The Gold Report: You recently observed in your newsletter
that gold has been acting more like a commodity, like pork bellies, than like
a currency. That misclassification has discounted the value of precious
metals, depressing the price. Why do you think that is?
Louis James: Commodities, as a group, tend to move together. We see
it with copper and other industrial metals, and we see it in other
commodities, including pork bellies. The commodities index is not just an
average line. It actually is fairly representative of the sector as a whole.
That matters right now because the trend for commodities is downward, plus
the fundamentals are. . .scary. China's slowdown is accelerating, for
example. If gold were just another commodity used to make jewelry or
fillings, it would be logical to lump it in with iron ore—and therefore be
bearish. But it plays another role that is much more valuable. It is the
currency of choice in an uncertain world.
The good news is that the perception seems to be changing. When China's
stock market tanked and the rest of the world hemorrhaged a month ago, gold
prices jumped. Gold acted as a safe haven asset; it acted like money. It was
where people went when they were scared. That was an important validation.
That doesn't mean everything is hunky dory now. But it is a reminder that
with sufficient provocation, gold still does its job.
TGR: What are some of the things that cause the fear-o-meter to
jump? Is it the Federal Reserve? Is it ISIS? Is it Russia? You mentioned the
Chinese stock market. I know a lot of people think a presidential election is
a scary thing. Are we going into a season of fear?
LJ: Financial fear trumps political fear when it comes to impacting
precious metal prices. The China stock market crash was indicative of what we
can expect in the future. Wall Street doesn't really pay attention to what's
going on in Eastern Ukraine and President Putin's macho posturing. Those
sorts of events are important, and they certainly have financial
consequences, but the markets react more to immediate stimuli. They tend to
be pretty shortsighted about what is going to affect the bottom line this
quarter.
TGR: The market seems hyper-focused on every twitch from the
Federal Reserve and what it plans to do about interest rates. Brien Lundin recently said an interest rate increase is
already priced in, and the actual event could be a good thing for gold
because people can put that behind them. Do you agree with that?
LJ: The Fed may raise rates by some nominal amount, just so it has
the option to lower them again later. Brien's right that that's largely been
priced in, but the reality often comes as a shock to those who don't believe
it. Even a nominal change can have dramatic results. There are so many
fragile points around the global economy today. Any jolt can cause follow-on
crashes, collapses—all the volatility we have come to know and love since
2008.
I understand why some investors are largely in cash right now. I can't
blame them. But people going long things that do well in a crisis—like
gold—are playing it smart. They should not panic: hold on. People who want to
make new speculations need to be sure they know which way the Fed will go to
go to place a bet. My general advice is to wait and see what happens. If you
are absolutely convinced you know what the Fed is going to do, there might be
some interesting options you can try, but don't kid yourself about the nature
of your gamble. For most investors, that's just not wise.
LJ: The majors are always the first line, the go-to money, when
gold starts to shine. They are also, however, the least responsive. It takes
a lot more to move a company with a $10 billion market cap 10% than one
valued at $10 million, let alone double. But a highly prospective junior that
has a rich discovery can easily move by that much just because of a turn in
sentiment.
TGR: Is that true with both the explorers and the smaller
producers?
LJ: The junior producers will benefit first along with the
development stories. These are the people who have already made a discovery
and are advancing toward production, or they've already gone into production
and margins are high enough to endure the downturn. Those are the companies
that will be best positioned when the market turns, the first magnets for new
money coming back into the market.
That said, if you really want to buy low and sell high, the maximum
leverage you can get is if you invest before a discovery is made. To do that,
you have to follow the competent prospect generators who have, can and will
come up with the next discoveries. Those stocks will not be the first to
respond to a market rebound, but for people who want absolute maximum gain,
they offer the highest leverage with the best risk mitigation possible.
TGR: Is there a prospect generator that would be a good example of
this strategy?
LJ: Renaissance
Gold Inc. (REN:TSX) is Ron Parratt's team. He's been a multiple winner
for us in the past. The company spun out of AuEx Ventures Inc. and has
projects in Nevada and Utah.
I also like Almaden Minerals Ltd.'s (AMM:TSX; AAU:NYSE) spinout, Almadex
Minerals Inc. (AMX:TSX.V). The original company has made a big discovery
and now the same team is tasked with exploration on some 20 projects in
Mexico, Nevada and Southern British Columbia.
Both of these teams are very strong. Both are stories that the market is
yawning at right now, but if you believe in backing the jockey and not just
the horse, these people deserve your attention.
TGR: What are some of the small producers with growth potential
that fit that description?
LJ: One of my favorites is Klondex Mines
Ltd. (KDX:TSX; KLNDF:OTCBB). It's a high-grade gold story in Nevada.
Klondex has actually been one of our best performers in the portfolio over
the last year. It's been up even while gold was down, because it is mining up
to half an ounce per tonne. It is making money hand over fist, even at
current prices. Obviously, that attracts a lot of attention.
TGR: Klondex recently announced that it discovered some new veins
at the Fire Creek project, and it's going to be doing a resource update. What
are you looking for in that update?
LJ: I think it will get bigger, and I think it will get better. But
the most important thing is that this is not just surface drilling on some
prospect that may or may not be mineable at some point. This is underground
exploration. These new discoveries are near existing underground development
so they could be put into production quickly and easily. This is a company
that already has a profitable, fully permitted plant in operation within
trucking distance of these discoveries. That's one reason why I think this
story has done so well despite how poorly the market has done. You can see
how close these high-grade discoveries are to hitting the bottom line.
TGR: Are there other companies with similar upside?
LJ: A similar story is Kirkland Lake
Gold Inc. (KGI:TSX). It's actually not so similar if you get into the
technical details of the deposit, but it is a high-grade vein story. This one
is in Ontario, Canada, another nice, mine-friendly jurisdiction. It is deep,
and it's more expensive mining than Klondex, but the company has many things
going for it. Management has been retooled, and is cutting costs. Mining
underground is going into increasingly higher-grade stopes. The company has
growth already in its existing reserves, as well as lots of exploration
potential. The great thing is that the mine plan works at current prices.
Even if gold prices go down, Kirkland is mining into higher-grade ore, so the
company could continue to do well—and it should do phenomenally well at
higher gold prices.
TGR: Are there more companies with that kind of potential?
LJ: Two more are up-and-coming producers. One would be Guyana
Goldfields Inc. (GUY:TSX) and the other is Rubicon Minerals
Corp. (RBY:NYSE.MKT; RMX:TSX), which is in Red Lake. Both have just built
world-class mines based on high-grade deposits. Rubicon's is underground. Guyana
Goldfields has an open-pit operation in Guyana. Both have poured their first
gold.
Guyana Goldfields has been doing better on the stock market. In fact, it's
gone up more than 300% since its low last year, a move that is common as a
development story transitions into production. The market likes it when a
company succeeds. Hats off to management and the whole team. I have high
expectations. If it keeps going, I could easily see another double on that
stock, even without higher gold prices. My only concern is political
uncertainty. There have been troubles with the local government, nothing
mining related, just internal political fighting. There's also been some
trouble with the psychotic regime in Venezuela, over the border. Anyone
considering a company in Guyana needs to understand the political risk, but
the project is doing great.
The next catalyst will be reporting how much money is going to the bottom
line. It should be announced after the next quarter at the latest. If I were
new to the story and the political situation remained calm, I would want to
own that stock before it reports its first net income.
TGR: What is the story on Rubicon's stock price?
LJ: Rubicon has reported some unexpected developments underground,
which it is currently negotiating. The company has been taken out behind the
woodshed and thoroughly thrashed over this. The share price is back where it
was before it even started building its plant, and the plant is actually
working better than expectations.
Of all the difficulties mining companies routinely face when they start
up, problems with the plant are the most potentially fatal. It is really a
very complicated chemistry set. You're shoveling a bunch of dirt through it
and if it doesn't work right, it may never make money. Underground, if things
are not quite as you expect, as long as they aren't too bad, you can adapt
your mine plan and usually get to where you were going. In fact, this happens
to the biggest players in the field. Goldcorp Inc.
(G:TSX; GG:NYSE) just announced that it has to revise its mine plan at
Éléonore, one of the highest-profile, new underground gold mines in Canada.
That's a spare-no-expense, five-star mine, and it is still adjusting to the
realities once it is in operation. Until we hear that Rubicon encountered a
seriously fatal problem, I think it's oversold and a real opportunity.
TGR: When gold prices increase, do you see silver prices following
or leading?
LJ: They always vary together. They can, as you know, vary by
larger or lesser amounts. Right now, it's a relatively large amount. It's not
quite a record amount, but it is close. It's about an 80:1 ratio last I
looked. That's pretty far from the recent norm of 50 to 60:1. That means it
might move more quickly. If you push that elasticity, a rubber band wants to
snap back.
LJ: He's right, but never forget that silver, in addition to being
a precious metal, is an industrial commodity. It is produced as a byproduct
more than by pure silver mines. Actually, there are really no pure silver
mines. Even silver primary mines are largely zinc or lead mines that have a
lot of silver in them. The point is that silver production is largely
determined by demand for other metals. Several mega-copper projects coming on
line soon in places like Peru have very strong silver credits. So we could
see supply exceeding demand on the industrial side and affecting the price,
regardless of what gold does. Or it could go the other way, if Glencore
International Plc (GLEN:LSE) and a lot of other companies do scale back
operations. It is unpredictable short term. Long term, it has to come back.
TGR: Are there some silver companies you like?
LJ: My favorite right now in silver production is Fortuna Silver
Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE). Fortuna's main focus
currently is the San Jose project in Mexico, where the credit is not lead or
zinc, but gold. I like gold as a credit in my silver mine. Fortuna recently
drilled off a new zone that's even higher grade than what it's mining now.
Fortuna also has a cash cow called Caylloma in Peru that's been mined on and
off over 400 years. There's some stability there, and there's exploration
potential in both camps. What I like most is this company is actually
profitable at current prices, or lower.
TGR: You are going to be sharing more ideas at the Casey
Research Summit in Arizona in October. What can attendees expect to take
away from that conference?
LJ: This will be the first year we are putting on the conference as
part of Stansberry & Associates family, so you know it will be a
first-class experience for attendees. That means the speakers and the
amenities will be top notch.
It's also going to be the only opportunity I will have to answer questions
directly from readers for the rest of this year. That's because, for legal
reasons, I am no longer able to correspond directly with them. But I can
answer questions from the podium, so attendees will hear it all first-hand.
This is also the one time a year investors can shake hands with Doug Casey,
talk to him, ask him questions. He's very easygoing and less restrained than
I am.
This conference will cover a wide range of sectors, from metals, to
energy, to technology, to water. On that last one, with El Niño gaining
strength and all the environmental hype about water scarcity, this is a
topical story. But there's a lot of money to be made in all these sectors.
TGR: Thanks for your insights.
International Speculator, is fluent in English, Spanish and French. He
has a background in physics, economics and technical writing, and travels the
world, evaluating highly prospective geological targets and visiting
explorers and producers at the far corners of the globe, getting to know
their management teams.
