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"So Certain, I'm Launching a Gold Fund"

You insure your house, your car. Why not insure your investments too...?
SWISS-based fund advisor and newsletter editor Björn Paffrath is so convinced we've seen the bottom in the gold mining sector that he's launching a new investment fund in Europe.
Authorized principal and head of trading for a well-known assets manager in Germany and the US from 2000 to 2005, since then he has been involved with various precious metal and resource funds, which have received a number of awards.
Now co-founder and chief editor of the subscriber-based financial and mining market letter, Cashkurs Gold, Paffrath here tells The Gold Report how investment capital is trickling back into long-forgotten gold mining equities...
The Gold Report: Do you expect a broad market correction over the course of the next two years or so? 
Björn Paffrath: Since the crisis in 2008, most of the well-known indexes, such as the Dow Jones Industrial Average or the German DAX, have almost doubled, and many individual companies have performed even better. Of course it is all liquidity driven, but it's at a level where we have to ask: Is it still justified or are we already in the next bubble?
On one side, indexes skyrocketed on the liquidity provided by the central banks. But interest rates and bond yields are so low that they are not keeping pace with inflation, so people put their excess cash in the stock market. And more money exited the underperforming mining sector as the general markets went up.
At some point we will have a painful correction of 30% or more. Maybe it started already, but it's tough to say because there is still a lot of liquidity in the market. There is a good chance that after the correction the bull market could run quite a bit longer. But we all know that we only bought time in Europe and the United States. A lot of Western countries have excessive debt. The painful end will definitely come at some point.
Outside events or black swans also could trigger it. Tension rises between Russia and the Ukraine almost daily now. In the Middle East there are uprisings in Turkey and Libya, Israel and Hamas are battling and there is a civil war in Syria. And Iraq is more and more lost to the IS-terrorists. Any of those events getting out of control could trigger further events on the market side.
TGR: Where should investors look for the first signs of problems? 
Björn Paffrath: You have to first watch the US, then Europe and China. The US made it out of the recession, but how sound is the foundation without the money that the US Federal Reserve is pumping in? That money will probably stop this year, but my guess is that the Fed will find other opportunities to pump more money into the market. We have to watch the US closely. 
Europe came late to the bond-buying game and the peripheral countries – Spain, Portugal, Greece – are not in great financial shape. The Portuguese recently used bailout cash to shore up Banco Espirito Santo, and Greece will likely require a third bailout. Europe put a curtain on the debt crisis. Everybody is happy with the stock market, but we didn't solve any problems. 
China, the future engine of the world, certainly of the mining industry, also has a problem. The central bank there recently warned about a real estate bubble. We never can really trust the economic numbers from China but if the Chinese volunteer information on some potential problems, we have to watch carefully. China could cause a lot of problems for the global economy. 
TGR: How should investors plan ahead?
Björn Paffrath: Investors have to find a way to still participate in the buoyancy of the market, yet be hedged against trouble. How do you hedge yourself? If you made good money in stocks, you should buy a hedge like precious metals. It's insurance. You may lose a few percentage points a year but you sleep better knowing you have it. You have insurance for your house, your car. Why shouldn't you have insurance for your portfolio?
Warren Buffett said: "Be greedy when others are fearful, and be fearful when others are greedy." We don't know where the Dow Jones or DAX will be in a year. At least take some of your big wins off the table and find a sector that is undervalued. In our case, that's mining.
TGR: You're a fund adviser based in Switzerland. Tell us about yourself. 
Björn Paffrath: I am an adviser to Stabilitas GmbH, a group of resource funds in Germany. Also I consult to various Swiss or German portfolio managers on the institutional side with regard to mining investments. Smart money with deep pockets thought it is the right time now for investments into the mining sector, so we launched a new gold and silver equity fund for them in Lichtenstein. We plan to cap it at around $100 million with a soft closing because we still want to play the junior and midtier stocks. 
On top of that, we work with some wealthy private investors who look to invest not only in mining equities, but also in production streams. Therefore, we created a new loan fund to work with smaller companies to help them finance through to production. In most cases we have an 8-12% bond. Then we negotiate a royalty stream or financing fee for 10-15 years. Our money helps small companies with low share prices that can't raise sufficient funds in the equity market. 
I also write a subscriber-based newsletter called Cashkurs Gold, which mostly covers large-cap precious metals producers, $400-500 million and up. Cashkurs roughly translates to "money direction". We educate mostly German and European retail investors on how the mining sector works and what constitutes a good investment. We also run a real portfolio there.
TGR: In an interview prior to the 2014 Prospectors and Developers Association of Canada (PDAC) conference in Toronto, you said the junior mining market had bottomed. Where is it now? 
Björn Paffrath: In 2012, and especially in 2013, we saw one or two good breakout months. We all thought that maybe that could be the turnaround, but it wasn't. The biggest difference this time is that the volumes are picking up. Volumes on the Market Vectors Junior Gold Miners ETF (NYSEArca:GDXJ) are increasing and we know that people are bringing fresh capital back to the sector. It's not a lot but there is inflow. It might be traders or generalists seeking value in gold and silver stocks but I think we have seen the worst in the junior sector.
We focus on the small producers and near-term producers. Most of the exploration stocks still have liquidity problems. Last year, brokers and banks did a lot of bought deals. So money is still there and some people are taking advantage of undervalued assets. 
TGR: Is that where the smart money is headed?
Björn Paffrath: It's still a small amount. The people who look for sector rotation see that the sector is beaten up. When we look at the long-term chart for the Philadelphia Gold/Silver Sector Index (IndexNasdaq:XAU), there were buying opportunities in the early 2000s, and 2008, of course. We actually had a bottom-building phase here at similar levels. That means we really have a chance.
Banks and other institutions, are investing into our new fund now in order to find the right investments. They want to get back into real assets; ultimately they know almost everything around us comes from mining. Before you own it, it's mined. So the smart money is starting to very carefully turn toward the mining sector. But if we combined the value of all the stocks in the Philadelphia Gold/Silver Sector Index and compared it to the market value of one publicly listed tech giant, it's a tiny market. It doesn't need much capital to raise it 10-20%. Even this year we have seen nice gains already. 
TGR: One of the common complaints among investors is that junior mining equities have little to no liquidity. How important is that? 
Björn Paffrath: That is key. These companies need to have experienced management that earns the trust of investors and large institutions to fund their activities. 
If no one will give you more money, especially in the junior sector, someone will take you out or you will go in default and someone else will take your assets. The gold will still be in the ground. Liquidity is almost as important as management, geology and jurisdiction.
TGR: What's your pitch to investors? 
Björn Paffrath: In general we tell people that mining is an important part of their lives. It's a great investment if you know how to play it, and if you do so at the right time.
We like gold and silver equities right now. That's why we launched a new gold and silver fund at what we believe is the bottom of the market. Even if the gold market drops a bit more, there are companies out there with all-in sustaining costs around or below $1000 per ounce, which means they can still make good money and survive at $1300 per ounce gold, and are well positioned if gold goes higher.
TGR: Parting thoughts? 
Björn Paffrath: For an investor who looks for a good opportunity, the mining sector is the place to be. You have to have patience so that you don't get shaken out on the pullbacks, but I would be quite surprised if you are not making a lot of money in this sector within the next two or three years.
TGR: Thank you for your insights, Björn.

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