Casey Research Senior Editor Louis James is very familiar with the gold market and with junior gold companies that have projects all over the world. In fact, he's visited many of the most promising ones. In this exclusive interview with The Gold Report, Louis offers tips on how to own physical gold and paper gold, and even picks some junior gold and silver plays with significant potential.
The Gold Report: Louis, earlier this month the U.S. government sold its new 10-Year Notes at about 2.7%. That's the lowest yield ever for a refunding, yet the sale was over three times subscribed. What's that telling us?
Louis James: Any particular event may or may not be a watershed; I try not to ascribe too much significance to one thing. Sometimes it's a straw in the wind and sometimes it's the straw that breaks the camel's back; you can't really tell until afterwards. But this one is interesting. It seems to me what this is telling us is that people are more worried elsewhere than they are in the United States. I was reading about declining numbers from China for about nine months running, and, of course, there's been all the excitement in the eurozone this year that's caused a lot of turmoil.
TGR: What numbers are those from China?
LJ: It was industrial output. This situation is not necessarily evidence of how great and trustworthy U.S. debt is. It's evidence of how much worse everybody else's debt is. In the race to the bottom, the U.S. is firmly in the rear-this month. That doesn't mean the U.S. is not headed down; it just means it's not leading the pack charging downwards.
TGR: The Fed sale came while the Dow was falling and gold was rising. Do you think this is the beginning of a trend or just more volatility?
LJ: Just more volatility. Even veteran Doug Casey won't look at the daily price of gold. He will look at the weekly and monthly movements. And if there's a big price jog in a day, we might discuss it- but again, we try not to ascribe too much meaning to the daily fluctuations. Gold is a volatile commodity, and the gold stocks, of course, are the most volatile stocks on earth. One single buyer can move these markets. You have to, just for your own sanity, pull back and have a bigger picture view.
TGR: If you had $100,000 to invest right now in 10-year T-bills or the equivalent in gold, where would you put your money and why?
LJ: Absolutely, no question: if those were my only two choices, I would put 100% of that in gold. I have very little confidence in the loser in the race to the bottom. Just because the United States is seen as the least bad place to invest and people have to put their money somewhere, that doesn't actually make U.S. Treasuries a safe investment. When there is as much doubt about the solvency of the backer of any security as there is about the U.S. and the other world powers, it just makes no sense. But that's actually only half the equation; the other half of the equation is that I am very bullish on gold.
TGR: All right, but banks and foreign investors are buying these T-bills. If it's plain to you that buying gold is a much better investment, why aren't these banks and these other institutions doing the same?
LJ: In spite of the news that gold has made, it's not seen as an important instrument of investment by most people. If you're a gold bug or you're somebody who is already interested in the sector, you see advertisements on the Super Bowl and say, Oh, wow, this is really catching on! This is going to be like the '70s and the wave is coming. Perhaps the wave is coming; I believe there will be a wave. But I am not sure we're even in the beginning stages of that crest yet. There has been some effort to get the word out, but if you go to a family dinner and you ask your family and friends how many of them actually own gold, unless yours is a family of gold bugs, you're not going to get a lot of people holding up their hands.
The average person is still not involved in this market, and the average central banker and the average Wall Street type still doesn't think about gold anywhere near as much as he or she will when the mania phase kicks in. I have a friend who is a financial manager for some very wealthy families in Europe. He's based in Switzerland, and he, alone among his peers that I know of, placed a lot of his clients in gold before the crash of 2008. He's now very popular with his clients.
But that's uncommon. Most people wouldn't even talk about it. My sister is a mainstream U.S. banker. She called me a couple of weeks ago and asked me how to go about buying physical gold. I was shocked. There is awareness percolating out there, but it's just barely getting started.
TGR: Maybe your sister read your piece on Goldseek.com, where you talked about picking up American Buffalo gold coins. Tell us about your penchant for hoarding gold coins.
LJ: Well, I like gold coins.
TGR: But why Buffaloes?
LJ: I like the Buffaloes because they're unalloyed. It's as much gold as you're going to get in a bullion coin. You look at it and it's just gold, whereas as the Eagles are alloyed with a little bit of copper that makes them harder and more durable. The Eagles are the most recognized coin in the world and most easily exchangeable anywhere you go-but the Buffalos are prettier, and well recognized among those in the business.
I like having physical gold-the fact that it's portable and, in many cases, untraceable. The government has passed new regulations whereby U.S. gold coin dealers will have to fill out 1099s on anybody who buys or sells $600 worth of gold. Which means, of course, that the tax man is going to be looking at these things all the way down to a single-ounce coin transaction (unless gold really crashes from here).
That's a significant change. Right now the anonymity is a strong pull for U.S. consumers. But I think everybody should have some physical gold, because gold is the only financial instrument that is not simultaneously somebody else's obligation. Silver too, of course. If you've got paper gold, even good quality paper gold like Perth Mint Certificates, it's still a piece of paper. You should have some physical gold in hand. Obviously you can't carry around millions of dollars with you, but a couple of months' living expenses is a good rule of thumb.
TGR: But let's say gold goes up significantly from where it is now. Unless you're buying something substantial, I don't see how it's going to work as a currency because if you want to buy a loaf of bread, how are you going to do that with a gold coin? That gold coin could be worth $4,000.
LJ: That's true, but there are half-ounces, one-tenth ounces; there's silver, too. I saw a YouTube video featuring a convenience store in Los Angeles that has a guy in the back with an assay test and scales for gold and silver. At that place you can buy a loaf of bread with your ex-wife's wedding ring if you want.
But will gold become a currency again? I think there's a good chance that it might if the financial catastrophe unfolds the way we think it will, and paper currencies, as a whole, come to be regarded with the suspicion that they so justly deserve. But whether or not that happens, it is good to have some form of concentrated portable wealth in times of financial chaos.
I was in the Republic of Georgia, just a couple of weeks before the bombs started falling two years ago, and I was interested to see that there are gold dealers on street corners there. It is part of their culture, and it's part of Middle Eastern culture. In Mexico, many towns have basically pawnshops where they will buy scrap gold and silver. I've used such places to liquidate bullion and buy groceries. On a larger scale, a couple tubes of gold coins that would fit in any briefcase or purse could easily be turned into, say, a house in Argentina. You will find a facilitator in Argentina who would make the exchange happen.
TGR: But how do you protect yourself when you're carrying around a briefcase full of gold bullion? I mean if you're buying Buffalo coins fairly consistently, you probably have a reasonable store of wealth at this point, and to me that seems dangerous.
LJ: Well, first and foremost, you don't tell anyone. [Laughs] So here I am telling people in this interview!
TGR: You stated it on your website long before this.
LJ: Yes, but, seriously, this is the first rule: security through obscurity. You don't tell your neighbors; you don't bring out that bar of gold at Thanksgiving and show everybody how proud you are of it.
For small amounts, if nobody knows about it, you're not likely to have any trouble. If you're a serious player, a segregated account in a facility that's set up specifically for gold storage is a good idea. Some of the near-gold substitutes are also a good idea. I mentioned Perth Mint Certificates before; we like those. The Australian government runs a mint that's an audited facility; they will store gold and silver for individuals. These certificates are transferable and they're deliverable. If you get nervous about your gold, you can have them send you your gold via FedEx Corp. (NYSE:FDX). Or you can sign your Perth Mint Certificate over to someone else for paper currency, or whatever you want in exchange.
TGR: In the same Goldseek.com article where you mentioned your coins, you said: The strategy called for is a more cash-focused version of our 'buy only the best of the best' (BOTBOTB) program. Buy nothing new unless you're offered a great bargain in a solid company that can deliver significant new or expanding production. Give us a quick overview of your more cash-focused BOTBOTB program.
LJ: What we're saying is that we're not in any hurry to have our portfolio fully invested at this point. We see a significant risk of correction in the very near term; yet we are very bullish on gold going forward. We see the second dip in the W-shaped economic slump coming, perhaps by the end of this year. We have already had some of the typical summer weakness. With these possibilities in mind, we don't want to tell people, Buy, buy, buy!-not when there's a very good chance they will be able to buy at better prices soon.
You want to buy right now only if you can look at something and say, These guys have all their ducks in a row. Even if there is a correction, they have enough cash, they have the right property and they have the right people that they will proceed anyway. If you see that in a company you want to own but don't, then buying some of those shares may not be a bad idea. We could be wrong about the correction, so you don't want to be completely out of the market.
There are good companies out there that I think will go higher from where they are now. But I already have shares in most of those, so I don't want to buy more now. What we say to new subscribers in the newsletter is Here are the ones to focus on.
TGR: All right, what are some of the companies in your newsletter?
LJ: We like emerging producers or companies with discoveries in hand. An emerging producer that I like a lot is Medusa Mining Ltd. (ASX:MML; AIM:MML; TSX.V:MLL). It's an Australian company that has quite a large portfolio of properties in the Philippines along a very prospective belt where there have been a number of discoveries. They keep finding new gold veins with great potential in the same property as their very high-grade producing Co-O Mine. Co-O is cranking out about 100,000 ounces a year, a significant producer, but they're finding more gold at about the same rate as they're mining it, so the asset is not depleting-a strong plus in an extractive business. They're able to make money, and they have great discovery potential. I like that a lot. There's underpinning value there. And I should say it would be safe for anybody reading this to assume that I own shares in these companies, because I do eat my own cooking.
TGR: Hopefully, our readers will consider you a gourmet. What are some other companies you are following?
LJ: One of the companies that I think we have spoken about before is AuEx Ventures, Inc. (TSX:XAU). This company is a project generator. It has multiple projects, most of them in Nevada, but also in a very prospective area of Argentina that's pro-mining, and in Spain of all places, which is a better mining jurisdiction than most people appreciate. AuEx's main asset is the Long Canyon Project in Nevada, a joint venture with a company called Fronteer Gold Inc. (TSX:FRG; NYSE.A:FRG). AuEx has 49%; Fronteer has 51%. We're talking about AuEx rather than Fronteer because AuEx is much cheaper. Fronteer is a great company with other assets I do like a lot, but that's a different play (partly a uranium speculation).
Long Canyon is just a peach of an asset; it's a potential open pit, which is your cheapest method of mining, and for an open-pit resource, it's very high-grade, more than 3 grams per ton gold. And it's oxide material, which means you can heap leach the ore instead of the more expensive milling. It has all the characteristics of a highly profitable mine. They did a preliminary economic assessment, and the internal rate of return was something like 66%.
TGR: That's well above average.
LJ: Fantastic numbers. The resource has doubled since that preliminary assessment, which will improve the project economics, and they continue to step out and discover more. They recently hit 10 grams per ton over 44.2 meters of mineralization; it's just a peach of a project. AuEx is not particularly cheap today; if there is a market correction, these shares could easily go on sale at a great discount. But at the end of the day, they have a project that looks very much like Nevada's next gold mine.
TGR: Any others?
LJ: One that I like, with a shorter fuse, is International Tower Hill Mines Ltd. (TSX:ITH; NYSE.A:THM), which is an Alaska-focused discoverer-explorer developer. Their primary asset is the Livengood Project, on land owned by the state of Alaska, intended to generate royalties to pay for the state's mental health care system-so they have an ally in the government that really wants to see the project developed. That's always a good thing for permitting and other purposes. The royalty is a cost, but it's bearable. The project is huge. Depending on the cutoff grade, it's almost 20 million ounces, but within that you've got 9 million ounces at a good open-pit grade.
There are lots of good things I could say about Livengood. But I mentioned a short fuse; the company has a portfolio of other assets that they're spinning out into a new company. Shareholders of record at a certain point will get shares in the new company that will get the other assets and some cash to advance them. That should happen over the next month or two. In other cases where we have seen this kind of spinout, it has worked out very well for shareholders.
TGR: International Tower Hill is part of the Cordero Group. When we interviewed you last time, you talked about Fortuna Silver Mines Inc. (TSX:FVI; Lima Exchange:FVI), part of the Gold Group, which specializes in mining plays.
LJ: The group you refer to here is basically centered around Simon Ridgway. The Gold Group has a number of companies-Radius Gold Inc. (TSX.V:RDU), Focus Ventures Ltd. (TSX.V:FCV), Western Pacific Resources Corp. (TSX.V:WRP) and others. There's a bunch of them, but the projects are all quite different.
In some ways, Fortuna Silver is similar to Medusa. It has a producing mine with a really big, high-grade vein that they could mine for many years, and they're continuing to discover more resources in that project area. This is the silver-zinc-lead Caylloma Mine in Peru, and it's another peach of a project-one that has 400 years of mining history and was once a cornerstone of the wealth and power of the king of Spain. It's a cash cow that is going to continue cranking out cash for years. Different zones have different mixtures or minerals, but a significant portion of the value at Caylloma comes from the base metals.
We're wary of base metals these days, but Caylloma has a very clean concentrate that's actually in great demand. Smelters want Fortuna's concentrate, because it's pure enough to use as flux to mix with the concentrate that they get from other mines that isn't so pure. They have negotiated very good terms with their smelter.
TGR: And then there is Fortuna's gold-silver San Jose Project in Mexico.
LJ: Right. There's where the big upside is. You have this cash cow with Caylloma that's funding the work, and on the other hand, you have this new gold-silver mine that's primarily silver. We like a gold lining to a silver story much better than a lead lining. It's bigger too; San Jose is basically going to quadruple Fortuna's production. And it's already being built. We expect that to come into production next year and start adding to the company's bottom line immediately.
There's always a question you have about exploration companies that become miners, because these are very different skill sets. To discover something is one thing, but bring a mine into production is something very different. Fortuna is one of those rare companies that has shown it can do it. These guys are very good.
I believe that the technical risk of developing the San Jose Project is very low. The resource is there and there's room to make it bigger, so you have cash flow, visible growth and a team that has shown it knows how to do things. I like it.
TGR: Where do you see gold finishing 2010?
LJ: Well, our company has been predicting $1,450 to $1,500 by the end of 2010. That was our call at the beginning of the year, so I want to stand by it. Right now, it may seem, Well, gee, maybe it won't; gold's retreating. But it is common for gold and the gold stocks to retreat in the summer, and it is common for gold to have a very good fourth quarter in the average year.
There are some people who like to try to calculate the correct price of gold, given supply and demand fundamentals. I believe this is all a little bit silly because the supply of gold is essentially infinite, as gold is not really consumed-most of the gold ever mined is sitting around in refined form in one vault or another. At the right price, it comes into the market. It's just not a commodity that is bought and sold and consumed the way other commodities are, even silver.
The price of gold is really a barometer of fear. Given what we've said about the other dip in the W, our basic view is we're still in the eye of the storm and we're looking to head out into second half of the storm later this year and into 2011. As this becomes evident and fear rebounds, the consequences for gold should be very substantial. People think the economy is recovering and everything's going to be fine, and that hope is going to get smashed. The level of fear produced is going to be even larger than in 2008. That will move gold significantly.
TGR: Do you have a forecast out on 2011?
LJ: No, we'll probably do that at the end of the year.
TGR: Do you have some parting thoughts you would like to leave with us with?
LJ: I just want to specify again that I am bullish in the near term on gold, if you think of the end of the year as near term. But in the very immediate future, I am saying there is plenty of room for volatility. If you read this article and go out and buy gold Buffaloes today because they're Louis James' favorite, and gold falls off $30 tomorrow, don't get mad. If gold drops in the short term, look at that as a buying opportunity.
TGR: Thanks, Louie. Interesting to talk with you, as always.
Always on the lookout for the next double-your-money winner, Louis James is the master of metals at Casey Research, where he's the widely read and well-respected senior editor of the International Speculator, Casey Investment Alert and Conversations with Casey. Fluent in English, Spanish and French-and conversant in German and Russian to boot-Louis (aka Lobo Tiggre) regularly takes his skills on the road, evaluating highly prospective geological targets, visiting explorers and producers in the far corners of the globe, and getting to know their management teams. In addition to subject matter expertise, he's built a following on the basis of a dynamic combination of investment savvy, practical advice, experience in physics and economics and a gift for comprehensible technical writing.
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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 Energy Report or The Gold Report: Western Pacific Resources, Fortuna and AuEx Ventures.
3) Louis James: I personally and/or my family own shares of the following companies mentioned in this interview: International Tower Hill Ltd. I personally and/or my family am paid by the following companies mentioned in this interview: None.
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