While timing exactly
when the rebound will happen is impossible, Marshall Auerback,
director of Pinetree Capital, believes now is the
time to pay the gold market renewed attention. In this exclusive Gold Report interview, he explains why the gold market
is more interesting than in the recent past and shares what he would do if he
were chairman of the Federal Reserve.
The Gold Report: Marshall, in a July 12, 2012, post on the Pinetree website,
you suggest that some central banks may have forward-sold their gold against
their initial positions, thereby eliminating them altogether. Can you tell us
Marshall Auerback: I have seen these central banks in action
and have met with people from several of them. They would contend it was
their obligation to maximize the yield on any of the assets they had in their
reserves, including gold.
Back when gold was in
the low $300s/ounce (oz), the Bundesbank
considered gold nuclear waste from the old gold-standard era. There are some
suggestions, based on Roger Lowenstein's work, that
the Bank of Italy lent out some of its gold to long-term capital management
as a funding source. The point is that these banks have been a major source
of flows into the market. These flows have had the same impact as de facto
sales, in that they make available gold to the forward market and help fill
the gap between supply and demand.
This is significant that
the Bank for International Settlements has talked about reclassifying gold
for commercial banks from a Tier 3 to a Tier 1 asset, which effectively means
that gold will have 100% weighting, as opposed to 50%. This reflects a change
in how the official sector views gold.
The second phenomenon is
what has been happening in the Eurozone. A fiat currency is vaporizing before
our eyes. A number of central banks hold a substantial amount of euros in
their foreign exchange reserves that may be worth nothing. Some central banks
may have gold holdings, but not as much as they claim, because of forward
sales. There is most likely a structural short in the market from the central
A decade ago, the mining
companies would have been selling forward production, and the private sector
would have had the structural short position. Today, nobody is selling
forward gold because companies are much more optimistic about the price, and
nobody wants to borrow it right now. As usual, the central banks are on the
wrong side of the trade.
TGR: Are you willing to
speculate about which central banks are shorting gold?
MA: From what I have heard,
it would not surprise me if the International Monetary Fund and the Bank of
Italy have done it. The Bank of Spain and the Bank of Portugal have sold a
lot of their gold and may be lending the rest; also the Bundesbank.
A lot of these sales
took place many years ago when the price of gold was $500–1,000/oz. My
point is that the actual holdings these banks retain are much smaller than
what appears on their balance sheets. Of course, they would want to get that
gold back to spare the embarrassment if the euro blows up. This is why I have
suggested that even if there is one more selloff in gold, the declines will
be cushioned because the central banks will be bidding to buy back what they
TGR: Could this information
create a spike in the gold price?
MA: Many thoughtful people
would see the demise of the euro as very bullish for gold, along with the
possibility of higher inflation in China and all of the qualitative easing
introduced by the Federal Reserve lately. Yet, gold has gone nowhere.
If one measures the
position of traders reports on the Comex and then
factor in that the Over the Counter market (OTC) is about 5–10 times
the size, the net long position of speculative interest in gold is huge. That
said, net positions have been reduced substantially in the past several
months—several hundred tonnes would be my
guess—and yet the price hasn't declined that much, which suggests that
there is a bid in the market. The official sector, perhaps?
I would say there could
be another 400–500 tons liquidated, which would easily be absorbed by
the central banks. Ultimately, this slow, ticking time bomb will resolve
itself with a much higher gold price.
TGR: Is Pinetree
Capital increasing its overall exposure to gold equities due to your theory?
MA: I think we have
increased it from a few years ago, but I do not know if my theory has had an
Our general feeling at Pinetree that gold is slowly being re-monetized has
driven our investment decisions. Relative to the metal, gold equities are at
such valuation extremes that it makes it a much more compelling valuation
relative to copper, iron ore or some of the base metals. But we've been
bullish on gold since the early 2000s, based on the positive supply/demand
fundamentals. All of those factors are part of the decision to increase our
TGR: How much of Pinetree's resource pie was
dedicated to gold-based equities on March 31, 2012, versus March 31, 2011?
MA: We remain at
40–45%. The percentage is much more significant than it was two years
ago. We have been bullish on gold since we started investing back in 2002.
However, it is important to point out that we are talking about shifts within
valuations relative to copper and iron ore.
TGR: How do you explain the
recent disconnect between the performance of gold and gold equities?
MA: One reason is the very
strong rally in 2010. When you have a strong rally, a digestive process seems
to follow. The market gets loaded up with paper and it takes 18–24
months to resolve before a new cycle starts. At this point, a lot of paper
has been digested and the sellers have mostly gotten out of it.
There also is increasing
resource nationalism. Mines operating in politically sensitive jurisdictions
have been derated for that reason.
In addition, gold has
been securitized. Ten years ago, we didn't have a gold exchange-traded fund
as such. A lot of people simply buy these synthetic indices instead of junior
stocks. But once you get a strong rally in the gold price, people inevitably
Finally, there are
liquidity preferences. People tend to buy the bigger stuff first and if the
rally sustains itself, as I think it will, they will move into the smaller
TGR: When do you anticipate
MA: Autumn would be my
guess, sometime in the next three or four months.
volatility will increase fairly dramatically. You might get one more sharp spike to the downside, as the result of
euro-related selloffs and the drive for dollars. These movements start with
what I call the "algo monkeys," traders
whose computer programs use algorithms to trade mechanistically, independent
of any kind of fundamental backdrop.
I expect a substantially
higher gold price four to five months from now. A year from now I would not
be surprised to see gold above $2,000/oz.
TGR: You also are a
proponent of further public-sector deficit spending to create jobs and reduce
MA: Yes, and it has nothing
to do with Keynesianism; it is Accounting 101. In any accounting period,
total income in an economy must equal total outlays, and total savings out of
income flows must equal total investment expenditures on tangible assets.
The financial balance of
any sector in the economy is simply income minus outlays or its equivalent,
savings minus investment. Any sector, whether it be the government, external,
import/export, private household or businesses sector, can run a deficit or a
surplus. In aggregate, they all have to balance, but any
one can run a deficit providing someone else is prepared to run a
If the private sector,
in the aftermath of the recession, is trying to pay down debt and
re-establish a level of savings, you have to prevent a major contractionary spiral. That means either substantially
increasing exports or running a larger government deficit. The latter
facilitates private-sector deleveraging and helps sustain economic growth by
putting a floor on demand.
Everyone who promotes
cutting back public spending is effectively advocating private-sector debt. A
private-sector debt bubble got us into this mess, not profligate government
TGR: You have accused Ben
Bernanke, chairman of the Federal Reserve, of "talking out of both sides
of his mouth." What would you be doing if you were in his shoes?
MA: The first thing I would
do is be honest. Mr. Bernanke has quite rightly warned of the dangers of the
U.S. falling off a fiscal cliff at the end of 2012 if there is no agreement
between both houses of Congress and the president to prevent $1 trillion (T)
in budget cuts, and I applaud him for that.
But then he goes on to
say, longer term, we have to pay down these bills because they are fiscally
unsustainable. I think that is totally wrong. Fiscal sustainability is a
meaningless concept. A country that issues its own currency and issues debt
in a free-floating, nonconvertible currency can always create more of its
currency to sustain its spending. Mr. Bernanke should be honest about this
but central bankers always emphasize the virtues of monetarism. There is no
evidence that their tools work. The impacts of monetary policy, as opposed to
fiscal policy, are much more diffuse. It is akin to doing surgery with a
butcher's knife rather than a scalpel.
TGR: Do you advocate
targeting certain areas of the economy versus broad-based bond buying?
MA: Bond buying via
quantitative easing accomplishes nothing. It simply constitutes an asset swap
on the Fed's balance sheet. When the Fed buys a bond, it replaces the bond
with reserves in the banking system. You are swapping something that yields
2% with something that yields 0.25% at current rates.
There is nothing
inherently inflationary about the process, as it is only spending per se that
creates inflation (and that assumes that we are at full real resource usage).
Monetary policy per se does not contribute to overall increases in aggregate
demand or spending power. There is actually an argument that it reduces it,
because as you are presumably helping borrowers, you are robbing savers and
pensioners of income by keeping rates low.
I think it is more important
to get money into the hands of regular individuals so they can spend. A lack
of spending power is creating the conditions for sluggish economic growth.
TGR: What would you do
besides being honest?
MA: I would like to see the
federal government implement more New Deal-style programs, as we had under
the Works Progress Administration and Civilian Conservation Corps. I would
have a government job guarantee (JG) program as a permanent feature of
government spending, to act as a buffer stock the way gold did under the gold
standard system. Government as employer of last resort would not be
introducing another element of intrusive bureaucracy into our economy, but
simply better utilizing the existing stock of unemployed, now dependent on
the public purse—especially the chronically long-term unemployed.
The current system we
have relies on unemployed labor and excess capacity to try to dampen wage and
price increases; however, it pays unemployed labor for not working and allows
that labor to depreciate and develop behaviors that act as a barrier to
future private sector employment. Social spending on the unemployed prevents
aggregate demand from collapsing into a depression-like state, but little is
done to enhance future growth and demand, which can be done via the JG
program by providing them with employment, greater education and higher skill
The JG program would
allow for the elimination of many existing government welfare payments for
anyone not specifically targeted for exemption, and would command greater
political legitimacy, as society places a high value on work as the means
through which individuals earn a livelihood. Minimum wage legislation would
no longer be needed, as it would be established via the JG. Labor would
welcome the safety net of a guaranteed job, and business would recognize the
benefit of a pool of available labor it could draw from at some spread to the
government wage paid to JG employees.
guaranteed public service job would be a counter-cyclical influence,
automatically increasing government employment and spending as jobs were lost
in the private sector, and decreasing government jobs and spending as the
private sector expanded. It would therefore remain a permanent feature of our
economy, in effect acting as a buffer stock to put a floor under
unemployment, while maintaining price stability whereby government offers a
fixed wage, which does not "outbid" the private sector, but simply
creates a stabilizing floor and thereby prevents deflation.
When the private sector
wants to retrench, the government would step in and offer jobs at a certain
rate for anyone willing and able to work. That would resolve this old canard
about how much unemployment is voluntary versus involuntary. The point is,
not to outbid the private sector for workers, but to keep workers trained and
working until the private sector is ready to hire. Otherwise, capacity
restraints appear much earlier among the long-term unemployed because their
skills erode substantially.
I also would introduce
revenue sharing with the states so they would not have to use the contractionary fiscal policies that they are introducing
now. This would be done on a per capita basis for all 50 states.
In addition, I would
like to see large infrastructure projects undertaken. All you have to do is
drive through New York City to realize that $1T could be spent revising that
city's infrastructure alone. That would generate growth, employment and
higher incomes, and you would have a substantially lower public deficit as a
My point is that you do
not want credit-based policies. You want policies that increase employment
TGR: Are Western economies
headed for another recession inside of two years?
MA: They could be if the
mania for fiscal austerity, particularly in Europe, continues. What is
happening in Europe is misconceived and destructive. If you are in a hole,
the first rule is to stop digging. The risk of the U.S. falling off a fiscal
cliff is reduced if Obama is re-elected.
And while it has slowed
down, I see signs that China is responding with another big ramp-up in fiscal
expenditures, through state-sponsored, fixed-investment projects that are
financed through expansion of bank credit and money.
Securities News reported that China's four biggest banks issued around
¥50 billion (B), about $8B worth in new renminbi
loans in the first half of July. That is double the same period in June. The
article also suggests that China has been speeding up infrastructure, project
approvals, spending subsidies and offering tax breaks for smaller businesses.
This is significant because some fairly pronounced domestic inflationary
pressures remain in China. Renewed money and credit expansion will increase
the rate of growth of nominal incomes, and that will go more into price
inflation, as opposed to real growth, which has been the case in the past.
TGR: With everything we have
talked about in mind, is this the time to invest in high-risk mining
MA: We are closer to an
inflationary inflection point than a lot of people realize. In addition to
what I've described in China, you have the dynamic of a possibly evaporating
euro. You have political pressures in Japan for a monetary policy that
pursues a positive inflation target. Eventually, the Fed will try another
gimmick to shift private portfolio preferences toward assets like gold.
Add all of those things
together, and you have a very gold friendly environment.
At first, this will
manifest itself in demand for the bigger companies, but many of the smaller
companies have very compelling valuations. I look at them as long-day,
Timing the entry points
is never easy, but I think we are closer to the beginning of the end of the
down cycle. The gold market is more interesting than it has been in three or
four years. Now is the time to pay it renewed attention.
TGR: As of March 31, Pinetree owned 15.5M shares of Apogee Silver Ltd. (APE:TSX.V) with about 625,000 more
shares set to expire on May 12. Why such a large position?
MA: Apogee continues to
advance its silver project in Bolivia with a feasibility study due to be
concluded by the end of 2012, which will include an updated mineral resource
estimate. It also recently acquired the Cachinal
silver property in Chile, which will provide further resource growth and
geographic diversification. The realities in terms of political risk vary on
a company by company basis and Apogee appears to have the support of local
communities, which is critical to operating in most jurisdictions.
TGR: One of Pinetree's largest positions in the precious metals space
is Gold Canyon
Resources Inc. (GCU:TSX.V). As of March 31, 2012,
you held 10.288M shares. Gold Canyon recently raised
$15M in a bought-deal offering. Raising that kind of cash is no easy task
today. Why are institutional investors so bullish on this junior?
MA: Its success raising
money indicates that Gold Canyon has the makings of a world-class deposit.
Its significant moves in the past few months have not been reflected in the
stock price because of market conditions.
The recent stepout holes and intercepts of depth show that Gold
Canyon has really only scratched the surface. There is a lot of prospectivity here. Because of prevailing current market
conditions, you get a fairly well-defined area, along with a lot of free
optionality. The initial resource of 4 million ounces (Moz)
gold equivalent is just a start. The next resource update should show
TGR: Do you believe Springpole will become a gold mine?
MA: The company has
recently added a team of mine builders to the board with the addition of Troy
Fierro and Richard Hall, who have the ability to
push the project forward. We do not foresee adverse surprises and believe the
project has an above average probability of going into production.
has positions in other small-cap precious metals companies, including Prodigy Gold Inc. (PDG:TSX.V) and Unigold Inc. (UGD:TSX.V). Could you tell us about
MA: Prodigy is a very good
example of the risk/reward of the junior gold market. The first preliminary
economic assessment (PEA) outlined a pre-tax net present value of 8% of
$709M. The company recently raised more than $40M at $0.80/share and
$0.95/share in flow-through capital, despite trading below $0.60/share. The
market cap is around $160M.
Prodigy's deposit is in
a very stable jurisdiction. I do not see the Ontario government expropriating
assets, and Wawa is as safe as any place in the world right now. It has
infrastructure nearby. The deposit is unlikely to provide any great technical
challenges. For whatever reason, it is underappreciated. A new resource and
PEA expected later this year will probably provide near-term catalysts to
give the stock good momentum. Prodigy is a standout among its peers.
Unigold has multimillion-ounce
potential at its Neita project in the Dominican
Republic, a jurisdiction that may not be as politically stable as Wawa,
Ontario, but there have never been any signs of problems. It is in a very
attractive mineral belt that hosts the 25.3 Moz
Pueblo Viejo deposit, a joint venture between Barrick
Gold Corp. (ABX:TSX; ABX:NYSE) and Goldcorp Inc. (G:TSX; GG:NYSE).
Recent drill results at
77 meters showed 3.81 grams per ton gold. It is increasingly rare to find a
combination of those grades and widths. This could be another world-class
deposit. It has a very large drill program planned and plenty of cash. Unigold can continue to drill and maintain its stepout program. I think its near-term catalysts will
lead to a significant value rerating.
TGR: But the deposit is
right on the border with Haiti. Any concerns there?
MA: Not really. Haiti
certainly has suffered many human tragedies and natural disasters, but there
has never been an indication that it is hostile to mining interests or
TGR: Market conditions have
taken a negative turn this summer. What's your advice to retail investors
MA: Patience, patience,
patience. To acquire strategic positions in this market sector, you have to
get in early and sometimes sit with your positions. It can be very
frustrating, and you cannot time these things perfectly.
Markets tend to gap up
very dramatically, sometimes on very limited volumes. We would rather be in
position when the move comes. People know that when they invest with us, they
will be getting the full, maximum leverage. We are not trying to be market
timers. We may be a little bit in the relative valuation business, in terms
of preferring one sector to another, as we do with gold right now.
When you have good macro
combined with strong valuation considerations, it is a good time to invest
over any sensible medium- to long-term timeframe.
TGR: Marshall, thank you for
your time and insights.
Capital's corporate spokesperson, Marshall Auerback is a member of Pinetree's board of directors and has some 28 years of
global experience in financial markets worldwide. He plays a key role in the
formulation and articulation of Pinetree's
investment strategy. Currently, Auerback is a
senior fellow at the Roosevelt Institute, a research associate for the Levy
Institute and a fellow for the Economists for Peace and Security.
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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: Apogee Silver Ltd., Gold Canyon Resources Inc., Prodigy Gold
Inc., Unigold Inc. and Goldcorp Inc. Streetwise
Reports does not accept stock in exchange for
services. Interviews are edited for clarity.
3) Marshall Auerback: I personally and/or my family
own shares of the following companies mentioned in this interview: Pinetree Capital. I personally and/or my family am paid by the following companies mentioned in this interview:
Pinetree Capital. I was not paid by Streetwise
Reports for participating in this interview.