Have you ever actually held a bar of gold in your hands? Byron King,
editor of the Outstanding Investments and Energy & Scarcity Investor
newsletters, suggests that you do. But becoming a smart investor shouldn't
just be about physical gold, King says. He also encourages investors to use
investments in gold mining juniors to increase their exposure to precious
metals. Read on in this Gold Report interview to find out about the handful of
companies he's expecting to shake up the market in 2013.
Report: Byron, many gold investors spent the
early part of December exiting their long positions in gold. Is 2013 the year
the gold bull market ends?
King: I don't think the gold bull market
will end any time soon. I believe that much of the recent gold exit has been
a reaction to the impending tax changes on Jan. 1, when tax rates will go up
unless there is Congressional action. I don't think very many investors are
selling physical gold or silver. I do think people are selling paper and
electronic gold to lock in gains and pay capital gains at the lower 2012 tax
rate. It is tax-driven selling, not a reflection that the world's monetary or
economic system is getting well.
should investors handle the tax-loss selling season?
have to make their own decisions. If investors own a physical precious metal,
the last thing they ought to do is sell out. Really, never sell actual gold
or silver if you can avoid it. With the paper gold, or electronic gold, or
gold shares? It depends on the investor's situation. If you have large gains,
perhaps you want to lock in the gains, sell and pay a 15% capital gains rate
in 2012, versus selling it after Jan. 1 and paying a higher rate. If that's
your case, then sell now and buy it all back next year. Everyone is
should investors position themselves in gold for 2013 and beyond?
now, an investor ought to have cash, which is dry gunpowder, as well as
physical precious metals in one's possession. I don't mean own a certificate,
own a call on gold or gold in somebody else's storage locker. I mean, own the
should that portion be approximately?
BK: That's a
matter of individual taste. My view is 10–15% of your portfolio ought
to be in precious metals. Some people say 5%. Some people say 25%. The
University of Texas at Austin, which has a very large endowment, owns over
663,000 ounces (oz) of physical gold. Kyle Bass, a
wealthy Texas resource investor, convinced the board of directors of the
endowment to put 5% of the endowment into physical gold, and more
importantly, to take delivery.
TGR: You say
that the sector is poised for a rebound. Which part of the sector is most
likely to rebound first?
producers are refocusing and re-emphasizing capital discipline. In the last 10
years, as gold went from $300/oz to $1,700/oz, many gold mining companies—most,
really—added new ounces for the sake of adding ounces. They expanded
their resource base and added reserves without any real regard to the
profitability of each ounce. The culmination of that came with Barrick Gold Corp. (ABX:TSX;
ABX:NYSE) this summer. The company has all that gold, and not all that much
profit. So Barrick fired its chief executive
officer and brought in a different management team. The board of directors
and the new management announced a re-emphasis on the profitability of each
new ounce that it adds.
don't think the gold bull market will end any time soon."
The Barrick situation was a reflection of how the price of
gold went up six times in the last 10 years. In general, the share price of
large gold miners did not have that same bounce.
the biggest issue with gold mining companies right now is steadily creeping
costs. Some analysts believe that mining companies aren't watching their
costs as closely as they could be. Do you believe that some companies have
better control of that than others?
BK: Yes. For
example, take Gold One International Ltd. (GDO:ASX; GDO:JSE; GLDZY:OTCQX), a
wonderfully run company in South Africa. It's had labor issues and strikes.
It had to fire workers, just like a lot of other companies. However, its cost
control is phenomenal.
down into the Modder East mine near Johannesburg in October. It's one of the
newest mines in South Africa. It's an absolute model of smart design and
high-end safety. In terms of cost control, Gold One management measures everything.
Down at the rock face, the miners sweep up the last bit of dust off the
bottom of the mining panel. Gold One even prints photocopies on both sides of
the paper. It is as cost conscious as any company I've seen in a long time.
mining is a tough, expensive environment. Energy costs are going up, in South
Africa and everywhere else. Oil costs have gone up. Labor wants a larger
slice of the pie. The cost for concrete, steel, machinery,
equipment—you name it, everything is more expensive. Cost growth is a
TGR: Is there
solution is really good managers building really good relations with really
good miners. At the operational level, you need to keep everybody productive
and working as hard as they can. The externalities—oil, cement,
steel—are things that companies can't control and have to design, build
or work around.
sell actual gold or silver if you can avoid it."
news is that we live in an era of money creation and inflation. The good news
is that the price of gold will still keep going up. The price of gold may, on
occasion, be manipulated downward by the little gnomes of Zurich, to use an
old expression from the 1960s, but long-term gold prices are destined to go
up. That brings me back to that point I made earlier: Investors who do not
own physical gold are truly shortchanging their own future.
TGR: Can you
forecast a trading range for gold in 2013?
could hit $2,500/oz during 2013.
you're a bull.
BK: I'm a
bull. But I like to think I'm a realistic, informed bull. For example, have
you seen reports on how Iran is trading oil with Turkey? Iran has to work
around economic sanctions on its banking system. Iran can't use SWIFT
anymore—the Society for Worldwide Interbank Financial
Telecommunication. So Iran is out of the system for currency trades. What can
there's massive gold trade between Iran and Turkey for oil. It's in the range
of $15 billion/year. Just that little vignette illustrates the point that,
whether the monetarists of the world like it or not, gold retains its
usefulness as a means of lubricating transactions.
TGR: You wrote
in a recent edition of Energy & Scarcity Investor, "We've
also followed gold miners like Carlisle
Goldfields Ltd. (CGJ:TSX; CGJCF:OTCQX), Mega Precious Metals Inc.
(MGP:TSX.V) and others. The gold miners have been
drilling core samples, growing their resource base and adding reserves, which
is the idea in the junior space. Eventually, with the gold miners, the
reserve and resource numbers will be big enough to attract interest from
third parties interested in a takeover. Until then, we watch and wait."
Is that your thesis? Is it all about patience?
BK: You named
two of my favorite small companies. Carlisle and Mega are very similar. They
are both located in Manitoba, Canada, in the classic, old Precambrian
greenstone-type regions. Both companies have been working in areas that have
been historically picked over. Carlisle is working in an area that was mined
for copper-nickel back in the 1960s. Mega is working in an area that has been
explored by a multitude of companies during the past 25 years.
should look at gold on numerous different levels of personal wealth
protection, growing wealth over time and diversifying a portfolio."
companies are growing their resource bases very nicely from the 2 million
ounce range. Mega and Carlisle are among the cheapest gold miners on the
whole stock market by share value per ounce. They actually have gold. I have
been to both places and seen the cores. The assay numbers are very
respectable 2–4 grams per ton with some spikes into much higher numbers
in certain sweet spots and zones.
both companies, you've got a solid, safe mining jurisdiction, plus great
geology. There's plenty of legacy exploration. Carlisle and Mega are both
growing their numbers. One of the larger miners or independents, even a
biggie, will absolutely have to take a hard look at them. That is the thesis.
TGR: Last time
we talked, you told us about Reservoir
Minerals Inc. (RMC:TSX.V). What is
new with that company?
Minerals is a Canadian company, operating in Serbia. It was spun out of
Reservoir Capital Corp. (REO:TSX.V). Reservoir Minerals
has a play beneath surface deposits, a couple of miles down the road from
what was formerly the largest copper deposit in Europe, Bor,
in eastern Serbia. Bor is in the Carpathian Alpine
mineral district, where people have been mining since the days of the Roman
teamed up with mining giant Freeport-McMoRan Copper & Gold Inc. (FCX:NYSE) and started drilling holes. The first couple of
holes were not so great. Then, about a year ago, it pulled out a core that
was in the range of 15% copper. Companies are mining copper at fractions of a
percent grade, so 15% copper, including a rather scarce mineral called covellite, is really something.
the size of the resource?
Minerals should have a number within a year or so. Until the news of that
first big core, Reservoir Minerals was trading the rest of the pack in the
junior range, sort of floating along. After the high-grade news, shares went
from $0.50/share to about $1.50. Then the follow-up news came out and it went
to above $3/share, although it's trading down with year-end tax-loss selling.
A year ago, investors were looking at Reservoir and thinking it was just
another copper-mining wannabe. Now it's up by a factor of six and it's
partnered up with mining giant.
TGR: Is there
a gold sweetener in that?
BK: There are
quantities of gold at that project. Reservoir Minerals also has other
localities in Serbia, and it has expanded its footprint on the Gold Coast of
West Africa. Reservoir Minerals is a fabulous copper play, and it's quite
clear that the overall mineralization holds gold and silver.
seen some friendly mergers and takeovers in the gold space recently with Osisko Mining Corp. (OSK:TSX) and Queenston
Mining Inc. (QMI:TSX); PMI Gold Corp. (PMV:TSX.V; PVM:ASX; PN3N:FSE) and
Keegan Resources Inc. (KGN:TSX; KGN:NYSE.A); Andina
Minerals Inc. (ADM:TSX.V) and Hochschild Mining Plc (LSE:HOC); and Argonaut
Gold Inc. (AR:TSX) and Prodigy Gold Inc. (PDG:TSX.V). Is
this a trend?
BK: After the
year-long share-price meltdown in the Canadian junior space, a lot of
companies have their backs against the wall. A good many gold miners, and other resource companies as well, face
depleted cash resources. Plus, it's virtually impossible to raise new money
without massive dilution. So stronger companies can pick up great assets for
TGR: In a lot
of these cases, they were neighboring companies.
Consolidating plays, consolidating ideas, regional trends or adjacent mineral
claims is part of it. When adjacent companies come together, they can reduce
TGR: Is that
an investable theme in the gold space? Should investors look for companies
that are operating in the vicinity of each other, one with significant cash
on hand and access to capital and one that perhaps has a promising deposit
but is a little low on cash?
BK: Yes. It
goes back to the game of Monopoly, where you want to own all the same
properties with the same colors so when somebody lands on it, they have to
pay you even more rent for the house or the hotel that you built there.
TGR: What are
some other junior gold plays you're following, Byron?
BK: I've kept
an eye on NOVAGOLD (NG:TSX;
NG:NYSE.MKT) in Alaska. NOVAGOLD spun out the
Ambler project into NovaCopper Inc. (NCQ:TSX.V; NCQ:NYSE.MKT). It's
been a longer, harder slog than a lot of people thought to get these two
projects going in Alaska. It can be very frustrating, but they are great
assets, run by very solid management. NovaGold and NovaCopper are two nice plays.
an eye on Argentex Mining Corporation (ATX:TSX.V; AGXMF:OTCBB) in
Argentina. The company has had mixed visibility. It pops up, then goes out of
sight, and then pops up again. However, I've always liked one main key play,
with Argentex: It controls a deposit that's rich in
indium. Indium is an absolutely critical electronic metal. It is almost
always associated with zinc deposits. The Argentex
deposit at Pinguino is rich in sphalerite
with a high concentration of indium. It may be among the highest
concentrations in the world. From an electronic metals and technology metals
standpoint, Argentex is a company to keep watching.
indium is basically a sweetener in that play. It's mostly a silver-gold
the latest viewpoint. As Argentex worked up the
base metals, and the associated indium play, it drilled into serious silver
and gold assays. How lucky can you get? So yes, I know what you mean about
the gold and silver side of Argentex, but then
again the world is filled with interesting gold and silver plays. Indium?
It's quite uncommon. Indium distinguishes Argentex.
Indium makes the Pinguino play that much more
TGR: Argentex has multiple projects. It's not all about Pinguino. It's currently trading at about $0.21/share.
yes, there are several plays with Argentex. But in
my view, a small, developing, pre-operational, pre-revenue company, which is
burning cash, has to decide how much it wants to confuse investors. What are
you? Gold? Silver? Zinc? Indium? Pick something, and be good at it. The
"flavor of the month" club is a vanishing business concept in this
market. Get with a program, and stick with it. Then, as we've seen with other
players, a company can double or triple its stock price inside of a couple of
days with the right drill hole.
your advice to precious metals investors as we are heading into 2013?
need to own precious metals on several different levels. Physical metal is
wealth protection and wealth preservation over time. Yes, metal prices go up,
prices go down. Investors need to understand the concept that gold is money.
Metal will hold on to its purchasing power and its value over time. There are
historical reasons to own gold as a form of money stretching back over the
last 5,000 years at least. Investors have to look at it at that level.
also part of prudent diversification. When you invest in most financial
instruments, you're investing in somebody else's liabilities. If you put your
cash in the bank, that's not your cash anymore. It's ones and zeros down at
the bank. You won't get the same $20 bill back that you put in. So even a
bank deposit is a liability, so to speak.
bonds are liabilities. Electronic and paper gold are liabilities. However, if
you own physical gold, then you control that asset. Obviously, you have to
protect the asset. You don't want to just leave the stuff lying around. But
it's your asset, and it retains value over time.
should look at gold on numerous different levels of personal wealth
protection, growing wealth over time and diversifying a portfolio. In a
sense, just simply the act of owning gold, improves your IQ as an investor
because once you have gold in your hands, you will never touch paper money
quite the same way. If you haven't ever held a gold bar, or gold coins, in
your hand? Well, maybe you don't know what I mean. I suggest you do it.
There's no fever like gold fever.
TGR: Thanks for
Click here for a free copy of Bryon King's award-winning Outstanding
King's ideas for investing in the Critical Metals sector here.
Byron King writes
for Agora Financial's Daily Resource Hunter. He
edits two newsletters: Energy & Scarcity Investor and Outstanding
Investments. He studied geology and graduated with honors from Harvard
University, and holds advanced degrees from the University of Pittsburgh
School of Law and the U.S. Naval War College. He has advised the U.S.
Department of Defense on national energy policy.
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1) Brian Sylvester of The Gold Report conducted this interview. He
personally and/or his family own shares of the following companies mentioned
in this interview: None.
2) The following companies mentioned in the interview are sponsors of The
Gold Report: Argonaut Gold Inc., NOVAGOLD and Argentex
Mining Corp. Streetwise Reports does not accept
stock in exchange for services. Interviews are edited for clarity.
3) Byron King: I personally and/or my family own shares of the following
companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this
interview: None. I was not paid by Streetwise Reports for participating in