The Gold Report (TGR): In your January newsletter, there's a table that shows how the HUI Gold BUGS Index over 10 years was the top asset class. Can you talk about gold as the top asset class compared to these others?
Greg McCoach (GM): We see by the statistics that the HUI Index, which is a measure of gold and silver precious metal stocks, has performed better than any other asset class in the past 10 years. Now what's interesting is that we're still in the process of watching this gold bull unfold. In terms of the four stages of a bull market, we are probably past the midway point and heading into the latter stages. This is where the parabolic moves in the precious metals will start to happen. And with all that is unfolding in the world economic scene, it's not difficult to see why gold will soon be soaring.
TGR: So you definitely think this bodes well for the next phase of the gold bull market; there will be a parabolic move?
GM: Yes. This is where you're going to see gold really go to levels that people can't even comprehend. Up to this point, gold has been a surprise to many in the mainstream media. What investors need to understand about the bull market in gold thus far is that the numbers that we're dealing with, $960 an ounce gold right now, is nowhere near the 1980 high in gold of $875 an ounce.
You have to inflation-adjust those 1980 numbers for 28 years of true inflation. If you did that, the $875 high in gold would have to be $6,500 an ounce in inflation-adjusted terms. For silver, it'd be $400 dollars an ounce. So when you see silver at its current rate of $14 an ounce and gold at $960 an ounce, in real inflation-adjusted terms, those prices are still dirt cheap, relatively speaking, compared to where they're going to be going.
As we see the world financial system continue to unravel, the dollar along with all fiat currencies will just implode leaving gold as the currency of last resort. Gold, and silver will go into the stratosphere as this happens. People need to remember that what took gold and silver to their all-time highs in 1980 pales in comparison to what we are dealing with now. The world has never witnessed the likes of the financial destruction that is now underway. It is truly frightening.
TGR: You say in your “Greg's Crystal Ball” section that you think the mania phase is going to start happening sometime next year, in 2010.
GM: I think by the end of this year things are going to be so bad worldwide that gold is going to become headline news and that will become the driving force towards the parabolic moves. What's happening right now is that the big money is still playing the paper game of musical chairs. Paper musical chairs, I call it. When the music stops, people run from one chair to the other chair looking for safety. They run from bonds to dollars to Euros, etc., trying to find the safest place. But they're not finding it. Why? Because the paper system as we've known it is unraveling. So people are trying to chase safety. Well, they can't find it because it doesn't exist. They go into dollars, and they feel comfortable there for a little while; then suddenly the dollar tanks again, and then they run out of the dollar to another paper currency.
Ultimately, when the music stops, they're not going to run to a chair; they're going to run for the exits. When that happens, they're going to discover the asset class known as gold. That's when these parabolic moves are going to happen. As that happens of course, the select precious metal mining stocks will move up accordingly. The leverage investors can get will be phenomenal during such a scenario.
TGR: You say the key is to own the physical metal, as well as the stocks. What do you recommend as far as percentages in a portfolio?
GM: Right now my personal portfolio is 25% cash, 25% physical metals. I take physical delivery of gold and silver. I have 35% in select precious mining stocks, junior mining stocks mostly, and then the balance is in Canadian oil and gas trusts that pay a monthly dividend check.
TGR: You favor the juniors over the more senior producers simply because of the growth potential?
GM: Yes. The leverage is better. For me, personally, I'm willing to take the extra risk with the juniors because I feel like I know what I'm doing and I'm confident about it, so I feel comfortable in being able to identify the juniors that are going to perform very well. The seniors will do well, but they won't do as well on a percentage basis. In other words, there's not as much leverage with the seniors as there is with the quality juniors. But the big problem for the average investor is trying to understand what a quality junior is. There's so many of these companies out there, 80% of which are nothing but moose pasture, and it's very difficult to sort through all the promotions and scams to find the real jewels. That's my job as a newsletter writer; that's what I do. I travel the world trying to sort through all the garbage to find the real opportunities that can deliver the big returns.
TGR: What do you see right now with the juniors? Some of them definitely are climbing back up.
GM: I think it's nice to see them recover a little bit. This is a very good learning situation for investors of mining stocks. Look at the companies that are rebounding. If we have another implosion, which companies do you want to buy? The ones that rebounded the quickest and the most in the past several weeks, months.
Since the bottom in late November, early December, we've had companies that have doubled, tripled, and even quadrupled if you had enough courage, or any cash, to buy back then. But there are other companies that haven't moved at all, and they're just stuck in the mud. So, obviously, you have been given a great opportunity to see the companies that are more quality oriented, that have the value, that have what the market is looking for, and those companies are the ones you want to really pay attention to.
Since a lot of the stocks on our list bottomed out, the top 10 list, in particular, has had some of the stocks do quite well. Some of them have doubled, tripled, and have bounced back quite nicely from the bottom. Unfortunately, most of us probably bought at a higher level and so we're not even up to the point where we're at break-even again. Obviously, we're still waiting for higher levels.
Now what I've been saying is that, unfortunately, with the severity of the world economic events, up to this point our mining shares have been sucked down the drain, so to speak, when world stock markets sell off. Every day that the world stock markets have had a bad day, the mining stocks have had a bad day as well. What we're looking for is the precious metal prices to help us disconnect from that activity. It hasn't happened yet. I'm still worried that the next downturn in the world markets could affect our junior mining stocks again. I've been looking for this key disconnect moment, where the precious metal prices take us into another realm and help protect and insulate our select junior mining stocks. You have to use ‘select' because so many of the juniors are going nowhere. It's only the select companies that are going to be protected or insulated from other market activity that's going in the wrong direction. So I'm looking for that moment our quality junior stocks start to move on their own accord.
TGR: Can you give us an overview of what you consider a select company? What is the criteria?
GM: The criteria is this. They have to exceptional management. In other words, out of all the management teams that exist out there, there's probably only a small handful that really have the quality background and experience to do what they say they're going to do. Most of these other people are just managers or lawyers who don't have experience or are hoping to get involved with a hot sector. They're highly promotional, and most often are only looking out for themselves.
So you look for the people that have the right resumes, the ones who have worked for the majors for 10, 15, 20 years or more and have the experience (paid their dues so to speak), learned the business, understand what they're doing and what they are trying to accomplish. Do they have experience in doing this specific task such as find gold? Did they mine gold or silver before? If they were mining for uranium their whole career and they jump into gold, well, that doesn't sound too good to me.
So you have to have the experience and the knowledge base. That's key. The way we've been playing this market the last eight years is no longer as valid as it once was. We need to adjust to the new rules on how to play this game and win.
What the market is looking for is very specific. If you make a good gold discovery, it has to be in an existing mining camp. It has to be in an area where the development costs aren't very large. If you make a big gold discovery, and it's in an area that's out in the middle of nowhere, the development costs are going to be too high. No one's going to fund it; no one's going to finance a project like this with the new market environment. It doesn't matter how good the results are.
So you have to find these discoveries in good jurisdictions that have short permitting times that have existing infrastructure. If it doesn't have those things, forget about it. There are plenty of great discoveries that I know of. They're just in the wrong area. Some examples would be Romios Gold Resources Inc. (TSX.V:RG) , Copper Fox Metals Inc. (TSX:CUU) , who have tremendous discoveries but are unfortunately in the wrong area. It takes too much money to develop such a desolate area as we have seen with NovaGold Resources Inc. (TSX:NG) (AMEX:NG) in their effort to get the Galore Creek deposit in production. The cost overruns were so enormous, they had to shut the whole thing down. Well, the market's not interested in those kind of projects anymore. I choose to invest in areas that have what the market wants.
Look in the areas that have plenty of existing mines and infrastructure. This is where plenty of experienced mining people already live and juniors who can make a discovery will most likely be bought out by a major who is in the area.
Now certain jurisdictions are better than others. The political risk now is more intense than it was. Political risk is always a big factor, but the political risk now is just amazing, so you have to be very careful where you're willing to invest your money. For me, I'm getting to the point where there are only a few jurisdictions that I'm willing to look at. Certain parts of Canada where there's existing mining camps, certain parts in the United States, and Mexico which still looks very good. That's about it. Everything else is no longer as attractive as it once used to be.
We're also looking for higher-grade resources vs. lower grade. We're looking for low-cost development situations vs. high-cost development situations. We're looking for economic deposits that can be financed.
Here's another situation—within mining, the different kinds of discoveries. A large copper-gold porphyry system is known to house large amounts of gold and silver,; but, unfortunately, it's also known to have very high development costs. Who's going to finance that? I'm not as interested in those kinds of stories as I once was. You're better off looking for the higher grade— “epithermal”—smaller vein, higher grade, near-surface deposits that will have an easier time of actually going the whole distance and getting into production.
TGR: Let's talk about some of the companies on your top 10 list. Pediment Exploration Ltd. (PEZ:TSX) (PEZGF:OTCBB) (P5E:FSE) is at the top; can you give us an update?
GM: Since they bottomed, Pediment has more than doubled. They're hanging around the dollar trading range, which some people have been disappointed with. But what I say is, look, Gary Freeman, the CEO, is just weighing his options right now. He's not making much in the way of news. That's okay. He's lying low, he's looking at his options right now, and this is a company that is about to release a new 43-101 that will have more than 2 million ounces of gold in the ground. This is a verified situation. That's a significant number because once a company, a junior, crosses the 2 million ounce gold mark, it gets on the radar screens of the majors.
Gary has a lot of things he's weighing out. After the market meltdown, he decided to reduce costs, get things trimmed down, and get the burn rate really low to conserve cash. So, in the last few months there has not been much in the way of news. The company is lying low for now, but I think you're going to see that change as PEZ announces their new 43-101 resource calculation. At that point I think you're going to see Pediment start to have a lot of news flow, which should be very good for the share price.
He's got the Baja property we just talked about that's going to have the new 43-101. I don't see how it's not at least 2 million ounces based on my back-of-the-envelope calculations, but you never know with these things until they actually come out. I would guess it's going to be over 2 million and there's plenty more to be discovered there In my opinion, this deposit could be greater than 3 million ounces before all is said and done. Well, that's a major discovery. It's in the right jurisdiction, with very low development costs and it's in an existing mining area, so it should do very well.
Now, Pediment also has a project called La Colorada that could be a near-term producer. It's the old open pit that El Dorado Gold Corporation (ELD.TO) (AMEX:EGO) produced from, which really made El Dorado Gold what they are today—what launched them—that discovery and putting it into production. Pediment now controls it and other people are interested in it. Should Gary vend it out to somebody else, take the cash and run, or should he develop it himself? He has lots of options. He has lots of cash. He has lots of great properties. Gary has many different things he can consider at this point, so I think he wisely just stepped back, started to look through everything that he has and what options are available. We'll see what happens but the prospects for the company look very good..
I'm sure there's been interest by majors already on the Baja Project. He's probably gotten plenty of calls, where the majors are already saying, hey, look, what if we just take you out at this price? Is it high enough? Is it worth taking the money now and running, letting somebody else deal with it? Or is it better for the company to go down the road a little bit further, develop it themselves in the hopes of getting a much higher price later on? These are things we all have to weigh out. Is it better for us as shareholders to take the money and run right now, even though we might get a lower price for it? Or should we wait a little bit longer, and get a higher price when they develop it? These are things we have to look at. So, with that being said, in my opinion, as we see these higher gold prices and with the news that's about to come out, I think Pediment's a two dollar stock in the next six to eight weeks.
TGR: Capital Gold Corp. (TSX:CGC) is also on your list, correct?
GM: Yes, and as Capital Gold runs up to the 90 cent level—it was recently in the 80 cent range—as it gets close to 90 cents Canadian, I'm telling people to start selling, start taking some profit. What's going to happen is the company is going to do a reverse stock split, which is going to be a minimum 4:1 stock split. These stock splits are always negative for current shareholders. Let's just say they decide to do the reverse split at a dollar. They'll reduce their outstanding shares by 75% and the stock would be at four dollars at that point, which would get them their AMEX listing (which is a good thing), and that's why they want to do it. But, typically, what happens, after they do a reverse split, the stock gets hammered. The four dollar share price gets leveled and it usually retracts to a level that is very damaging to current shareholders. So this is why I'm saying take some profit as Capital Gold gets over 90 cents, hold the cash.
I think Capital Gold is worth holding in the portfolio, but wait ‘til after the reverse split and the detrimental effects that reverse splits typically have on share prices. Wait for the share price to retract, and then buy in again because I think Capital Gold will be a good company to hold. I just think you should take some profits at this point.
TGR: What about SilverCrest Mines Inc. (TSX.V:SVL) ?
GM: Silvercrest is a great story. Their production scenario at Santa Elena in Mexico is a high-grade silver-gold kind of scenario. They just came out with their resource update. The resource is growing and the project should be in production by the end of 2009. Things are looking very good so I'm going to keep the company in my portfolio. This resource should grow with time. It's got all the things that the market's looking for—precious metals-oriented in Mexico, near-term production and the company should have cash flow.
TGR: Riverside Resources Inc. (TSX:RRI) just joined your top 10 list, right?
GM: Yes, they made their entry into the top 10 because they have shown me that they know how to manage the prospect generator model with success. The CEO, whom I like very much, really watches and guards the treasury and watches out for shareholders. He's managing his properties very well, and I think he's got not just one but possibly multiple discoveries. And this is what you want with a junior exploration stock. Some people say, Greg, don't you want to have people who have a production cash flow? Yes. We're going to have some of those in the portfolio, but the exploration companies—the good ones that can make the discoveries—is where you get the biggest leverage of all. And I think Riverside is in that category. So they are now number nine on our top 10. I like them very much and I think it's a good play.
TGR: Can you talk about another from your top 10 list— Allied Nevada Gold Corp. (TSX:ANV) (ANV) ?
GM: Allied Nevada is a good story because they're getting the Hycroft mine back into production. It's going very, very well. The stock price has rebounded very nicely, and I think it's probably poised to make a new high. Now we saw some selling pressure, some people were taking profits in January and early February as the stock was recovering; but now I think that selling pressure is gone and the stock is back up over the $6 level again. With higher gold and silver prices, I think you're going to see Allied make a new all-time high and I wouldn't be surprised to see the stock at $7 or $8. So there could be a profit opportunity on that one coming up here.
TGR: Now Vista Gold Corp. (TSX:VGZ) (AMEX:VGZ) is not on your top 10 list, but you cover them, correct?
GM: Yes, I like Vista Gold. Allied Nevada and Vista used to be one company before they did the split. The better properties I thought went with Allied Nevada, but Vista Gold still has plenty of good situations. Their model of acquiring cheap gold ounces in the ground, increasing the value of them in a market where gold prices are going higher, is a very valid market. They have a good share structure, they have cash in the bank, and they're a very well-managed company with top management talent. So, with higher gold prices, that model should do very, very well.
They've got multiple projects with big gold deposits in Australia at the Mt. Todd deposit, which is a 6 million ounce gold resource. They've got the Awak Mas property in Indonesia that is a very large holding of gold. And higher gold prices make these kinds of projects worth more and more. They've also got some great projects in Mexico next to Pediment's project on the Baja. They have the Paredones Amarillos Project, which is kind of waiting on a permit situation that they thought was already done years ago that seems to have had a little glitch there, but that'll get worked out. And they've got some other good projects in Idaho and one other one (I can't think of it off the top of my head), but it's a good scenario and that model should work well. If you believe in higher gold prices, Vista Gold should do very well.
TGR: Greg, this has been great. We appreciate your time.
Greg McCoach is an entrepreneur who has successfully started and run several businesses the past 22 years. For the last eight of these years he has been involved with the precious metals industry as a bullion dealer, investor, and newsletter writer ( Mining Speculator ). Greg is also the President of AmeriGold , a gold bullion dealer.
Greg's years of business experience and extensive personal contacts in the mining industry provide unique insights that have generated an impressive track record for The Mining Speculator since its inception in 2001. He also writes a weekly column for Gold World.