Trying to Time the Gold Market?
Tuesday, 8/20/2013 23:56
Timing the gold market matters much less than picking the right trade...
LOUIS JAMES is 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, he regularly takes his skills on the road, evaluating highly prospective geological targets and visiting explorers and producers at the far corners of the globe and getting to know their management teams.
And don't ask Louis James if the
gold price has reached bottom. He doesn't care about timing the market. The senior editor with Casey Research is too busy trying to ferret out those gold miners with a bird in the hand, as he calls it in this interview with
The Gold Report...
The Gold Report: You warn investors against trying to time the gold market. If even experts don't know a bottom until it's behind them, how do regular investors know when to invest, when to buy the next tranches and when to cut losses?
Louis James: The wisdom of not trying to time the market is tried and true. Benjamin Graham said the same thing 60 years ago. I shouldn't have to defend this premise. Even though investors all know it, they fervently wish it weren't so; they just can't help themselves.
You can't time the gold market. A bureaucrat in Washington can open his mouth and send the price up or down 5% in an afternoon.
Fortunately, we can look for value. Value tends to be slippery in the junior sector when you have a bunch of companies that, as Doug Casey famously says, are little better than burning matches. They have no income. Even the biggest players in the field are so volatile that Benjamin Graham would never touch them.
However, there are things that we can look for. We can compare companies to their peers. We can look at the ounces in the ground and see if something is out of whack. We can look at cash in the bank. The market is so beat up now that some companies with viable projects are trading for cash or less. It's actually possible in a market this beat up to make relatively low-risk acquisitions.
TGR: You can't really tell when to buy, but you can tell which one to buy. What's the most important factor to look at when picking a stock?
Louis James: I use Doug Casey's "eight Ps" formula. "People" is the first "P". The best projects can still be messed up if the wrong people run them. If you know the people involved have a track record unblemished by success, as Rick Rule likes to say, that's absolutely a warning, regardless of how cheap the shares are. Don't throw the fundamentals out just because it's on sale.
In fact, investors should start with themselves when evaluating any investment. Before they start buying shares, they need to determine what kind of investors they are. Risk-adverse investors probably want to stick with the producers. Investors after potentially big gains – those tenbaggers, the 1,000% returns – have to take a chance on early-stage, high-risk speculations.
TGR: Grade is important, but how does a regular investor reading a press release or a report on test results determine which are quality projects?
Louis James: Grade is king for good reason. High-grade forgives many sins and makes many things possible. People also say that size is king – that can also be true. I have been to projects that have very low grades and still make a lot of money, due to economies of scale.
Today, there's a great deal of skepticism about low-grade bulk tonnage projects. Companies have been taking write downs on projects that haven't worked out. Troubled projects are making headlines. There's a sentiment that low-grade bulk tonnage is out.
Investors want high-grade, but that's too simplistic. Large high-grade projects are very few and far between. There are not enough of those to sustain the industry.
I strongly urge readers not to throw the whole class of bulk tonnage out. You do need to be selective. If a company does a reasonable job and presents credible numbers in its economic studies, that does tell a lot.
TGR: You travel the world looking at investment opportunities and recently returned from Ethiopia. How do investors know what jurisdictions are safe?
Louis James: There is no place that's completely safe. There have been adverse actions in Canada – even in Québec. Nothing is sacred. However, at some level, market price trumps risk. Yes, Africa, as a general rule, is higher risk than Canadian provinces are. That's the nature of the beast. The gold mining market often factors that into prices, but sometimes it overdoes the discount and that can be an opportunity.
A number of the countries in West Africa have been relatively stable: Ghana, Burkina Faso and the Ivory Coast. The bad boy in the area is Mali, which unfortunately had military problems with rebels in recent memory, but those never affected the mining areas. The country just had a peaceful election. Negative headlines can be alarming, but it's a grave mistake to sell off everything in Africa just because one country had a problem.
For example, Eritrea and Somalia have garnered negative headlines recently, but, though nearby, Ethiopia is different. It does not deserve to be painted with the same brush. I did more than just look at projects. I walked the streets. I did man-on-the-street interviews. I haven't bought into any Ethiopia plays yet, but I came away quite impressed with the country, and am keeping my radar on, looking for targets.
TGR: You've spent a lot of time in Latin America. What catches your eye there?
Louis James: French Guiana is an interesting, "off the radar" place. It has the same geology as West Africa and has been home to significant discoveries. French Guiana is not an independent country, but a department of France – the regulators are in Paris – which has shown a willingness to work with miners.
TGR: You've said before that you also like Colombia.
Louis James: I like Colombia a lot because it was basically held off the market for decades due to the war there, making it a target-rich environment. That said, the country does have an active environmental movement, and you do need to take care to do things right.
TGR: Are there any countries that concern you?
Louis James: Argentina has great mineral resources, but has become a very risky political jurisdiction, and Chile, once one of the most pro-mining countries in Latin America, has taken several turns for the worse recently. We wouldn't touch anything in Bolivia or Ecuador, and don't care much for most of Central America for mining.
We were quite concerned about Peru after the election of the current president, Ollanta Humala, because he used a lot of anti-mining rhetoric in his campaign. We completely exited all our Peru plays at the time. However, he's since turned out to be more practical than he sounded. Some projects are still on ice there, but mining isn't easy anywhere in the world and Peru does have a terrific mineral endowment.
TGR: A country that doesn't get a lot of attention as a gold producer is Turkey. Does it have the geology to fit your profile of what can make money?
Louis James: I would encourage investors to reconsider any negative attitudes they may have about Turkey because the country has shown that it is truly open to responsible gold mining. It has permitted eight major gold mines that have gone into production this cycle alone, including several owned by Western companies. There have been some protests unrelated to mining and some violence along the border with Syria in the news. However, the companies mining in Turkey are mostly far from those sources of tension, and have not been affected. If the market sees the place as higher risk than it is, that's an opportunity.
TGR: What advice can you give to investors who have been on this wild ride for the last year, looking for ways to protect or even grow their wealth in the current market?
Louis James: Don't blink. Don't lose your courage. Do not sell just for portfolio balancing reasons or any other Procrustean approach. The gold market is off, but don't panic. Don't realize losses you don't need to. Be disciplined.
This is an opportunity to average down. That can be a scary thing to do, but if your investment premises remain true – gold is going higher, the company's story is still compelling, etc. – averaging down is a necessary part of success. Let's say an investor buys something at $1 per share, it drops to $0.50 and goes back to $1 per share – the investor is merely back at the starting point and hasn't made anything. Suppose the investor averages down, buying an equal amount of the stock at $0.50 per share. When it goes back to $1, the investor's average cost is $0.75 per share. That's the way to come out ahead.
If it's a great stock, a great story, a great company run by great people and you believe the fundamental premise of rising metals prices going forward, don't be afraid.
TGR: Thank you so much for your time.
Louis James: Sure, my pleasure.
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