to the downside in the junior market is badly mistaken.

Let me be clear: I do not expect a V bottom. I'm looking for an L bottom. We won't go dramatically up and it will take several months for confidence to build again through mergers and recapitalization.

TGR: You started trading more than 30 years ago. You have been through the wild ride of the '80s and '90s. What is the best advice you've ever received?

PG: Hope is a wonderful spiritual personal strategy to have because without it, it's very difficult to live. But, hope is a horrible investment strategy. When all you have is the hope something is going to get better or if I hope I get my money back rather than relying on fundamental and/or technical factors to justify that hope, then it's a very poor investment strategy.

The ultimate crime in investing is not being wrong, it's staying wrong. I had to look at myself in the mirror a couple of weeks ago and say, have I made that mistake? Have things really changed in the metals and mining industry? Have I ignored the facts because I make a living in the market? Do I need to stop being wrong? I made a conscious decision after evaluating everything that this was just another of the corrections that occur. That isn't hope. That is reality.

A Muted View
TGR: Steve, your AlphaNorth Partners Fund is a long-biased, small-cap hedge fund focused on Canadian companies. You've been on the buy side since 1997 and adjust your outlook and portfolio based on fundamental and technical analyses. In the last year, you have shifted to a more bearish outlook on gold and bullish outlook on equities. What changed your mind?

Steve Palmer: I've had a relatively muted view on gold for a couple of years now, not so much anymore though given the underperformance of both bullion and gold equities over the past couple of quarters. I'm not so much negative right now but, rather, I believe that there are better opportunities to invest in. So, in terms of new companies to invest in, the last sector that I would be looking in would be gold.

TGR: Is there some technical indicator on which that conclusion is based?

SP: I noticed that almost all investors had become unanimously bullish on gold, so sentiment was at an extreme. It's not quite as bad now with the underperformance in the last couple of quarters. But everybody you talked to was bullish on gold, and if you didn't think gold was going to multi-thousand dollars per ounce, they stared at you like you were from outer space.

The valuations of gold stocks were way out of line with other resource companies. They have underperformed considerably of late though, so that's more in line now. But it used to be that companies like Goldcorp Inc. (G:TSX; GG:NYSE) and Barrick Gold would trade at 30x earnings while Teck Resources Ltd. (TCK:NYSE; TCK.A:TSX) and Alcan Inc. [purchased by Rio Tinto (RIO:NYSE) in 2008] would trade at 9x earnings. That didn't make any sense to me. That valuation discrepancy has largely been corrected at this point, so I'm not as negative on those anymore.

That leaves two reasons why I remain not bullish on gold. There is still a lot of retail money that believes in gold as something that they need to own to protect against whatever is going to happen—inflation, deflation, death, whatever. It seems to be a cure-all for everything. The supply-demand picture on gold is not favorable. It's the retail money that has basically propped up the gold price, all the ETFs that have been created to hoard gold. I saw some data that investment demand over the last 10 years has increased 17% while total demand for gold is up only 1%. So that implies that fabrication demand, a real end-use demand, for gold is negative, negative 20% over that time. If you took away the investment demand, the picture for gold would be a totally different story. We've seen many times before how retail piles into an asset class, creates a bit of a bubble and when it gets out, it causes significant correction.

TGR: What do you think is a reasonable price for gold?

SP: I don't know. Because there are so many factors and variables, it would just be guesswork. It all depends on what the sentiment of the retail investment does that's going to drag gold. I don't know the timing of that. So I use technical analysis to predict shorter-term swings. I know there will be a big bust in gold at some point, but I don't know when it's going to occur.

I think it will still go up this year along with the other commodities, but it's unclear what will prompt the big downturn in gold. I would imagine at some point, if the equity markets are generating decent returns as I think they will, investors will re-evaluate their portfolios and wonder why they're holding gold, which is only costing them money because it doesn't generate any return like a bond or a stock with a dividend. It just costs money to store it.

TGR: When you say a big bust, how big of a dip could it be?

SP: It could be in half. A few months ago we saw gold drop $100/oz in one day. That just gives you a sampling of what could happen when things unwind.

TGR: What impact will any quantitative easing (QE) 3 or inflation have on your projection?

SP: In the short term, the markets believe that QE3 will be positive for gold. It remains to be seen whether QE3 happens or not. It would be beneficial to gold over the following few months if it were to occur.

TGR: You've called your "muted" view on gold an out-front, lonely maneuver, quoting Army Colonel John Masters: "Only if you are far enough ahead to be at risk do you have a chance for large rewards." How far ahead do you try to go?

SP: Not too far. Time is often the most difficult component to predict. In my mind, there is no question that there will be a big down-move in gold. It's just getting the timing right that is difficult. So I don't put on positions, hoping for something like that, waiting two to three years for it to happen because a lot can happen in the shorter term. On occasion when the technicals looked very unfavorable, we have shorted it.

TGR: Are you short gold now?

SP: Currently, we are not short. I don't think a collapse is going to happen this year.

TGR: You mentioned that one of the signs that gold was overvalued is that everyone was investing in gold. Do you consider yourself a contrarian?

SP: Yes. I try to be whenever possible because that speaks to that quote you just mentioned. If you're always doing the same thing as everyone else, you're not going to stand out in terms of performance. You're just going to generate the same returns as everyone else.

TGR: Has it been working for you?

SP: So far it has been working, yes.

TGR: What were your returns last year?

SP: Last year, we were +2.4% in the AlphaNorth Partners Fund. The Toronto Stock Exchange Venture Index was -35% and most of the small caps were negative for the year, so I consider that a big win.

TGR: In December 2011, you said, "Our strategy of avoiding the precious metals sector has added value over the last couple of quarters as gold and silver remain entrenched in the downtrend. Both of these commodities peaked in the summer and have continued to hit new lows since that time. We prefer to invest in other sectors with more favorable supply-demand fundamentals." It looks as if you've reduced your precious metals holdings from 11% to 6% of your holdings, but you still hold 20% in industrial metals. Are you more upbeat about copper and nickel?

SP: Yes, I am.

TGR: Why is that?

SP: Gold is not really used for any meaningful purpose other than jewelry, which is not a critical item, whereas many of these other commodities are. Once you use oil or copper, it is gone. Gold just sits around.

TGR: So are those industrial metals more dependent on global economic trends?

SP: Yes. The biggest factor would be Chinese growth.

TGR: Are you worried about slower growth in Asia?

SP: I think the concern over Chinese growth rates is overblown in the short term. I find it funny that the concern a few months ago was inflation in China. Inflation was getting out of control, so the government instituted some policies to control the growth and make sure inflation didn't become a problem. It was successful, but now everyone is complaining about the growth slowdown.

TGR: Other than industrial metals, what sectors do you see as more favorable and why?

SP: I have been focusing on the energy sector, the major base metals, specialty metals like graphite—those stocks have all been performing very well lately—iron ore, coal, all those types of commodities. The supply-demand outlook is much more favorable. You don't have a looming potential risk of all of the retail money unwinding out of the ETFs.

TGR: If you were to give our readers some investing advice for the rest of 2012, what would that be?

SP: I view this year as the time to buy on weakness. Don't get whipped by the headlines about the end of the world. There are always problems. When the news is bad is the time you should be adding to positions. Once these positions have a significant move as we saw from October to January, when the Standard & Poor's index was up over 20%, you should take some money off the table.

Financial Adviser and Market Analyst Peter Grandich started publishing The Grandich Letter—now a blog—without a high school diploma or even a day of formal training. His ability to interpret and forecast financial happenings, which once earned him the moniker "Wall Street Whiz Kid," has led to hundreds of media interviews. He is regarded as one of the world's foremost market strategists. He's also published a new book called Confessions of a Wall Street Whiz Kid.

Steve Palmer is a founding partner and chief investment officer of AlphaNorth Asset Management. Prior to founding AlphaNorth in 2007, he was employed at Canadian Equities, one of the world's largest financial institutions, as vice president where he managed the Canadian equity assets of approximately $350 million. Palmer managed a pooled fund, which focused on Canadian small-capitalization companies from its inception to August 2007, achieving returns that were ranked #1 in performance by a major fund ranking service in their small-cap, pooled-fund category. He also managed a large-cap fund, which ranked in the first quartile of performance among other Canadian equity pooled funds. From 1997–1998, Palmer was employed as a portfolio manager at a high-net-worth investment boutique. Palmer earned a bachelor's degree in economics from the University of Western Ontario and is a Chartered Financial Analyst.

Want to read more exclusive Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Exclusive Interviews page.


Gold & Precious Metals

Has gold hit bottom, and what will drive it to $10,000?

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Posted by Nick Barisheff via Mining.com

on Friday, 01 June 2012 08:00

The macro-economic conditions that have supported gold’s bull run over the past decade have not changed; in fact, they’ve become progressively worse.


Gold is universally under-owned by everyone, including institutional portfolio and pension fund managers (Figure 2). Pension fund managers have a fiduciary responsibility to meet liabilities. They use asset allocation to achieve diversification in order to reduce risk, maximize performance and thus responsibly manage their funds. To ignore the best-performing asset class year after year could conceivably expose managers and trustees to legal liabilities (Figure 3).


.....read more and view 4 more charts HERE


Nick Barisheff is President and CEO of Bullion Management Group Inc., a bullion investment company that provides investors with a cost-effective, convenient way to purchase and store physical bullion. Widely recognized in North America as a bullion expert, Barisheff is an author, speaker and financial commentator on bullion and current market trends.  For more information on Bullion Management Group Inc., BMG BullionFund, BMG Gold BullionFund and BMG BullionBars visit: www.bmgbullion.com



Gold & Precious Metals

The Fear Factor in Gold Equities & 14 Equities

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Posted by The Gold Report

on Thursday, 31 May 2012 07:55

The market is like a kid that can only ride a bike with training wheels on it, according to Robert Cohen of GCIC Ltd. As portfolio manager of the Dynamic Precious Metals Fund and the Dynamic Strategic Gold Class Fund (sold in Canada) and the Dynamic Gold & Precious Metals Fund (sold in the U.S.).


Cohen is expecting a new set of training wheels in the form of a third round of quantitative easing. In this exclusive interview with The Gold Report, Cohen suggests that, as fear among investors continues to drive down stock prices, the market is now primed for patient accumulation.

The Gold Report: Robert, British Prime Minister David Cameron said that the European debt crisis could "get a lot worse." What's your view on the likely outcome?

Robert Cohen: I think he's right. It has the potential to get worse before it gets better. Europeans are going to have to deal with some sort of Eurozone fracture. Greece could certainly exit the euro within weeks rather than years. It has an election on June 17, and it will probably be bankrupt by the end of June.

TGR: Can the Eurozone survive without Greece?

RC: It can survive, but other countries could leave or it could break into two parts, like a northern Eurozone and a southern Eurozone.

TGR: Is the debt crisis in Europe a continuation of the 2008 market meltdown?

RC: Absolutely. It's just another chapter of the global financial crisis. There's been a buildup of global foreign exchange reserves. I think that's the root cause of a lot of the problems in the Western world. The foreign exchange reserve buildup globally, probably generated out of China and Organization of Petroleum Exporting Countries, circulated into the developed bond markets of the world.

The whole notion of the Eurozone was poorly planned. It doesn't give individual central banks the ability to manage their balance sheets to debase their own currencies. Different countries with different economies have the equivalent of one Fed. It's hard to get decisions made in Europe swiftly and effectively. It's dysfunctional.

TGR: How long before it spreads to North America—or does it?

RC: We're all connected to the global economy. It can spread very quickly depending on how interconnected the financial systems are with one another.

TGR: Was JPMorgan's $2 billion loss related?

RC: I think that was just a rogue trader. However, it still has to be investigated.

TGR: How is what's happening in Europe impacting your day-to-day fund management? How do you manage against fear?

RC: What's going on macroeconomically is causing dysfunction in the stock market, but not the underlying metals. I'm actually quite comfortable with the gold price around $1,600/ounce (oz), oil at $95/barrel (bbl) and copper at $3.75/pound.

Paper money is losing its purchasing power. What's happening globally is creating fear and contagion that's spreading into the stock market. We're at a unique place in history where the metal prices are robust and yet the stock prices are the cheapest I've ever seen them relative to the underlying commodity prices. It's a behavioral finance issue. Investors are cranking up the risk premiums and their perception of risk. It's manifested in the stock prices across the board.

We use quantitative models that statistically measure observations of the stock market. You already know stocks are cheap. The model concludes when stocks are cheap, we should to buy more stocks and less bullion. We run a secondary model that actually brings in other effects, such as the U.S. monetary base. That model has a bit more of a neutral stance between equities and bullion at present. While one of the models is indicating to put the pedal to the metal because equities are super cheap, the other model is saying to ease up slightly. I take a neutral stance between the results of those two models and go 60% equities and 40% bullion in our Dynamic Strategic Gold Class fund, which is still fairly defensive.

The other fund strategy is an all-equity fund. We keep it defensive by owning a tight number of equities. Two-thirds of the fund is in 20 names. The remainder is in another 20–30 names. It's a very concentrated portfolio. We've hunkered it down into our favorite stocks because you could be a genius stock picker and still miss in a market that is being ruled by fear.

TGR: Was there any point in the last 18 months when you wished you could have been invested in 100% bullion in your strategic gold class?

RC: It would have been doing a "George Costanza" of what our models are saying. The models would indicate to go to 100% bullion when the market is over-exuberant on stock valuations. Stocks have undoubtedly been undervalued since 2007.

Our models don't indicate if the market is going to get more fearful in the next chapter. We can't predict that. We just observe and allocate accordingly.

TGR: Are precious metals equities still safe havens or is that status all but gone?

RC: Gold bullion and gold equities are two different asset classes. Gold is a monetary asset that works through time. If you wanted to protect your purchasing power, you could have put an ounce of gold in your safety deposit box in 1971 or 16.5 bbl oil in your garage, and today, 41 years later, swapped them at the same ratio. That tells me that gold keeps its purchasing power. Gold is an ideal way to protect your purchasing power—not to mention that barrels of oil in the garage would have taken up a lot of space and been a fire hazard.

We are going through a period of the erosion of the purchasing power of money. We've always gone through that—our parents, grandparents. One of the slides I use in my presentations is a bunch of Vancouver kids in 1947 protesting a hike in the price of chocolate bars from $0.05 to $0.08. You can look back on it today at how laughable and cute that is, but it was a serious matter to them. Monetary reflation is constantly chipping away at your purchasing power.

Now, are precious metal equities safe havens? While equities are never safe havens by definition, gold equities can provide the potential for capital appreciation over the long term. However, the last four years have witnessed a change in the stock market functionality. The financial crises unfolding in Europe, fiscal deficits, government debt piling up in the U.S. and global trade imbalances have put a lot of fear into the equity markets. It's going to bounce along the bottom here for some time. Often quantitative easing (QE) is a trigger to get the market functioning well. In January 2009, after QE1, functionality returned to the market. Then it sort of wore off again. Then QE2 put some more functionality into the market. QE2 has kind of worn off. Here we are, wondering what the governments are going to do next.

We need the functionality back in the stock market. QE could help. The market is like a kid that can only ride a bike with training wheels on it. If the training wheels start breaking or you try to take them off, the kid can't ride the bike. We need new training wheels right now.

TGR: Are you expecting QE3?

RC: I am, which presents an opportunity in itself between now and the time it comes. It's a good time to accumulate patiently.

TGR: Most of your top equity holdings in the Dynamic Strategic Gold Class Fund have flagship operations in North America. However, one key holding, Perseus Mining Ltd. (PRU:TSX; PRU:ASX), has an operating mine in Ghana that has been in commercial operation since the beginning of this year. Perseus also has some exploration projects in Côte d'Ivoire. Why is it your second-largest holding?

RC: I like up-and-coming producers with quality assets. Over the years, we've bought things like Perseus, Osisko Mining Corp. (OSK:TSX) and Red Back Mining Inc. (RBI:TSX) that were the new kids on the block. They're gradually transforming into household names.

Perseus' Edikan mine has been operating for a couple of quarters. It is still working through some of its initial teething problems, but what mine has started up without some sort of teething problems? It's worked through a lot of the issues. It can produce more than 200,000 ounces (200 Koz)/year from Edikan.

The Côte d'Ivoire is its next leg of growth. That should give it more than 100 Koz/year. It's a higher grade, so is even more financially robust.

Because this name isn't a household presence, we see an opportunity. It's a very well priced stock right now. With the way the stock market is acting now, we still think it's undervalued given valuations of similar peers.

TGR: How do the cash costs of Edikan compare with similar mines in West Africa?

RC: It's bang on at around $600/oz. People complain that the costs are going up, but it's actually one of those good problems to have. If costs are moving up, it probably means the revenue line is moving up, which means the percent profit margin is also expanding. An investor who thinks that the gold price should move up and everything else should stay flat might be disappointed that the profit margin is not expanding. That's not how things work. You can't hold your cost line flat and have your revenue line flat. Take it for what it is. It's an improved profit margin. Be happy about that.

TGR: What do you expect Perseus to do with that tremendous amount of cash flow?

RC: Dividend it out, buy back its shares or find other projects in West Africa to acquire and build. This is the nucleus of an operating company. It could probably take on another project. After all, it's assembled an engineering, construction and permitting team. It could keep these people perennially busy doing new projects, but in this market, it might be smart to find a good opportunity and get the next leg of growth under its belt.

If it can't find a project, it can certainly crank up its dividend. That might be another way to get these equities fired up. Some of these companies can afford to pay north of a 5% yield. That could be a catalyst for the industry if they start paying yields that get even grandma and grandpa interested in these stocks.

TGR: What are some of the other stories in West Africa that you're following?

RC: We're following quite a number of stories in that region. Geologically, it hasn't been as well combed over as other parts of the world. Political risk isn't as bad as the worst places in the world. It's not a bad risk-to-return ratio. You have to select your countries. There are obviously going to be problems in West Africa, usually infrastructure related—be it power, water or skilled labor. Even with those hurdles, there are some robust projects with decent internal rates of return (IRRs), good payback and relatively fast payback periods. West Africa is where the interesting up-and-coming companies are working.

We're following Ampella Mining Ltd. (AMX:ASX)Papillon Resources Inc. (PIR:ASX)Gryphon Gold Corp. (GGN:TSX; GYPH:OTCBB)Volta Resources Inc. (VTR:TSX) and Drake Resources Ltd. (DRK:ASX) out of Australia; and Roxgold Inc. (ROG:TSX.V)PMI Gold Corp. (PMV:TSX.V; PVM:ASX; PN3N:FSE)Azumah Resources Ltd. (AZM:ASX), and Canyon Resources Ltd. (CAY:ASX) out of Canada. Perseus is still one of the most advanced ones, so that's one of our favorites.

TGR: Volta has the Kiaka project in Burkina Faso that has about 4 million oz (Moz) in the Measured and Indicated category and another 1 Moz Inferred. What do you see happening with that project?

RC: I do see a mine at some point, but the share price could do all kinds of weird and wonderful things in the meantime. Investors are putting a lot of extra risk premiums on companies. It doesn't matter if it has a great project if it's not yet financed. Volta has to raise the better part of $600 million in equity and debt to build this. I still see a decent payback period of just over three years without even including the discovery at South Kiaka. I see something there that looks financially robust.

The bigger macro picture with Volta, and many other companies just like it that have good projects, is that it has to finance these things. Meanwhile, this is still a project that should be at the top of the shopping list of bigger companies looking for a new project that's already well advanced in that region.

TGR: I'm sure you have a similar view of Roxgold, but Roxgold is interesting in that its Yaramoko project is a high-grade gold project in West Africa, which doesn't generally happen. These are generally large, low-grade deposits with an open-pit signature. Have you visited Yaramoko and seen it firsthand?

RC: There is not much to see there other than the drill core. I've gone through the drill holes in a lot of detail in multiple meetings with the company and a few of the sell-side analysts who have gone over there, seen it and keep close tabs on it. I look at things like ounces per vertical meter (oz/m). It put down Hole 69 that was about 650 meters (m) deep. It even reported before the assay came in that it saw 34 flakes of gold in the core, which would normally correlate to some sort of high-grade assay. That got the stock fired up.

What is somewhat perplexing is that the grade of that particular hole didn't return anything all that significant. There was some background grade there. Even the company was a little perplexed. It took the remaining half of the drill core and quartered it just for another round of assay to see if something different comes back. The market reacted quite violently on the downside when Hole 69 didn't return a high-grade assay.

It would be nice to see more vertical extent on the Yaramoko deposit, but I haven't ruled anything out yet because it has to do a lot more drilling to understand it. I certainly like what I see in the top 250m, which is one reason why we own it. If this one works out down deep, great. If it doesn't, the fat lady hasn't sung because there are still things to look at laterally as well.

TGR: Does it have the right people in place to gain a full understanding of that deposit?

RC: The geologists are good. I'm not one to praise or criticize anyone. Are there smarter people out there who might be able to hone in on the gold faster? Perhaps. I don't know. I like what I see so far.

That's what early-stage exploration is all about. We don't know exactly how this is going to wash out. But as you pointed out, this is high-grade gold in Burkina Faso, which keeps me pretty curious.

TGR: Continental Gold Ltd. (CNL:TSX; CGOOF:OTCQX) owns the Buriticá project in Colombia, which has demonstrated tremendous grade. Intercepts outside of the resource model are sitting at 50 grams per ton in some drill holes. Is the gold going to be easy to recover from that type of mineralogy?

RC: It is actually operating a small mine there right now, so we already know that the gold is easy to recover. These are narrow-vein systems. It will probably use shrinkage stoping in selected areas. Of course, with mining methods like shrinkage stoping, the skill level of the workers goes up commensurately. Colombia doesn't have a history of underground mining, so it may have to move some skilled Canadians down there to train the locals. But there is enough high grade here for it to still be robust.

TGR: Continental has started work on its preliminary economic assessment at Buriticá. What are you expecting from that?

RC: It's yet to be seen, but I think we'll see something that should be more robust than a lot of other discoveries. I think we have the grade. I think we have the vertical extent and continuity. Let's wrap some real line plans around it. Let's wrap some real dilution around it and some capital costs for building a plant. Obviously, the higher the grade, the smaller the plant it needs to build, so it should have a good rate of return. I would hope for a rate of return north of 20% after tax.

TGR: Osisko has been topical lately because it missed its first-quarter estimates and had a fire in its mill. That is a low-grade project at first world costs. I think there are a lot of investors on the Street who would say they saw some of these things coming. What's your view?

RC: I don't have any issues with the grade. It's a homogeneous deposit. It's easy to mine compared to other low-grade deposits. It may have worse start-up problems, but once it's engineered its way through the mechanical crushing of the ore, it will be up to nameplate capacity. For a low-grade project, it's still robust. It's just in the early stages of operating. It has a lot of flexibility, too.

TGR: Torex Gold Resources Inc. (TXG:TSX) is developing the Morelos gold project, which is relatively close to Mexico City. Is that going to be a big cash-flow producer once it's in operation?

RC: Yes, it's one of the better discoveries of recent years. It's into its final stages of engineering and so on. I see a project that should have approximately a three-year payback after tax, so that gives it a fairly healthy IRR and a good long mine life of 11 years.

TGR: Do you believe it's a takeover target?

RC: If I were running a mining company, it would definitely be at the top of my shopping list.

TGR: Can retail investors still make money when the markets go down and sideways as they have in 2012? If so, what strategies would you suggest?

RC: That's the million-dollar question. If markets are flat to oscillating, investors can make money with short-term trading, but I don't encourage that. Like Warren Buffett, I encourage investing in good-quality businesses because just picking the right projects doesn't guarantee that you'll make money.

Let's go back to 2007. Here's a situation where you can pick the right projects and still lose money. Ron Little's Orezone Gold Corporation (ORE:TSX), between 2006 and 2008, was a $2/share stock. It had the Essakane project. Fast forward to today. Essakane is now a flagship mine of IAMGOLD Corp. (IAG:NYSE).

It fit the bill as a good project in 2007. An investor would have asked: Is this project robust? Check. Is it something a big company would want? Check. And sure enough, Orezone was actually vindicated. A big company did want it. Is it an operating mine as predicted? A robust mine? Check. But the company wasn't financed at the time and the share price went down a corkscrew because investors perceived more dilution coming.

When the crisis hit in September 2008, the market took it all the way down to $0.14/share. Then in December of that year, IAMGOLD smartly swooped in and bought it for $0.50/share. The only investors who made money on it were the ones with the stomachs of steel during the crisis. Investors could have checked off every box, but the stock market still killed it.

TGR: Thanks, Robert.

A mining and mineral process engineer by training, Robert Cohen is vice president and portfolio manager for GCIC. His experience in the mining industry is extensive and includes work as an engineer and a corporate development adviser for an international gold mining firm. Cohen completed his Bachelor of Applied Sciences in mining and mineral process engineering at the University of British Columbia in 1992. In 1998, he received his Master of Business Administration and, in 2003, Cohen received his CFA designation.

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