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Gold Mining: What's the Smart Money Doing?

How investors are responding to the global debt crisis...

INVESTORS unsure of which way to turn in this market need only watch the "smart money," says Jeb Handwerger, the editor and publisher of Billionaires like John Paulson and Carlos Slim are plucking up mining investments on the cheap. In this interview with The Gold Report, Handwerger shares his thoughts on "smart money' and recent economic events.

The Gold Report: Gold recently witnessed some upside price support after the Cypriot parliament proposed taking money from private bank accounts to raise the €5.8 billion needed to qualify for an international bailout. What was your first reaction to that news?

Jeb Handwerger: Any confiscation of bank accounts would just highlight what I have been saying for a long time—savers are losing money in their banks. Bank deposits are supposed to be a safe haven. Investors are going to seek out alternative hedges against the deterioration of currency and financial repression worldwide. This isn't just happening in Cyprus, but all over the world where there are citizens losing money in their banks and are experiencing negative real rates. Investors need to look for the assets that will protect and grow their wealth in case public policies continue to destroy wealth and savings.

TGR: How does this differ from what happened in Greece?

Jeb Handwerger: This takes bailouts to a new level. The debt crisis still continues. The Swiss said they are devaluing the franc to keep pace with the Euro. The Japanese are printing Yen like crazy. Savings are already being stolen to bail out the banks. It has happened in the US since 2008.

Precious metals are ripe to breakout. This is the environment where investors can get in ahead of the storms. We're seeing little waves, but they'll build up. It's like a coiling spring. There could be a breakout, panic move into precious metals and the mining equities as investors rotate from the overbought equity market into the undervalued precious metals and the even cheaper gold and silver miners.

TGR: If that is the case, why didn't we see a bigger run on gold when the news of Cyprus broke?

Jeb Handwerger: In Cyprus there is panic because it tried to confiscate money outright, but the US and Europe have been subtler about it.

What's going on with precious metals is also hidden. Right now, precious metals are out of favor and mining equities are oversold. Investors believe dividend-paying stocks are a safe haven.

This also happened in the 1990s before precious metals and mining stocks broke out. They pushed the dividend stocks up to a premium, and dividends became smaller and smaller. Eventually, investors realized that dividends weren't such a safe haven because they weren't able to beat inflation.

From 2000 to 2007, there was a massive move into the mining equities and commodities that was set up in the 1990s when dividend stocks were a craze.

Capital will eventually seek out the traditional safe havens, which are precious metals and mining equities, as it has done in the past. Because this sector has been hit hard in 2011–2013, the subsequent rally should be quite impressive.

TGR: Can other citizens of the world expect treatment similar to Cyprus when their governments are short on cash?

Jeb Handwerger: They should not only expect it—they're experiencing it right now. Inflation is greater than what governments are saving. There's disruption of capital and wealth as we speak in many countries, including the US, most of Europe, Japan and in the Swiss Franc. It might not be front and center, but people better start wising up to it and preparing themselves. Once the public realizes this, once inflation starts rearing its ugly head, it will be too late to get in.

To paraphrase Gerald Loeb, who wrote "The Battle for Investment Survival," the worst way to fight inflation is to buy assets at an inflated price. Mine equities are at historic discounted valuations compared to the overall equity markets. The long-term trend for inflation is that it will move higher. This is a significant discount for investors who want to prepare and be hedged against inflation with assets that are trading at deflated prices.

TRG: Is the Euro doomed?

Jeb Handwerger: What currency isn't? What currency will still be in use in several hundred years? None. The only thing that lasts is gold, silver and precious metals.

TGR: The S&P/TSX Global Gold Index has lost about one-third of its value in the past two years. Things are far from rosy.

Jeb Handwerger: Investors must realize that a poor performer last year might be the best performer this year. I believe gold is undervalued. It could definitely breakout this year and going into 2014.

TGR: In a recent commentary on you wrote, "Stick to the long term and don't get shaken out of core positions as the smart money will turn around and buy these junior assets graciously from you." I think everyone wants to believe that, but give us a reason why we should.

Jeb Handwerger: Major billionaires are taking positions. Billionaire Carlos Slim recently bought gold assets in Mexico; John Paulson has large gold holdings. The smart money has a long-term approach and understands how to protect wealth by buying undervalued assets that have the ability to provide leverage to a rising gold price and inflation. The smart money is positioning and protecting itself ahead of the storm.

TGR: The smart money is looking to undervalued junior miners that should survive this downturn?

Jeb Handwerger: Investors don't think that the junior mining companies are going to survive. But they can pick up assets and create value during these difficult economic times if they start paying attention to the companies that can actually grow. Investors have already thrown out some advanced assets, some that are already permitted—that's worth a lot! Yet investors have this attitude that the junior miners are going to go bankrupt. Some of these companies are priced at liquidation levels, but are quality assets, with good management teams in friendly jurisdictions. With strong shareholder support, they are going to survive. They are going to retain value.

TGR: Juniors need cash to survive. What's the minimum they need to survive the limited financing environment that exists right now?

Jeb Handwerger: It depends on the company and the burn rate. Every asset is different. If a company doesn't have cash, is its asset worth something? It could be a candidate for an acquisition. There's very limited downside risk if there's an asset or cash backing the company. The investor just has to hold on and wait until the markets turn.

TGR: You were at the Prospectors and Developers Association of Canada (PDAC) conference recently and discussed platinum at length.

Jeb Handwerger: Unlike gold, platinum is consumed in the auto industry and in other industrial applications for its properties as a catalyst. Platinum is trading at a significant discount to gold. Historically, platinum trades double to gold. It is three times rarer than gold and its supply is very unstable—more than 90% comes from South Africa, Zimbabwe and Russia. There's been talk of resource nationalism in Zimbabwe. There's going to be a search for new supply in stable political jurisdictions.

TGR: What are some parting thoughts on the "smart money"?

Jeb Handwerger: After being in this market for some time, it still amazes me that investors get caught up with the day-to-day and lose their long-term vision. Patience is more important now than ever. 

There's a season for excitement when speculation is great and investors are euphoric, and there is a season for discontent when investors are abandoning the sector and companies are thrown out.

The great investors that I've studied have made their money from mispriced assets. Gold miners are trading at historic low valuations. Eventually the sectors will turn. Jesse Livermore said that money is not made in the buying and selling, but in the waiting.

The opportunities I've seen haven't been observed for many decades. This level of disconnect between market cap and value has never been seen. This is a great opportunity for investors who want to get in before the panic of inflation and wealth deterioration.

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