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Debt, not
the fiscal cliff, is what concerns Jason Hamlin, publisher of the Gold
Stock Bull newsletter, and if his prediction of a split in the EU comes
to pass, it will bolster the case for gold equities. In this Gold Report interview
Hamlin shares his preference for royalty streamers and prospect generators in
the gold space and explains his attraction to graphite.
Companies
Mentioned :Almaden Minerals Ltd. : Energizer Resources Inc. : Focus Graphite Inc. : Sandstorm Gold Ltd. :
Silver Wheaton Corp.
TGR: Jason, you
recently told your Gold Stock Bull readers that you had sold some
equities. What were your reasons for selling?
Jason
Hamlin: At the time, we were nearly fully
allocated and decided to move to a position of roughly 20% cash. Even though
this is a high seasonal period for precious metals, we sold a couple of
underperformers to take advantage of any potential year-end selloff driven by
concerns about the fiscal cliff and its impact on economic growth. There are
also year-end opportunities for tax-loss selling and we want to have some dry
powder for bargains that may materialize over the next few months in quality
resource stocks.
TGR: Do you
believe investors should reduce risk and take a more conservative approach
until we know what are the repercussions of the fiscal
cliff?
JH: I do not.
It is sensible to always have some cash available for a selloff, but I do not
view the fiscal cliff as some Armageddon-type event like other analysts. I
think the politicians will come to a resolution before things become too
explosive, but we should never discount their ineptitude.
For me,
the true issue here is debt, not the fiscal cliff. Debt is the root cause of
nearly all of our economic and social issues.
"I
think the official, inflation-adjusted high for gold of $2,400/oz will be taken out within the next 12 months."
As it is a
mathematic impossibility to ever pay off all of the outstanding debt, neither
tax increases nor austerity will solve the debt crisis. As all money is
created out of debt and the interest owed back does not exist in the system,
the only workable solution is liquidating or forgiving the debt. As
controversial as that might sound, one only needs to look up the term
"debt jubilee" to see how often it has been used throughout history
to clear the slate and allow for a fresh start. So, without getting too
detailed, the fiscal cliff in the U.S., debt crisis in Europe, student loan
crisis, home mortgage crisis and every other monetary crisis can be tied back
to the fact that our monetary system at its root is unsustainable.
TGR: Do you
have a calculation that illustrates how difficult that would be?
JH: One way to
view that is to look at the percentage of the U.S. budget now being put
toward interest on the debt and how it has grown over time. As long as that
percentage keeps increasing, it means less and less money is available to
spend on legitimate needs and to direct toward growing and driving the
economy. This expanding debt burden stifles any type of economic growth that
might otherwise be possible. Until our leaders are honest about our debt
predicament, balance the budget to stop the bleeding and face the necessity
of massive debt forgiveness, my forecast is for continued slow economic
growth with the potential for contraction in the near future.
TGR: What are
the threats to the average retail investor, especially in the precious metals
space?
JH: I believe
that another banking crisis could be on the horizon, driven by the large
amounts of toxic derivatives and potential revaluation of assets that could
render many big banks insolvent. The same kind of threat we saw in the
2008/2009 crisis is still hiding under the surface, as it was only papered
over to buy time, rather than addressing the core issues. This could lead to
a sell-off in all assets including gold and another rush to the perceived
safety of dollars. However, I predict that the deteriorating faith in fiat
currencies will translate into a very short dumping of true safe-haven assets
such as gold and even quicker rebound that we witnessed following the last
financial crisis. Given this outlook, I think it is wise to hold through such
corrections and keep cash available to take advantage of the panic selling
that will occur if such a crisis materializes.
TGR: While we
are talking about the future, do you have any other predictions for 2013?
JH: On a
positive note, I think the world will survive the end of the Mayan calendar.
Seriously,
I think the euro will fall apart when one or more countries leave. The strong
countries will only support the weaker, over-indebted countries for so long
before realizing that their sovereignty is more important than the European
Union. I think dissolution is absolutely the right course to take, as the
concept of the European Union was flawed from the start.
TGR: But the
European Central Bank (ECB) has vowed to do everything in its power to
stabilize and keep the euro together. Can or should the ECB stave off
disintegration at least until the end of 2013?
JH: I think
the ECB will try its best, as centralized banking has much to gain from the
EU staying together. This attempt will surely involve more bailouts, stimulus
and money printing, which will be bullish for precious metals. Ultimately, I
think the attempts will fail and we could see a split of the euro as early as
next year.
The ECB
has constraints that the U.S. Federal Reserve, operating in just one country
and with the world reserve currency, does not have. The ECB cannot employ the
same bag of tricks as Ben Bernanke and the Fed, so I think it has fewer ways
to kick the can down the road. This is why we are seeing the crisis escalate
first in Europe, but it will eventually come to the shores of America as we
witness a loss of faith in the U.S. dollar as world reserve currency.
TGR: That makes
a nice transition into gold. Precious metal investor and Cranberry Capital
CEO Paul van Eeden recently said that gold
was overvalued. Do you agree?
JH: Mr. van Eeden correctly pointed out that the problem in the U.S.
is not inflation, but debt. And I agree with him that the predictions for
imminent hyperinflation are overblown. But that is where our agreement ends.
"Precious
metals equities are undervalued right now relative to bullion."
I think
his methodology for calculating money supply and gold's true value is flawed
in that he incorporates worldwide gold supply, but compares it only to the
U.S. dollar. Demand is strong worldwide and gold has been making new highs in
several currencies, not just the dollar.
I also
disagree with his notion that the Fed will be able to easily sell assets back
into the market to control the inflation that is likely to occur. I'm not
sure there would be many buyers of such low yielding bonds in an inflationary
environment. The Fed is already forced to buy over 50% of bonds the
government auctions during the current environment of relatively low
inflation.
Mr. van Eeden has been calling gold overvalued for years now. I
think he is a bright analyst and I enjoyed his commentary on gold earlier in
this bull market, but he has now joined the ranks of a few other gold bears who have been consistently wrong about the gold price.
They will eventually be correct about gold being overvalued, but I suspect it
will be a number of years and a few thousand dollars higher before that happens.
That being said, I could see some sell-off in gold occurring as a knee-jerk
reaction by leveraged investors, but interest rates would have to rise
substantially above the true rate of inflation for any serious or lasting
impact. Such a move would sink the stock market, which is not something the
politicians or central planners would allow. They would prefer to print more
money, debase the currency and present the illusion of continued prosperity
rather than take their medicine. I do not see interest rates rising any time
soon.
The only
way to deal with a banking system that is so overleveraged and a government
so burdened with debt is to allow the free market to reprice
the debt—to reprice housing and equities to
their true free market value. However, that would cause the banking
system—and possibly the entire world economy—to collapse.
The
alternative is to fire up the printing presses, inflate away the debt and
hope that the bad loans will once again become solvent. If you study history,
you are likely to forecast that the government will choose this option over a
deflationary collapse, which will continue to push gold higher in dollar
terms.
More
broadly speaking, if you take two forms of money valued relative to each
other (demand being somewhat constant), the one that increases in quantity
faster will lose value against the other. Growth in the gold supply is
relatively flat, about 1.5% annual growth. The growth of the supply of almost
all fiat currencies ranges from 8–10% on average. To me, that says that
gold priced in dollars or any other currency being debased will go up in
value relative to that currency.
The other
factor to consider is velocity of money, which has been low and has held
inflation in check thus far. But in light of quantitative easing (QE) to
infinity, which is essentially what QE3 is, recent improvements in housing
and the stock market, and some proposed legislative changes to get banks lending, we might see this change in 2013. If
velocity picks up, we could see inflationary forces start to take hold. If
just a small amount of all of the new money created over the past five years
were to begin flowing through the economy, the impact could be significant.
TGR: You rely
on technical charts for your advice to your readers. What do your technical
charts tell you gold will do in 2013?
JH: I just ran
this exercise for my subscribers, and came up with a chart showing the
minimum target price of gold at $2,200 an ounce (oz)
and over $3,000/oz on the high end by the end of
2013. These prices represent gains in the 35–75% range from the current
price. It is a much more aggressive annual return than I would usually
forecast—much higher than the average annual rate over the past 10
years.
 
However,
precious metals have been consolidating for well over a year. The chart has
an incredible amount of pent-up upside potential for 2013. Plus, the gold
price is now bouncing around the bottom line of its trend channel. A failure
to push higher and break $2,200/oz by the end of
2013 would mean that gold has fallen out of its long-term trend channel and
signal the end of the bull market. I put the likelihood of that outcome at
less than 5%. Thus, I think the official, inflation-adjusted high of $2,400/oz will be taken out within the next 12 months.
TGR: Given that
prediction, should investors be buying gold, gold equities or both?
JH: I recently
published an article on this topic and the answer is: It depends. From 2001
to 2005, gold was up roughly 92% and gold stocks up 648%. In this period you
would have seen seven times greater returns investing in gold stocks.
"I
view technical analysis as just another data point for reference, not as a
panacea for forecasting price movements."
From 2006
to today, the NYSE Arca Gold BUGS Index (HUI) of
gold stocks advanced by about 39% while gold itself is up 232%. That equals about
a six times greater return for physical gold than mining shares.
However,
if you combine both periods and look at the entirety of the current bull
market, gold stocks have been the better investment.
From 2001 through Nov. 12, 2012, physical gold has appreciated by 537%.
However, gold stocks have gone up nearly twice the rate of gold for a gain of
936%. This is the leverage that seasoned investors remember and it drives our
decision to allocate a significant portion of our portfolio to mining stocks.
That said, I believe it is best to own both bullion
and mining shares, because they serve different purposes.
Just from
the start of August through mid-November, the gold price advanced 8%. Gold
stocks were up 18%. That is leverage of roughly 2.4 times. It is hard to say
if that will continue, but it is a positive sign for investors in mining
stocks.
TGR: When you
look at technical charts for precious metals equities, what do you look for,
other than an upward trend?
JH: I view
technical analysis as just another data point for reference, not as a panacea
for forecasting price movements. In markets that are as manipulated as ours,
where large firms tilt the level playing field via high-frequency trading and
collocation, and banks use their leverage to push prices, I take technical
analysis with a large grain of salt.
That being
said, I look for the usual trend channels, support and resistance indicators,
volume levels, momentum indicators, (Fibonacci) retracements, whether the
stock is making lower lows or higher highs. I couple these insights with the
timing of fundamental developments for miners: drill results, resource
updates, upcoming preliminary economic assessments (PEAs) or feasibility
studies to try to time our entry and exit points on trading positions. Our
model portfolio also contains long-term holds or core positions that we do
not trade.
TGR: What is
your investment thesis for precious metals equities?
JH: The
equities are undervalued right now relative to bullion. A lot of that has to
do with distrust of the stock market and of Wall Street in general, after all
of the fraud and failures in the past years. But if the market holds up for a
while longer and current trends continue, I think we will see mining stocks
continue to outperform gold.
TGR: Which
precious metals equities are you telling your readers about?
JH: I have
been an early advocate of the streaming royalty model in the mining sector. Silver Wheaton Corp. (SLW:TSX; SLW:NYSE) pioneered
it and some of its management broke off to start up a similar company in Sandstorm Gold Ltd. (SSL:TSX.V). I first
bought Sandstorm at around $0.50/share; it now trades around $13/share and is
up nearly 200% since our last purchase.
Streaming
companies make an advance payment to a company with a pre-production stage
mineral deposit in exchange for a negotiated percentage of the metal produced
for the life of mine.
This model
gives companies diversification and risk mitigation because it has agreements
with several different miners. There is unlimited upside potential in that
the deal is usually for a percentage of the production mine life and limited
downside risk if a miner sees its profit margins squeezed as the agreed
purchase price is fixed.
Streamers
also enjoy an advantageous tax situation, with rates that are usually much
lower than tax rates for mining companies.
TGR: You put
out a note on Sandstorm after its share price had taken a steep drop, which
you attributed to comments made by a pundit in the U.S. Tell us about that.
JH: Two things
were at play. First, the stock price got ahead of itself a little bit and was
due to pull back. Second, CNBC's Jim Cramer made some comments that were
interpreted negatively on his show, including (referring to Sandstorm Gold):
"They're good, but remember if gold prices go down to a certain price,
then those miners won't be drilling. That is your worry there."
He did not
change from a bullish to a bearish call, but it was enough to ignite a
sell-off.
TGR: The
streaming royalty space has seen some consolidation in recent years. Is
Sandstorm, given its suite of royalties, a favorable target for larger
royalty companies?
JH: I do not
think so. Nolan Watson heads up Sandstorm and it seems to be his intention to
continue running and growing the company for the long term. With all of the buzz around streaming companies at the moment,
Sandstorm may be able to command a nice premium, but I don't believe it will
sell.
TGR: The stock
is now trading at $12.30/share. If an investor does not have a position in
Sandstorm, is this a good time to take one?
JH: I had
written that any pullback to $11/share or less would be a good opportunity to
establish or add to a position. Funnily enough, it dipped to a $10.99/share
low in the U.S. I like Sandstorm as a long-term play and think buying on any
dip below $11 will prove a good move a year from now.
TGR: What other
companies are you telling your readers about?
JH: Another
business model with great merit is the prospect generator model, pioneered by
Almaden Minerals Ltd. (AMM:TSX; AAU:NYSE). It has
some similarities to the royalty-streaming model that has treated us so well.
Because Almaden owns its own drill rigs, it can drill at a lower
cost and has more flexibility with timing. Almaden
unlocks value via discovering resources, selling them and usually acquiring a
royalty in the process. The company itself is not in the business of
production. Its management believes the greatest shareholder value is
unlocked when finding the discovery, doing the drilling and passing the
project off to a larger company for production.
Almaden has 15
exploration royalties right now, a few of them nearing production. Lately Almaden has focused on the relatively unexplored region
of eastern Mexico, where its Ixtaca project is
located. Ixtaca has been returning impressive
intercepts this year, most recently 134 meters (m) of 4.1 grams per ton (g/t)
gold. Almaden expects to issue its NI 43-101
resource on Ixtaca this December. Two years and
more than 70,000m of drilling will go into that NI 43-101, including lots of
long intercepts over high grade. If the drill results we have already seen
are any indication, it could be an absolute game changer for the company.
Producing
companies have already shown a lot of interest in Ixtaca,
so I think Almaden will be able to sell it rather
easily and get an exceptional return on its investment. The best part of this
project is that most of the property is still relatively unexplored. There
are multiple blind targets and blue-sky potential for Almaden.
TGR: Those
recent drill results averaged 4.1 g/t. Is that the sweet spot Almaden has been looking for to make the deposit
economic?
JH: It was
along the trend, but 50m northeast of the closest drill results that are
going into the maiden resource. This shows the potential to significantly
expand the current scope of the project. The grade was very convincing.
TGR: What do
you expect to happen once the NI 43-101 comes out?
JH: I expect
it will attract the attention of investors and that its market cap will
increase substantially as a result. This maiden resource may convince larger
companies to firm up their offers and move forward. But with the latest round
of very strong drill results, it might be better for shareholders if Almaden continues expanding the resource prior to
considering any bids.
TGR: Would Almaden issue a dividend to shareholders or keep the
money and reinvest it in other projects?
JH: In order
to maximize exploration efforts, Almaden does not
pay out a dividend and I prefer this. When you can trust management to make
deals that are accretive to shareholders, I would rather see the money used
for more drilling on prospective projects, of which Almaden
has a number in the pipeline.
TGR: You also
follow the graphite space. What is the latest news there?
JH: Overall,
graphite is attractive due to strong supply/demand fundamentals. Prices have
come back down from lofty levels last year, but have stabilized recently and
remain elevated. This means that a number of graphite projects that might not
have been economic in the past are economic today.
Given that
graphite is a key ingredient in so many established industries, from aviation
to automotive, steel and plastic, I see prices holding up well. However,
future demand growth is likely to come from the high-purity, large-flake
graphite that is used in lithium-ion batteries for electric cars and such.
People
talk about the big run-up in lithium a while ago, but 10 times more graphite
is used inside a lithium-ion battery than lithium. There will be significant
demand as we move toward electric vehicles and electric-based power.
The other
exciting driver in investment demand for graphite is the potential of graphene, which is reportedly the thinnest and strongest
material ever developed. Graphene is 200 times stronger
than steel, several times tougher than a diamond and it conducts electricity
and heat better than copper. It could even replace silicone in
semiconductors. Also, graphene is nearly impossible
to break. You could throw a graphene mobile phone
display on the ground and it will not shatter like the glass on current
phones. Researchers claim graphene is the most
important substance to be created since plastic.
Samsung
Electronics Co. Ltd. (005930:KSE) plans to launch a
cell phone in mid-2013 that will have a bendable display made from graphene. Future versions could be a phone that rolls up
on your wrist or that could be folded to fit into your pocket. There is a lot
of potential for graphene in the expanding cell
phone and green energy markets. The military has an interest as well.
TGR: To date, graphene has been made only in labs using synthetic
graphite to control for purity. Is there a graphite deposit in the world that
will meet the need for very high-purity, large-flake graphite to manufacture graphene?
JH: Yes, there
are a few deposits, and companies are making progress in addressing the
technical challenges to reach the purity needed to produce graphene.
Focus
Graphite Inc. (FMS:TSX.V) has a
high-purity deposit. It just released its PEA in October at 32% pre-tax
internal rate of return. It has a 2.8-year payback and is fairly easy to
finance with capital costs of just $154 million. Its
very low $435/ton cost is driven by the high grades in the deposit.
Management believes the company will be one of the highest-grade, lowest-cost
producers in the world once it is up and running. This stock has a lot of
potential, despite having been beaten down a little bit in the last six
months.
TGR: Does that
make Focus a good entry point for investors looking for graphite exposure in
their portfolios?
JH: Yes, as
long as they take a longer-term view and are not looking to trade in and out
quickly. It will take Focus time to get closer to production and to prove up
the resource. Long-term investors who can buy and hold will find a lot of
potential there.
I also
like Energizer Resources Inc. (EGZ:TSX.V; ENZR:OTCBB). This
company recently completed a drill program of more than 47 holes over 9,000m.
It included the largest intersection of graphite ever reported: 421m grading
6.18 carbon, including the valuable jumbo-flake graphite at 93% purity. Plus,
the mineralization is exposed at the surface, which means you can build a
low-cost open-pit mine.
In
addition to possibly sitting on the world's largest graphite deposit,
Energizer also has one of the world's largest vanadium deposits. Its PEA,
expected by year-end, could well be the catalyst to push Energizer's stock
price higher. We are looking to buy on any dip below $0.30/share.
TGR: The
biggest concern is that the Green Giant project is in Madagascar. Not only is
it a difficult place to permit a mine, there are also a lot of places where it
would be hard to mine. Do you know what Energizer's strategy is for getting a
permit and opening a mine?
JH: Given the
size and purity of the deposit and the potential revenue for the country, the
government may allow some leniency regarding the permit. Energizer will be
able to apply some environmental safeguard best practices, which should help
with environmental concerns.
I think
the mine will get built. Thus far, indications are that Green Giant will be a
very economic project. I think the company will find ways to work with the
local community and the local government.
TGR: Jason,
thank you for your time and your insights.
Jason Hamlin
is the founder of Gold Stock Bull and
publishes one of the most highly rated investment newsletters available,
focused on strategies for profiting on the bull markets in gold, silver,
energy, critical metals and agriculture. Hamlin has a background analyzing
charts and trends for the world's largest market research company, is versed
in fundamental and technical analysis and has consulted to Fortune 500
companies around the globe.
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DISCLOSURE:
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: Almaden Minerals Ltd. and
Energizer Resources Inc. Streetwise Reports does not
accept stock in exchange for services. Interviews are edited for clarity.
3) Jason Hamlin: I personally and/or my family own shares of the following
companies mentioned in this interview: Sandstorm Gold and Almaden
Minerals Ltd. 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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