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Ron Struthers has crunched the numbers and his indicators are telling
him the gold markets are poised for a big jump up. The editor of Struthers'
Resource Stock Report called a double-bottom in July and is ready
to deploy his liquid reserves so he will be ready for the next bounce. In
this exclusive interview with The Gold Report, he makes
recommendations for optimal portfolio diversification and names some junior
companies set to take off.
The Gold Report: Last November, you talked about indicators you use
to make investment decisions, mentioning the S&P 500, the PHLX
Gold/Silver Sector Index (XAU:NASDAQ), the AMEX Gold BUGS Index (HUI:NYSE)
and the TSX Venture Exchange. You recently predicted junior explorer stocks
would stay low over the summer before recovering, along with the commodity
price. What indicators are behind that, and do you foresee a dramatic rise or
a gradual slope?
Ron Struthers: We have seen a downward
correction in the market space, a deflation scare because of Europe, and that
has been the theme for some time—a battle between deflation and
inflation—while central banks print money to make up for a contraction
in money because of imploding debt and slowing economies. But everything has
corrected substantially; the senior gold stocks bottomed in May, and since then, gold has gone sideways. Gold stocks
and the S&P 500 have rallied, but we've only seen part of a potential
summer rise so far. Now the S&P 500 is at 1,400 and the high before the
correction was 1,420. There will be substantial resistance, but the S&P
500 should rise above that.
On the correction, the
S&P held its 200-day moving average and bounced off, forming pretty close
to a perfect doji star reversal pattern. That's a
strong candlestick indicator of a major bottom. With gold stocks measured by
the AMEX Gold BUGS Index, we've seen the same doji
star reversal pattern (that is a dark, down candle in a downtrend, followed
the next day by a doji cross indicating indecision
and the third day a long up or white candle); thus the predicted bottom
during the early summer. A nice rally went into mid-June, came back down in
mid-July and then bottomed close to the May bottom but above it, which makes
sense, since the doji star reversal pattern
indicates a bottom. The July lows were close enough for a double-bottom,
meaning we have a strong base to rise from.
I closely watch the old
Reuters Commodity Index, referred to as the Reuters
Meanwhile, while some
say the commodity bull market is over, we are really seeing a correction in
the continued bull market. The new CRB index has gotten nowhere close to its
2008 high, but the true measure of commodities, the CCI ,
reached well above the 2008 high of about 600. It fell back to 600 in late
2010 and went to a new high of almost 700 in 2011. The higher inflation
scenario from excess money printing is alive and well.
Short term, both
commodity indexes bottomed in May, and are moving steadily higher. The old
CCI bounced off 500; now it is at 563, and it was 566 a few weeks ago. The
bottom stands mainly because agriculture prices won't come down anytime soon,
but there has been a strong correlation between both the CRB and CCI indices
and the TSX Venture Index going back to 2008. We have seen a substantial
rally in the CRB, so the TSX Venture should soon follow, and the move will be
dramatic because the gold stocks and juniors are so depressed. They have not
seen such low valuations since the 2008–2009 bottom,
when there was severe panic in the market. We had an average gain of 155% in
2009 with gold stocks in my newsletter. I see the same opportunity now for
late 2012 and 2013.
TGR: So this could be a sharp
jump instead of a gradual increase?
RS: We could see a strong
move over a six-month period, which most would consider short term.
TGR: How can you tell the
difference between a correction and a turn toward a bear?
RS: I watch for several
things in the long term. To be termed a bear, it should break substantially
below a previous long-term low. The S&P 500 held above its 200-day moving
average, so it didn't get into bear territory. You might call gold stocks a
short-term bear market—the correction is about nine-months long.
However, we have not broken down below the early 2010 low where the
2010–2011 rally started, so long term on a 5- or 10-year chart, we have
not seen a lower low.
TGR: What impact could the
presidential election have?
RS: Elections are not a
factor. Whoever is elected will work for Wall Street and the big investment
banks. There may be short-term reactions, but we will continue our course,
with artificially low interest rates, quantitative easing and money printing
until the bond market cracks and interest rates rise. The U.S. debt is bigger
than Europe's; it just has not received the same attention.
"Gold stocks and
the S&P 500 have rallied, but we've only seen part of a potential summer
rise so far."
In addition, the Federal
Reserve will probably hold off quantitative easing (QE) until after the
election. It wants to maintain the illusion of being unbiased and doesn't
want to be seen as affecting the election. After its September meeting,
something could change; it could argue that changes won't have an effect
until after the election, but for now, it will stay the course and use the
QE3 when they really have to—after the election.
TGR: You say it is easy to
outmaneuver automatic trading systems. Does that impact the junior market,
where volumes are lower and volatility can be affected?
RS: It is surprising that
computer trading has entered the smallest juniors, even the thinly traded
nickel and dime stocks, but computer trading is taking advantage of their
volatility. With these little stocks, the programs look for ways to come
between the buy and the sell and skim pennies. It sounds like nothing, but it
is happening with thousands of stocks daily. Computer trading is also active
in the higher priced juniors with more volume, trading between $0.50 and a
few dollars a share; you will also see this with the huge amount of 100-share
trades.
Something else happens
with computers, but is attributed less often to automatic trading: that is
severely shorting the junior gold stocks. In the past, we have seen short
trading on the senior and midtier gold stocks, but
now we see a lot of shorting on junior producers, too. For instance, New Gold
Inc. (NGD:TSX; NGD:NYSE.A) has 10% of its stock
shorted, and Argonaut Gold Inc. (AR:TSX) has 14%. We never would
have imagined that in the past, so I am closely watching the short positions.
Strangely, most of the short positions came at the bottom of the market in
May /June, so it won't take much to put them underwater, and short covering
could add fuel to a rally.
There has been a big
increase in computer trading; there are more professional traders in the
market and fewer retail investors. There are also more exchange-traded funds
that hedge in a lot of these stocks. With the extensive shorting, we are
either seeing intervention in the gold stocks or the reflection of strong
beliefs that the gold bull market is over. However, in the latter case, they
will be proven wrong, and that is why short covering could be substantial.
TGR: Last year you were
liquidating your portfolio, based in part on the jump in the price in silver,
and by extension, gold. Silver is now at $28/ounce (oz)
and gold is still around $1,600/oz. How are you adjusting your portfolio to
fit this new reality?
RS: Gold and silver often
rally together and both are in short physical supply and highly
leveraged—the same ounce of gold or silver has been sold 50–100
times. We are in a currency war. Countries are fighting to keep the
fast-moving money in their currency to prop up their huge debt loads; gold
and silver are competing currencies.
The U.S. has intervened
to keep interest rates low, trying to keep the system afloat and intervening
to keep the stock market up, but commodities and gold lower. Europe is doing
the same thing. Meanwhile, a lot of Eastern countries, with huge U.S. dollar
and euro reserves, are trying to diversify out of these debt-ridden
currencies into other currencies, including gold. Every month we see news of
mostly Eastern central banks—including India, China, Russia, and Korea,
etc.—buying gold. Physical gold is in short supply, but they know the
price is being held down with intervention in the paper commodities market.
We are seeing a continuous flow of gold from the West to the East, the same
thing that sparked the big rally in the late 1970s to 1980. This will happen
again; it just depends on when the West does not want to give up any more physical
gold to the East, at least at these prices. In that case, we will soon see
gold move easily above $2,000/oz, taking silver
higher with it.
TGR: How high could silver
go?
RS: It will hit resistance
at $50/oz again, but eventually it will break
through. If that does not happen on this next rally, it will on the next one.
We are speaking in dollar-inflated terms; $50/oz
was the high from 1980, and we still are not above that, but gold has gone up
well above the 1980 high of about $850/oz.
TGR: What percentage of your
portfolio do you have in cash versus stocks, and juniors versus mid and large
caps?
RS: It has been about the
same since 2008, adjusted a bit here and there, but we keep about 20% in
physical gold and silver, keep cash up around 30% because of uncertain times,
and then keep about another 15–20% in good dividend stocks. With the
low interest rates, some good dividend interest is great. These dividend
companies have served as pillars of strength in our portfolio during this
period. I devised what I call a Millennium index of dividend stocks we use to
invest here. The last 30% or so we invest in gold stocks, mining and energy
stocks.
TGR: Are you looking mainly
at gold juniors or producers?
RS: I have a mixture. I have
about 20% in the senior and midtier golds. There is a lot of leverage in the junior producers
and advanced juniors, so I have about 25% in small and emerging producers and
another 20% in advanced. We put about 15% into the small exploration plays
that seem promising and 20% into some of the energy stocks—I call them
energy and cleantech, but they can involve some of
the other areas, like graphite.
TGR: You talked about the
leverage available in the juniors—what are some of the junior companies
that could be successful in the macroeconomic environment we've just
discussed?
RS: Right now I'm looking
at the juniors with a good share structure that can finance when the market
improves, ones with good gold deposits and resources and ample cash, and
there's a lot of potential takeovers as well. I'm also looking at ones moving
into production. Urastar Gold Corp. (URS:TSX.V;
URNRF:OTCQX) is in play. The company
is hitting good drill results. Urastar is
surrounded by Alamos Gold Inc. (AGI:TSX) and
Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE), and both companies would like
the ground to add to their deposits.
"Right now I'm
looking at the juniors with a good share structure that can finance when the
market improves."
TGR: So you like Urastar because it is a takeover candidate?
RS: Yes. Even though it
really does not have a resource yet, a lot of these large companies are
loaded with cash, and the juniors are priced so cheaply that you will see
mergers and buyouts just based on strategic landholdings.
TGR: Urastar is trading at about
$0.40/share. Do you see any takeover bids going much higher than that?
RS: It wouldn't be much
higher in today's market, maybe $0.45–0.50/share. And potentially you
could have two companies go for that. However, I couldn't see it going much
higher than $0.55–0.60/share, given where it is in exploration.
TGR: What other companies do
you like?
RS: Canaco Resources Inc. (CAN:TSX.V) has a million-ounce gold
resource and a large land position it hasn't explored yet. The company was
trading under cash value at $95 million (M) at the end of May. This allows it
to compete and buy out some of the other cheap juniors, too.
Roxgold
Inc. (ROG:TSX.V) has a lot of cash on
hand. The company is getting good drill results and is still going on what
will be a good-sized and high grade deposit in West Africa.
TGR: Roxgold is down quite a bit
from where it was even a month ago. Do you see any catalysts that would take
it higher?
RS: There has been a bit of
a positioning battle there with current shareholders—perhaps wait on it a bit longer. However, that seems to be concluding,
as it sorts itself out with a good outcome, getting some new people, and then
getting back to business. Roxgold has a good gold
discovery, and it seems there are always battles when there's a good gold
discovery. Thus, in one sense the battle is a good sign.
TGR: It has a large number
of drill results expected in the next couple of months, correct?
RS: Yes; the company still
has six drill rigs turning—it is pretty actively drilling. In time, we
should see a continuous flow of drill news and updated resource numbers.
Levon
Resources Ltd. (LVN:TSX.V; L09:FSE; LVNVF:OTC) has a large polymetallic discovery in Mexico. It's up to 360 million
ounces (Moz) silver and 1 Moz
gold with lead and zinc. The company has lots of cash as well, with $56M. Levon is another company that fits the criteria.
A new producer is Avino Silver & Gold Mines Ltd. (ASM:TSX.V; ASM:NYSE.A; GV6:FSE). The company is
restarting silver production at its Avino mine in
Mexico. It also has ample cash and soon will have the cash flow and earnings
from mining. The mine was profitable in the past at low metal prices. While
costs are higher now, it has electrical grid power for the first time, the grid power to the mine should help costs.
A cheaper one is Majescor Resources Inc. (MJX:TSX.V), with a substantial
copper-gold-silver discovery in Haiti. Haiti is not well known for
exploration, but it's well known enough that the company's ground is
surrounded by Newmont Mining Corp. (NEM:NYSE) and it
has a large exploration budget there as well.
TGR: Could Majescor be a takeover target as well?
RS: Eventually Newmont could
take over, unless Majescor can make a large enough
discovery to bring another major in. But Majescor
is really on the same trend as Barrick Gold Corp.
(ABX:TSX; ABX:NYSE), which made a discovery across
the border at Pueblo Viejo in the Dominican Republic. That is more than 25 Moz gold, so that is the potential in this mineral belt
shared by the Dominican and Haiti. It is getting good results.
"Many
exchange-traded funds and gold are so leveraged that I am worried a lot of
people have ended up paying for the same gold ounce."
Another cheap one is Zonte Metals Inc. (ZON:TSX.V). It is under $0.10/share,
but only 20 million shares out, so the market cap is only $1–2M. The
company has strong management experience at Linear Gold Corp. (LRR:TSX), Paramount Gold and Silver Corp. (PZG:TSX;
PZG:NYSE.A) and Evolving Gold Corp. (EVG:TSX;
EVOGF:OTCQX; EV7:FSE). Interestingly, Zonte has discovered Carlin-style gold mineralization in
Newfoundland hosted in a porous shale-type rock. If future drilling proves a
deposit, Zonte won't only have a deposit; its large
land position means owning a whole Carlin-type trend. I also expect Zonte to take advantage of this market and make some
acquisitions of projects or properties, not necessarily other companies.
Because of the market situation, vendors are trying to sell all kinds of
properties and projects, so it is a very good time for companies to acquire
these. Companies can get far better deals for their money and shares than
they could six to nine months ago.
TGR: They just have to have
the money to buy them.
RS: Prices have come down so
much, companies don't need a lot of money. They can
set up deals where they put a little bit down up front and much more down the
road if they find something. There are plenty of good projects out there that
are at bargain prices.
TGR: Do you like any
companies working domestically?
RS: I follow a number in
Nevada, definitely a well-known jurisdiction. Asher Resources Corp. (ACN:TSX.V), a junior, has a really
nice exploration property there called the King project, with a well-defined
gold zone on surface and with old adits.
Surprisingly it has never seen a drill. Meadow Bay
Gold Corp. (MAY:TSX.V; MAYGF:OTCQX) has quite a good
discovery at the old Atlanta mine in Nevada, with over 500,000 ounces now and
that can easily be multiplied with more drilling. I also follow Rye Patch Gold Corp. (RPM:TSX.V; RPMGF:OTCQX) in Nevada; now it is up
to 2–3 Moz. It was able to snatch a bunch of claims from Coeur
d'Alene's Rochester mine last year that Coeur let lapse by mistake, so there
are plenty of good domestic companies. Another one is
Otis Gold Corp.'s (OOO:TSX; OGLDF:OTCBB) Kilgore project in
Idaho. I think that its stock is beaten down to a dime, and it has a good
gold resource close to 1 Moz now.
TGR: So what advice would you
give an investor who wonders what to do going into the fall?
RS: Always diversify.
Returning to my portfolio weightings: keep a good
cash cushion because if you don't have cash, you don't want to sell at
potentially depressed prices to raise it. Keep 20% in physical gold and
silver—you know you have it in your possession—or something like
the Central Fund of Canada (CEF:NYSE; CEF.U:TSX), which has been around a
while and is audited, so you know the gold it is actually there. Many
exchange-traded funds and gold are so leveraged that I am worried a lot of
people have ended up paying for the same gold ounce, and you don't want to be
one of them if the financial system falls apart further.
Dividend stocks are also
a good idea; it is nice to have income coming into your portfolio. The rest
should be in some gold stocks, the juniors, but again—diversify. It is
good to own 10–15 stocks in that sector, since it can be volatile,
especially on the exploration side. You can lose money in some, but if you
hit it big in just one or two others, your portfolio's still up
substantially.
TGR: Thanks for your
insights.
Ron Struthers, editor of Struthers' Resource
Stock Report, retired at an early age from IBM, where he spent many years
in customer service and as a systems, business and inventory analyst. He
began the Struthers' Resource/Tech Stock Report almost 20 years ago.
The report covers senior and junior companies with ample trading liquidity.
Since 2000, $1,000 invested in Struthers' Model Portfolio ended 2011 at
$9,244, $1,000 in Struthers Newsletter Stocks ended at $22,270 and $1,000 in Struther's Millennium Index, started in 2003, was worth
$3,884 at the end of 2011.
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DISCLOSURE:
1) JT Long of The Gold Report conducted this interview. She personally
and/or her 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., Urastar Gold
Corp., Roxgold Inc., Majescor
Resources Inc., Evolving Gold Corp. and Rye Patch Gold Corp. Streetwise
Reports does not accept stock in exchange for
services. Interviews are edited for clarity.
3) Ron Struthers: I personally and/or my family own shares of the following
companies mentioned in this interview: Levon
Resources Ltd., Avino Silver & Gold Mines Ltd.,
Zonte Metals Inc., Asher Resources Corp., Urastar Gold Corp., Otis Gold Corp, Majescor
Resources Inc. and New Gold Inc. 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
this interview.
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